Crypto assets are a craze sweeping across the United Kingdom. Nearly four per cent of the general population owns some sort of cryptocurrency. That totals roughly 1.9 million adults.
Cryptos are popular because they are supposedly unregulated and anonymous. But that isn’t entirely accurate. Government bodies have stances on cryptos, and you need to understand what they are.
Who regulates cryptos in the United Kingdom? How can you sell and exchange them? What are the regulations for taxing, owning, and estate planning in relation to cryptos?
Answer these questions and you can steer clear of legal penalties and restrictions. Here is your authoritative guide.
Definitions of Crypto Assets
The United Kingdom has a few unique definitions of assets. All regulators adhere to them, and you must understand them in order to read their guidelines.
E-money refers to digital representations of actual currency, like the pound or American dollar. Fiat currency backs it, unlike cryptos. The Electronic Money Regulations of 2011 serve as the regulatory basis for them.
A crypto asset is a digital representation of value that is reliant on ledger technology and cryptography. A person can sell, transfer, and trade their crypto assets online. Cryptocurrencies count as crypto assets, but there are other kinds of assets, including NFTs.
A crypto token is a denomination of cryptocurrency. Token issuance institutions issue tokens to their clients.
Security coins are crypto assets that have similarities to investments like shares in a company. They are usually digitized versions of traditional securities. The government can closely regulate security coins.
Utility tokens are unregulated. A person may use a token to buy a service online.
A person may use an exchange token to buy services. But they usually exchange them for something else. Bitcoin and Ether count as exchange tokens.
The Financial Conduct Authority (FCA) has the nominal duty of crypto regulation. The FCA monitors all financial services within the United Kingdom.
In 2018, the FCA formed a task force with the Bank of England and the HM Treasury. They issued a report later that year providing some initial guidelines.
Each institution has continued to work on cryptos. In 2021, the HM Treasury published a report calling for further regulations, especially in terms of taxation.
Because cryptos are so new, the institutions have issued only limited regulations. But they will deliver more substantial ones in the future.
Follow coverage of them closely and adjust your crypto strategy. Be in touch with a financial services lawyer and get regular updates from them on what is going on.
The Financial Services and Markets Act 2000 (FSMA) provides a framework for the sales of cryptos. They are not legal tender. But if a prospectus is adopted and approved by the FCA, the currencies may be offered to the public for sale.
Yet, this prospectus can only apply to currencies that are attached to specific investments. Security tokens are attached, but exchange tokens are not. This reduces the regulatory power of the FCA over Bitcoin sales, at least for the time being.
But the FCA does have rules against financial promotions that they do not approve of. This can limit the sale of cryptos. The government can control online advertising and distance selling.
Bitcoin ATMs are legal. They must receive a license and submit to FCA regulation.
You can buy and withdraw Bitcoins at these ATMs, and you can find one in most major cities. This makes the United Kingdom an ideal location for sales.
Exchange and Transmission
Regulators are carefully monitoring money laundering. Regulations crack down on payment services that issue and transmit e-money. Every exchange must have authorisation with careful safeguarding of the assets.
Regulators are also wary about financing terrorism and require that records are kept on clients. Anyone who exchanges money online must have an idea of who they are exchanging with.
People who facilitate exchanges of cryptos must follow money laundering guidelines. They must register with the FCA and provide their contact information with FCA officers.
Exchange providers must keep records of exchanges that occur on their platforms. The cryptography that cryptocurrencies rely on provide a degree of anonymity. But the records do prevent cryptos from being entirely anonymous, as was seen in the Colonial Pipeline story where the Bitcoins used to pay DarkSide were retrieved.
The FCA has banned exchange providers from offering cryptocurrency derivatives. They cannot facilitate options and futures related to cryptos. This limits the options that an exchange can provide, but it helps decrease market volatility.
People entering the UK are not required to declare their crypto holdings. Non-UK nationals can bring as much cryptocurrency as they want and conduct exchanges within the country.
You may be able to use cryptos when buying or selling a business. Talk to your lawyer and financial advisor before making the interaction.
Testing New Cryptos
The FCA has its own Innovation Division. The Division provides a sandbox so businesses can test crypto assets. If the assets seem to have financial benefits, the FCA can provide support for their development.
In particular, the FCA has shown interest in stablecoins. They are easier for them to regulate because their value is connected to external references like the pound.
If you are interested in developing a new crypto, consider a stablecoin. Make sure you have a lawyer who will talk to the FCA and appraise you of your rights and obligations.
Mining cryptos is legal within the United Kingdom. There are no regulations that focus on mining practices. No regulatory agency has announced plans to control mining.
But some mining practices may constitute exchanges. Cloud mining involves the use of a data centre that a person shares with other people. If a person pays to use the centre, they may have to report their exchange with the FCA.
HM Revenue and Customs is investigating taxation for cryptos. There are no current rules that apply to cryptos in particular.
But existing tax rules apply. HM Revenue and Customs has issued position papers proposing various tax rules. They may institute them in the years to come, so you should understand them.
According to Revenue and Customs, an individual may need to pay capital gains and income taxes. The buying and selling of cryptos constitute personal investment activities, akin to stock market trading. The individual must therefore pay a capital gains tax.
But if that person is a crypto dealer by their occupation, they may need to pay an income tax instead. The tax applies to the profits they garner from conducting trades.
They will need to pay an income tax if cryptos are their payment from their employer. If they dispose of cryptos that they get from their employer, they may need to pay a capital gains tax.
Cryptos count as property under inheritance tax guidelines. An individual may need to pay taxes depending on how they receive their currency.
Any cryptos that serve as remittances can be taxed. A value-added tax applies to any goods that a person obtains through exchange tokens. A person does not have to pay stamp duty taxes when exchanging exchange tokens.
The UK Jurisdiction Taskforce of the Law Society is examining crypto ownership. They have made several conclusions, though their investigation is ongoing.
Cryptos count as personal property. They fall under all English property laws, even though they are not tangible.
A person can engage in licensing with their cryptos. But they may need authorisation in order to craft a licence. Establishing a fund that offers exposure to cryptos may require approval.
Security tokens have confirmed rights to ownership. If you want a clear claim of ownership, you should invest in them over exchange tokens.
No special rules currently apply to cryptos in relation to estate planning. Normal legal principles do apply.
As mentioned previously, cryptos are subject to an inheritance tax. When planning your estate, you should recognize that. Include a note in your will stating that your assets are taxable.
Cryptos are hard to pass down to others because of their encryption. You should include instructions to your lawyer about how to decrypt your currency.
You should also provide access to your wallet. This does limit the anonymity of the currency. But if you do not provide access, your currency will be worthless after your passing.
Let a Lawyer Take Care Of You
More and more regulations are controlling crypto assets. Authorities distinguish between security, utility, and exchange coins.
The FCA attitude on crypto assets is permissive. You can buy and exchange cryptos, including through ATMs. You can bring cryptos into the UK, making the country ideal for outside investors.
But taxation of cryptos will come about over the next few years. You can expect to pay capital gains, income, and inheritance taxes. There are no clear ownership protections either.
If you want more information, hire an expert. Chic Consultants helps crypto entrepreneurs follow the law. Contact us today.