Crypto Regulations in the UK Key Takeaways;
- Cryptocurrencies not classed as legal tender
- VASPs apply to FCA for licence (e-money as the exception)
- Taxes based on activities/entities
- Ban on derivatives offering
- FCA, Treasury & BoE make up Cryptoassets Taskforce
- 8 Cryptoasset Market ‘Actors’
- FCA responsible for AML/CFT of cryptoassets
UK Bitcoin exchange regulations?
Regulations on UK VASPs (Virtual Asset Service Providers) have been created so as to not stifle innovation whilst maintaining the integrity of the wider financial system. To operate in the United Kingdom, crypto exchanges need to register with the Financial Conduct Authority – unless they have applied for an e-money licence.
UK-based VASPs must additionally adhere to a number of compliance rules. Those include regulations around KYC (Know-Your-Customer), AML (Anti-Money Laundering) and CFT (Combatting the Financing of Terrorism).
Cryptoassets Definitions by UK Regulators
- e-money tokens meet the definition of electronic money in the Electronic Money Regulations 2011 (EMRs) – broadly, digital payment instruments that store value, can be redeemed at par value, at any time and offer holders a direct claim on the issuer
- security tokens have characteristics akin to specified investments, like a share or a debt instrument, as set out in UK legislation. Broadly, these are likely to be tokenised, digital forms of traditional securities. As with emoney tokens, these are already within the UK’s regulatory perimeter and therefore subject to FCA regulation
- unregulated tokens are neither e-money tokens nor security tokens and include:
- utility tokens: tokens used to buy a service, or access a DLT platform – this could, for example, include access to online cloud storage; and
- exchange tokens: tokens that are primarily used as a means of exchange – this includes widely known cryptoassets such as Bitcoin, Ether and XRP.
Because the variety of business models, types of entities and functions of cryptoassets involved is so wide and constantly in flux, the UK’s FCA, Bank of England and HM Treasury jointly established the ‘Cryptoassets Taskforce’ in 2018, which sought to define when and how cryptoassets should be regulated.
The authorities of the Cryptoassets Taskforce have developed an approach to cryptoassets and DLT that:
- Maintains the UK’s international reputation as a safe and transparent place to do business in financial services.
- Ensures high regulatory standards in financial markets
- protects consumers.
- Guards against threats to financial stability that could emerge in the future.
- Allows those innovators in the financial sector that play by the rules to thrive.
The Cryptoassets Taskforce further identifies 8 distinct ‘actors’ in the market; Developers & Issuers, Investors, Financial Intermediaries, Miners/Tx Processors, Trading Platforms/Exchanges, Liquidity Providers, Payment/Merchant Service Providers and Wallet/Custody Providers.
What is the FCA?
The Financial Conduct Authority or ‘FCA’ – formed in 2013 – is the United Kingdom’s financial regulatory authority overseeing U.K. financial markets and “58,000 businesses which employ 2.2 million people and contribute around £65.6 billion in annual tax revenue to the economy in the United Kingdom”.
An independent agency, the FCA has the power to regulate the marketing of financial products and services, investigate entities/individuals, ban products and freeze assets. The FCA is part of the United Kingdom’s Cryptoassets Taskforce.
Are Bitcoin ATMs Legal in the UK?
UK’s FCA Ban on Crypto Derivatives
In 2021, the Financial Conduct Authority banned the offering of crypto derivatives products to retail users in the UK due to a number of inherent risks that the regulatory body believes could negatively affect retail customers of cryptocurrency in the UK.
UK Cryptocurrency AML/KYC/CFT Laws
From January 10, 2020 the FCA has been established as the Anti Money Laundering and Countering Terrorist Financing (AML/CTF) supervisor for businesses carrying out various cryptocurrency ventures.
In July 2019, the FCA released the final guidance on how AML & CFT in the crypto sector would be treated in “PS19/22: Guidance on Cryptoassets“.
All of the entities shown below must adhere to guidelines laid out in PS19/22: Guidance on Cryptoassets;
- VASPs and P2P exchanges
- Crypto & Bitcoin ATMs
- Tx of cryptocurrency
- Issuance of new tokens
- Publication of open-source software around coins, protocols, etc
UK AML requirements additionally need KYC (Know-Your-Customer) and CDD (Customer Due Diligence) checks for all customers of crypto native businesses such as the user’s legal name, their photo id as shown in an official document, and their proof of residence. These requirements are made in the “The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017″.
As well as KYC and CDD risk management policies to combat AML, VASPs must keep detailed records of beneficiaries, carry out Enhanced Due Diligence (EDD) of PEPs (Politically Exposed Persons), appoint an individual in charge of oversight of these compliance issues and other regulatory hurdles that the wider financial system must adhere to.
UK-based firms must also continue to comply with 5AMLD until further notice. 5AMLD is the first European Union AMLD to cover cryptocurrency and bitcoins in relation to predicate offense and makes reporting illicit activity obliged parties such as cryptocurrency exchanges, custodians and financial institutions a requisite.
PEP (Politically Exposed Persons) regulations in the UK are outlined by the FCA’s “FG 17/6 The Treatment of Politically Exposed Persons for Anti-Money Laundering Purposes”, which seeks to specifically set out how to carry out Enhanced Due Diligence in relation to PEPs in the UK jurisdiction and AML controls.
PEPs pose a more serious risk if the country in question they are associated with is;
- associated with high levels of corruption
- political instability
- weak state institutions
- weak anti-money laundering defences
- armed conflict
- non-democratic forms of government
- widespread organized criminality
- a political economy dominated by a small number of people/entities with close links to the state
- lacking a free press and where legal or other measures constrain journalistic investigation
- a criminal justice system vulnerable to political interference
- lacking expertise and skills related to book-keeping, accountancy and audit, particularly in the public sector
- law and culture antagonistic to the interests of whistleblowers
- weaknesses in the transparency of registries of ownership for companies, land and equities
- human rights abuses
Cryptocurrency Taxes in the UK
Bitcoin and cryptocurrency taxes in the UK are different between individuals and businesses. HM Revenue & Customs acknowledges crypto’s “unique identity”, meaning that the asset class is unable to be compared to traditional investments/payments, and tax rates are applied based upon the activities/entities involved. HMRC’s cryptoassets taxation policy was outlined in December 2019. Crypto taxes are based on the different types of assets, see ‘Cryptoassets Definitions by UK Regulators’ above.
Cryptocurrency taxes for individuals are dependant upon;
The typical gains and losses that are taxed under capital gains and the other activities pursued by individuals such as; mining, staking, etc.
Cryptocurrency taxes for businesses are liable to pay one or more of the following;
- Capital Gains
- Corporation Tax
- Income Tax
- National Insurance contributions
- Stamp Duty
- Value-Added Tax
UK Treasury is Seeking Consultation on Stablecoins and Cryptoassets Regulation
In the wake of Brexit, the UK is looking for a fresh start and HM Treasury has called for consultation on how cryptoassets, and specifically stablecoins, should be regulated in the future. The consultation period ends in March 2021.
The consultation sets out the landscape for cryptoassets and their current status in UK regulation, outlines the government’s proposed policy approach and sets out specific proposals with respect to cryptoassets used for payments purposes.
The call for evidence seeks stakeholder views on a broader range of questions in relation to cryptoassets used for investment purposes and the use of DLT in financial services. In particular, it asks about the benefits and drawbacks of adopting DLT across financial markets, whether there are obstacles to its adoption, and what further actions government and regulators should consider in this space.
Stablecoins have been growing in usage especially fast over the past year as interest-starved savers have sought to experiment with the asset class in DeFi and CeFi models.
As the asset class, “so-called ‘stablecoins’ are an evolution of cryptoassets” that the Treasury is considering creating a new category for of “stable tokens”, to go alongside the current categories that cryptoassets can fall into in the eyes of UK regulatory bodies; e-money tokens, security tokens, utility tokens and exchange tokens.
Some of the 30 questions in HM Treasury’s Cryptoasset & Stablecoin Consultation and Call for Evidence are below;
- Do you have views on the proposed new regulated category of ‘stable tokens’?
- What are your views on the extent to which the UK’s approach should align to those in other jurisdictions?
- Do you agree that the government should primarily use existing payments regulations as the basis of the requirements for a new stable token regime, applying enhanced requirements where appropriate on the basis of mitigating relevant risks?
- Do you have views on whether single-fiat tokens should be required to meet the requirements of e-money under the EMRs, with possible adaptation and additional requirements where needed?
- Do you agree Part 5 of the Banking Act should apply to systems that facilitate the transfer of new types of stable tokens?
- Do you have views on potentially extending Bank of England regulation of wider service providers in the stable token chain, where systemic?
- What, specifically, are the potential benefits of the adoption of DLT by FMIs? What could be the benefits for trading, clearing and settlement?
- Is UK regulation or legislation fit for purpose in terms of the adoption of DLT in wholesale markets and FMIs in the UK?
- What should the UK government and regulators be doing to help facilitate the adoption of DLT/new technology across financial markets/FMIs?
- What are the risks and opportunities you see in relation to DeFi?
- Do you have any evidence of risks to consumers when using tokens as a form of speculative investment or through DeFi that may be of interest to the government and UK authorities?
What is HM Treasury?
Her Majesty’s Treasury, the ‘Exchequer’ or simply the ‘Treasury’ is a department of the Government of the United Kingdom that is in charge of all public finance policy and economic policy. HM Treasury is part of the United Kingdom’s Cryptoassets Taskforce. The current Chancellor of the Exchequer is Rishi Sunak.