UK cryptocurrencies regulations allow users to buy and sell cryptocurrencies – but due to recent regulatory moves by the UK’s financial regulatory, the FCA, trading of cryptocurrency derivatives are banned.
Cryptocurrency 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 & tokens
- 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 fits the definition of electronic money in the 2011 EMRs or (Electronic Money Regulations). This would be digital representations of the United States Dollar or Great British Pound for instance.
- Security coins have characteristics such as financial securities, such as equity/debt instruments, as applied by United Kingdom law. Broadly, these are likely to be ‘tokenized’ – the digital forms of financial securities. As with e-money coins, these sit in the United Kingdom’s regulatory scope andtherefore applicable to Financial Conduct Authority regulation
- Unregulated coins are not security or e-moneycoins andinclude:
- utility coins: coins that are used to purchase a service or financial product/access a blockchain platform – such as DLT-cloud storage
- exchange coins: coins mainly used as a method of exchange – this would include prolific cryptoassets such as BTC, ETH etc.
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:
- Maintains the UK’s rep as a secure/transparent country to conduct operations in the financial sector.
- Ensures high regulatory standards in financial markets
- protects consumers.
- Safeguards financial stability from future coming threats.
- Enables risk takers/innovators in the industry 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?
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.
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.
The FCA cited 5 reasons for the ban; (1) the intrinsic nature of the underlying assets means digital assets do not possess a reliable benchmark for calculating values, (2) the rate of penetration of abuse/criminality in the secondary market (eg darknet markets), (3), extreme volatility in digital asset price fluctuations, (4) retail customers possess an inadequate understanding of cryptocurrencies (5) the lacking of a legitimate reason for retail consumers to place investments in virtual assets.
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 coins
- 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.
Funds (Information on the Payer) Regulations 2017 Download – PDF
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.
Related Article: 5 Steps into the 5th Anti-Money Laundering Directive
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.
exposed persons for anti-money laundering
purposes Download – PDF
PEPs pose a more serious risk if the country in question they are associated with is;
- associated with a higher level of systematic corruption
- political instability (regular coups)
- possessing weakened gov institutions
- weakened AML defenses/regulations (actively soliciting CFT)
- undergoing armed conflict
- un-democratic forms of gov such as dictatorships with human rights abuse history
- affected by endemic organized crime
The Joint Money Laundering Steering Group: JMLSG
UK cryptocurrency regulators additionally reference the Joint Money Laundering Steering Group (JMLSG).
The JMLSG is a committee with members comprised of a number of trade associations including the British Bankers’ Association (BBA), the Building Societies Association (BSA), the Association of British Insurers (ABI), amongst others.
The JMLSG offers industry guidance on how to comply with AML guidance on every aspect of the UK’s financial markets; retail banking, credit card providers, wealth management, financial advisers, asset, corporate and trade finance, private equity. It also offers guidance on cryptocurrency exchanges and custodians under ‘PART II – Sector 22‘.
In regards to the classification of mining, the JMLSG notes that while mining “does not as such fall within the definition of a cryptoasset […] some mining […] may be deemed to constitute exchanges, such as […] conducted via cloud mining” or ICOs.
The JMLSG’s guidance analyzes the unique potential for money laundering activities with cryptocurrency due to the inherently fast-paced innovation in the sector such as; privacy or anonymity, cross-border nature, decentralized nature, segmentation, digital nature, acceptability, immutability, convertibility, innovation.
The specifically looks further into privacy and anonymity issues;
- Tumblers & mixers (darknet ML services);
- Obfuscated DLT;
- Internet Protocol (IP) anonymizers (VPNs);
- Digital ring signatures;
- Stealth addresses (transaction obfuscation);
- Smart contract atomic swaps;
- Non-interactive zero-knowledge proofs (ZKP);
- Privacy coins (Monero); and
- A large proportion of the cryptocurrencies held/used in a given transaction being associated with second-party escrow service
Why is the JMLSG important? Guidance issued by the JMLSG, whilst not law, is taken into account of whether a firm has followed regulations stipulated by the FCA. JMLSG guidance states that it gives “a sound basis for firms to meet […] regulatory obligations.” And that “firms will have to […] justify departures […] to the FCA.” In a £163,076,224 penalty against the German financial institution Deutsche Bank in 2017, the FCA cited the JMLSG in a case of AML failures related to ‘mirror trading’. Thus, cryptocurrency providers should also follow UK regulatory guidance provided by the JMLSG in compliance procedures.
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 cryptocurrencies 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.