The UK has been well established as one of the leaders in Fintech innovation, and the place to be for financial entrepreneurs; however, when it comes to the cryptocurrency regulation in the UK, the country seems to be running a few places behind for the title of “world leader.”
In the UK, all activities encompassing the issuance of equity and debt are regulated by the Financial Conduct Authority (FCA). The FCA’s strategic objective is to ensure the seamless operation of relevant financial markets, and it achieves this objective by providing appropriate protection for consumers and investors, as well as by promoting effective competition in the markets.
However, when it comes to virtual currencies, the FCA maintains that “cryptoassets designed primarily as a means of payment or exchange would not generally sit within the scope of FCA authority.” Whereas the SEC and the CFTC play a massive role in crypto market regulation in the U.S, virtual currencies remain largely unregulated in the UK.
The UK’s unadventurous but positive regulatory approach
Virtual currencies don’t fit easily into the existing financial regulatory regimes, and the UK doesn’t specifically regulate them either. The FCA doesn’t consider virtual currencies to be currencies or commodities under the MiFID II and, therefore, has no jurisdiction over them. It does, however, have authority over activities related to virtual currency derivatives such as bitcoin futures, options, or crypto-linked ETFs (if approved).
Interestingly enough, the FCA’s position towards the growing number of ICOs in the UK has been somewhat blurry. On the one hand, the FCA never explicitly declared authority over security offerings in the form of ICOs/STOs, but on the other, it continually issues consumer warnings describing ICOs as “very-high-risk speculative investments” and FUD-triggering statements such as “Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.”
That being said, the UK’s authorities have taken a generally unadventurous but positive approach towards virtual currencies and the blockchain industry as a whole. The wait-and-see regulatory strategy has been recently substituted with a much-needed sandboxing program that allows for some form of cryptocurrency regulation in the UK, without actually having it.
On July 3 this year, the FCA announced that 29 companies have been accepted in the fourth regulatory sandbox, 11 of which are blockchain-related startups. Regulatory sandboxes enable blockchain startups to test their ideas, projects, and solutions in the UK market under a controlled regulatory environment, and can be contrasted with the American model, where no such scheme exists.
When it comes to cryptocurrency exchanges and custodians, even though they’re not under the FCA’s oversight, the UK authorities intend to apply AML regulations in order to comply with the EU’s 5th AML Directive.
Along the same lines, the Treasury has revealed their intentions to regulate cryptocurrency traders, requiring them to abide by KYC regulations and disclose their identities as well as report suspicious activities. This will, hopefully, add some sought-after legal certainty to the ecosystem.
Most banks in the UK, however, do not express the same “enthusiasm” as the government, and have been known to intentionally and systematically refuse support to virtual currency related transactions and businesses. This is detrimental to the still-developing blockchain industry in the UK.
Tax treatment of virtual currencies
In 2014, when Her Majesty’s Revenue and Customs (HMRC) published a guidance regarding the tax treatment of virtual currencies, the UK was one of, if not the first country in Europe to have a clear legal position on the issue – albeit “for tax purposes only.”
The HMRC guidelines clarify that: (i) mining income is not subject to VAT, (ii) any loss or gain arising from the holding and/or selling virtual currencies will be treated as gains made in other commodities or currencies, (iii) virtual currencies acquired and held for personal reasons instead of speculative purposes will probably not be subject to capital gains tax.
Worth noting here is that VAT is imposed by the EU, and according to the latest European Court of Justice decision – virtual currencies will not be subject to VAT. Furthermore, these guidelines have not been revised until the present day, even though the blockchain scene has evolved beyond recognition since 2014.
It seems that the UK policymakers are waiting to see how the other EU countries will tax virtual currencies, whilst preserving the perception as a more “light touch fiscal regime” when it comes to cryptocurrency regulation in the UK.
No more time to “wait-and-see” on cryptocurrency regulation in the UK
The global cryptocurrency industry is gaining new grounds relentlessly, and the UK authorities are under immense pressure to produce a comprehensive strategy towards virtual currencies as soon as possible. The rest of the EU countries are currently way ahead in terms of their legislative support for virtual currency related projects, and in the midst of Brexit negotiations, crypto firms will need some very compelling reasons to choose the UK over the EU.
The author is not currently invested in digital assets.
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