Cryptocurrencies are a central legal grey area in most parts of the world. The only countries with clear policies are those that ban any use of them entirely. Everywhere else, there is significant ambiguity as to how cryptocurrencies can be used, how they are to be taxed, and what disclosure and registration requirements are for both organizations and individuals.
The UK is no exception to the general rule, with significant confusion over both the letter and the application of the country’s cryptocurrency policies. This issue has been significantly compounded by Brexit, as much of the existing policy was heavily influenced by the European Union and deferred to EU precedent in many cases.
The Bank of England does not consider cryptocurrencies like Bitcoin to be money in the traditional sense. As such, they are primarily considered property, although there are many caveats to this designation. Both the Financial Conduct Authority and the Bank of England have guidelines for the use of cryptocurrencies, but these are often vague and non-comprehensive.
Recent Trends in Crypto Regulation
In June of 2021, the FCA took several actions that have shifted the cryptocurrency landscape in the UK. There have been crackdowns in several different areas, including both exchanges and cryptocurrency derivatives investing. These measures are focused on organizations rather than individuals and do little to clarify the legal ramifications of owning and using cryptocurrencies for the average citizen.
Earlier in 2021, the government clarified that the FCA has jurisdiction over anti-money laundering and counter-terrorism regulations regarding cryptocurrencies. The FCA now effectively regulates cryptocurrencies, at least on the organizational level. As such, they have set in place a requirement for cryptocurrency firms, such as exchanges, to register in order to keep operating in the UK. However, given the decentralized nature of cryptocurrencies, it is unclear how effective or actionable this will be.
Only six such firms have successfully registered to this date, with several dozen in the process currently. This clearly doesn’t cover a significant portion of cryptocurrency organizations, with thousands operating around the world. Many organizations have already withdrawn their applications as further clarification has more clearly revealed anti-money laundering requirements.
A Series of High-Profile Bans
The largest cryptocurrency exchange worldwide, Binance, is now banned from operating in the UK. In June 2021, the FCA issued a statement that Binance is not authorized to undertake the currently regulated activity of offering services as a cryptocurrency exchange. Binance had an application underway at one point but withdrew over anti-money laundering requirements.
This is the first move under the new rules regulating cryptocurrency exchanges. Earlier in 2021, regulations came into effect banning the sale of cryptocurrency derivatives. This refers to a method of investing in cryptocurrencies without ever actually purchasing them, often at considerable leverage. The space has been rife with scams for years, and there have been many victims in the UK.
While the FCA has taken significant action against cryptocurrency derivatives, the Binance ban represents the first case of banning direct cryptocurrency exchange.
Cryptocurrencies and Taxes in the UK
These recent regulations make things a bit clearer for organizations but don’t do much to clarify the situation for citizens. There are guidelines available from Her Majesty’s Revenue and Customs that explain the current rules. It has become clear that the UK intends to implement effective tax regulation for cryptocurrencies after a 2020 agreement with Coinbase that saw the exchange provide information on users who have more than €5,000 in cryptocurrencies.
HMRC breaks cryptocurrencies into four distinct categories, depending on their use. Most are called exchange tokens, and Bitcoin falls into this category. For the most part, cryptocurrencies are considered a personal investment, and the capital gains tax applies. For those that trade cryptocurrencies as a business activity, they’ll instead have to deal with income tax regulations.
Cryptocurrencies Have Gained A Bad Reputation
Blockchain and other technologies associated with the Fintech sector have thrived; and are definitely on the rise these days. However, there is an entire industry which has blossomed as a result of this trend. Forex, and more specifically contracts for difference are receiving much attention from regulatory entities due to various schemes like the latest Bitcoin Prime which has been exposed by industry watchdog sites like Scam Crypto Robots.
In some ways this is a positive development, since it’s expected from governments to protect their citizens. However, there are many who despise any form of regulation since they believe it interferes with privacy rights.
What This Means for UK Citizens
Still, these recent changes and regulatory decisions don’t directly affect UK citizens all that much. Binance must now list a disclaimer on their websites that they are not allowed to do business with UK citizens, but it’s not clear if this will be effective or enforced. There are also many other exchanges available, so the ban has done little to affect the ability to buy, sell, and trade cryptocurrencies.
What the decisions do indicate is the direction of policy to come. We now know for the first time that the FCA both intends and is capable of putting into place regulations on cryptocurrencies. It might not be long until they enact similar laws that more directly affect citizens and their private cryptocurrency holdings.