Crypto Regulations in the UK Key Takeaways;
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).
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 Cryptoassets Taskforce seeks to build an approach to cryptoassets and blockchain native businesses that:
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.
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.
Bitcoin ATMs in the UK are legal, if licenced and regulated by the FCA. There are currently more than 250 Bitcoin ATMs in the United Kingdom where the cryptocurrency can be bought, the largest number of machines in a European country.
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.
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;
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;
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;
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;
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.