Crypto regulation in the United Kingdom
In 2018, the UK government established a Cryptoassets Taskforce, which brought together the Treasury, the Bank of England, and the Financial Conduct Authority (FCA) to assess the potential impact of cryptoassets and distributed ledger technology. The taskforce's report, published in October 2018, recommended that the UK government take a cautious approach to regulating cryptoassets, while also acknowledging the potential benefits of the technology.
Since then, the UK government has taken several steps to regulate the crypto industry. In February 2021, the government published a consultation paper on regulating cryptoassets. The paper proposed several measures aimed at protecting consumers and preventing money laundering, including:
- Strengthening rules for crypto trading platforms;
- A robust world-first regime for crypto lending;
- Regimes for a range of cross-cutting issues which apply across cryptoasset activities and business models, including market abuse and cryptoasset issuance and disclosures.
The FCA has also taken steps to regulate the crypto industry. In January 2021, the FCA implemented a ban on the sale of crypto derivatives to retail investors. The ban was intended to protect consumers from the risks associated with these products. The regulator has also proposed giving itself powers over those conducting activities related to crypto that do not have origins or a base.
Later, the FCA has issued guidelines for crypto trading in the country. The guidelines state that crypto assets are not considered legal tender and are not regulated in the same way as traditional financial assets. However, crypto assets that meet certain criteria may be subject to regulation by the FCA. For example, if a crypto asset is considered a security or a derivative, it may be subject to regulation. The FCA also requires crypto exchanges to register with them and to comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations and to have adequate security measures in place to protect investors' funds.
In the UK, cryptocurrencies are subject to Capital Gains Tax (CGT) when they are sold. The amount of CGT that is due depends on the amount of profit that is made. If the profit is below the annual tax-free allowance, no CGT is due. If the profit is above the allowance, CGT is due at the appropriate rate.
Crypto assets received as payment for goods or services are subject to income tax. The amount of income tax that is due depends on the value of the crypto asset at the time it is received. The tax rate applied to gains depends on how much income you earn as an individual. If your taxable income is within the basic income tax bracket of £50,270, you will be charged a CGT rate of 10% on any capital gains. If you earn more than this amount, the rate increases to 20%.
Taxpayers who do not disclose gains could face a 20% capital gains tax plus any interest and penalties of up to 200% of any taxes due. Those found to have evaded the tax could also face criminal charges and jail time.
As we have already reported in June 2023 The UK Parliament's upper house, the House of Lords, has approved the Financial Services and Markets Bill (FSMB), which could recognize crypto as a regulated activity in the country. The bill was introduced in July 2022 to give regulators more power over the UK financial system and take advantage of Brexit freedoms.
The UK government has proposed several measures aimed at protecting consumers and preventing money laundering, including strengthening rules for crypto trading platforms and a robust world-first regime for crypto lending. The government's proposals include giving the FCA powers over those conducting activities related to crypto that do not have origins or a base.
Now the Government is consulting on a proposed regulatory framework for cryptoassets with the aim of encouraging growth and innovation in the sector while maintaining financial stability and clear regulatory standards. The consultation follows the proposals in the FSMB to bring «digital settlement assets» used for payments (i.e., stablecoins) within existing e-money regulations. The UK government is committed to regulating the crypto industry, and the proposed regulatory framework is aimed at encouraging growth and innovation in the sector while maintaining financial stability and clear regulatory standards. The FSMB is still making its way through Parliament, and it will likely take years before the measures are approved.