UK Cryptocurrency Regulations

Cryptocurrency is one of the most popular terms lately. Crypto assets include many different products, but the most common types of crypto assets are Bitcoin, Litecoin, Ether, etc. They are designed to be used as a means of payment. Cryptocurrencies such as Bitcoin are regulated in the UK only for money laundering purposes. In the UK, the Financial Conduct Authority (FCA) is tasked with overseeing cryptocurrency activities for anti-money laundering (AML) and counter-terrorist financing (CTF) purposes. Thus, cryptocurrency exchanges in the UK must be registered with the FCA, with the exception that certain cryptocurrency services may obtain electronic licences instead of registering with the FCA.

Money laundering and cryptocurrency in the UK

In the UK, the FCA must license an exchange that allows trading in crypto assets that are financial instruments under the Markets in Financial Instruments Directive II (MiFID II). Firms authorised by the FCA must comply with the FCA’s regulations on encrypted assets. The bitcoin system is an example of such encrypted assets. In the UK, consumers can easily purchase crypto assets such as bitcoin. The most important factor when buying and selling crypto assets is to ensure that cryptocurrencies are not used to fund terrorism or money laundering. For this reason, crypto companies must register under FCA rules. Cryptocurrency firms registered with the FCA have taken their responsibilities to combat money laundering in business seriously.

FCA Rules

It monitors its customers buying and selling cryptocurrencies with Know Your Customer (KYC) procedures at many UK cryptocurrency firms. KYC can provide firms with information such as customer identification details, passports, driving licences, photographs. Thus, KYC is the process of establishing the identity of the customer within the cryptocurrency arrangement. Customer due diligence procedures also identify the risks to the customer and take precautions in light of these risks. These measures are aimed at combating money laundering and terrorist financing in cryptocurrency transactions. The regulation of cryptocurrencies in the UK is very complex and there are many other issues that need to be addressed.

What are the regulatory requirements for cryptocurrency businesses?

The FCA has introduced certain rules to reduce and eliminate money laundering risks for crypto exchanges in the UK. The essence of the FCA’s regulations is that firms identify and assess the risks of money laundering and terrorist financing and develop policies and controls to address these risks. Firms must have processes in place to identify and assess these risks. The FCA regularly checks that cryptocurrency firms comply with KYC requirements.

The FCA has also said it will act swiftly if firms are unable to meet the desired standards in the cryptocurrency sector and put market integrity at risk. In January 2020, the FCA introduced new regulatory powers that allow crypto firms to monitor how they manage the risk of money laundering and terrorist financing. However, these powers do not extend to how cryptocurrency firms conduct transactions with consumers, meaning that the FCA is not responsible for ensuring that cryptocurrency firms protect rather than control customer assets.

Taxation of cryptocurrency in the UK

HM Revenue & Customs will tax cryptocurrencies such as Bitcoin, depending on the holder. The tax will also apply to the trading profits of those engaged in trading. HMRC is therefore using two different tax regimes for individuals and businesses trading cryptocurrencies. HMRC first announced the tax treatment of cryptocurrency in the UK in 2014. Subsequently, HMRC updated its initial tax guidance. According to HMRC, bitcoin and other cryptocurrencies are cryptoassets and are not taxed in the same way as incorporated currencies. In addition, it stated in guidance published in 2018 that there are three different types of cryptoasset: utility tokens, security tokens, and exchange tokens.

On November 1, 2019, HMRC published a policy paper setting out its position on the taxation of transactions by companies using exchange tokens. On December 20, 2019, it published a similar policy paper updating its guidance on the taxation of cryptocurrencies with Bitcoin for individuals. HMRC also states that it will address the treatment of utility and security tokens in future guidance and summarizes it as follows:

    The value of utility tokens is based on their use as a medium of exchange or investment.

    Value tokens can benefit the owner, for example in the form of trade debt or dividends to the company.

    Utility tokens give the owner access to specific products or services on a platform, often using distributed ledger technology. A company issues tokens and agrees to accept tokens as payment for specific products or services.

    Exchange tokens are defined as cryptocurrency, a new type of intangible asset intended for use as a means of payment.