In April 2021, Chancellor of the Exchequer Rishi Sunak directed the Bank of England to launch “a new taskforce between the Treasury and the Bank of England to coordinate exploratory work on a potential central bank digital currency (CBDC),” or national cryptocurrency, intended to confront some of the current challenges posed by cryptocurrencies such as bitcoin. Bank of England Governor Andrew Bailey has previously expressed that the instability and inefficiency of cryptoassets are two of the largest challenges in this process.[1]
In theory, the new digital version of sterling, which has been given the unofficial name of “Britcoin,” would give businesses and consumers the option to hold accounts directly with the Bank of England, widen access to central bank funds that are currently accessible by commercial banks only, expedite domestic and foreign payments, and minimize financial stability risks. It would not replace physical cash or existing bank accounts. However, neither the government nor the Bank of England has officially decided on whether to introduce a CBDC into the United Kingdom and “will engage widely with stakeholders on the benefits, risks and practicalities of doing so.”[2] Following Brexit, Her Majesty’s Treasury has also sought consultation regarding how cryptoassets should be regulated in the future. Such consultation period ended in March 2021.[3]
Regulations in the United Kingdom allow residents to buy and sell cryptocurrencies. In exchange, the sale of crypto derivatives to retail consumers has been banned in the United Kingdom by the country’s Financial Conduct Authority (FCA) beginning January 6, 2021. Specifically, the FCA banned the sale of derivatives and exchange traded notes (ETNs) “that reference certain types of crypto assets to retail consumers.” In general, crypto derivatives are tradable securities that derive their value from an underlying asset such as Bitcoin (BTC) or Ethereum (ETH), while ETNs are unsecured debt traded in a manner analogous to the stock market. Similarly, the FCA has banned the sale, marketing, and distribution of contracts for differences (CFDs), options, futures, and crypto-referencing ETNs, unless they are unregulated. Nonetheless, investors may continue to hold and sell investments that they already own.[4] Further, the ban does not extend to professional traders or institutional firms, which have always been allowed access to riskier financial products than the general population, only retail consumers.[5] Previously, the FCA has cited five primary reasons for the ban:
the inherent nature of the underlying assets, which means they have no reliable basis for valuation; prevalence of market abuse and financial crime in the secondary market (e.g., cyber theft); extreme volatility in crypto asset price movements; inadequate understanding of crypto assets by retail consumers; and lack of legitimate investment need for retail consumers to invest in these products.[6]
In 2018, the “Cryptoassets Taskforce” was established, consisting of the FCA, the Bank of England, and Her Majesty’s Treasury. It examines when and how cryptoassets should be regulated and identifies eight specific “actors” in the markets: (a) cryptoasset developers and issuers, (b) investors in the cryptoasset market, (c) financial intermediaries, (d) miners or transaction processors, (e) trading platforms and exchanges, (f) liquidity providers, (g) payment and merchant service providers, and (h) wallet and custody service providers.[7] Beginning January 10, 2020, the FCA has also been charged with acting as Anti Money Laundering and Countering Terrorist Financing (AML/CTF) supervisor for businesses carrying out various cryptocurrency ventures.[8] In addition, representatives from various trade associations such as the British Bankers’ Association (BBA), the Building Societies Association (BSA), and the Association of British Insurers (ABI) have spearheaded the Joint Money Laundering Steering Group (JMLSG), which offers industry guidance on how to comply with anti-money laundering regulation, as well as cryptocurrency exchanges and custodians as a whole.[9]
In July 2019, the FCA released the final PS19/22 Guidance on Cryptoassets, which governs firms issuing, creating, holding, marketing, buying, or selling cryptocurrency; cryptocurrency exchanges; the transaction of cryptocurrency; the issuance of new coins; the publication of open-source software related to cryptocurrency; and more. It aims to inform consumers as to what rules, regulations, and issues apply to their cryptoassets. In general, regulatory classification of specific cryptoassets can be made only by analyzing each cryptoasset on a case-by-case basis, with an investigation into the asset’s individual features.[10]
In addition, the United Kingdom requires know-your-customer (KYC) and customer due diligence (CDD) checks for all consumers of crypto-native businesses.[11] Similarly, virtual asset service providers (VASPs) must also keep detailed records of beneficiaries, complete further enhanced due diligence (EDD) of politically exposed persons (PEPs), and appoint an individual in charge of overseeing such compliance and regulatory issues in the wider financial space. Firms based in the United Kingdom must additionally comply with the Fifth Money Laundering Directive (5AMLD), effective January 10, 2020, until further notice. 5AMLD is the first European Union ALMD to cover cryptocurrency and bitcoins.[12]
In the United Kingdom, cryptocurrency taxes vary between individuals and businesses, as outlined by Her Majesty’s Revenue & Customs (HMRC) in December 2019. Individuals are labile to pay for the typical gains and losses that are taxed under capital gains and other activities pursued by individuals such as mining, staking, and more. Conversely, businesses are liable to pay for capital gains, corporation tax, income tax, national insurance contributions, stamp duty, and value-added tax.[13]
In order to operate in the United Kingdom, crypto exchanges must register with the FCA, or, alternatively, apply for an e-money license. Similarly, bitcoin ATMs are legal in the United Kingdom, provided that they are licensed and regulated by the FCA. Currently, the United Kingdom has the most machines in a European country, with over 250 bitcoin ATMs across the country.
P.S. Insights on Cryptocurrency Legal Issues
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.
Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.
Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries:
Is cryptocurrency legal in the United Kingdom?
Do you have questions about cryptocurrency, digital currencies, or blockchain technology?
Freeman Law can help with digital currencies, tax planning, and tax compliance. Contact us now to schedule a consultation, or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.
[1] Huw Jones, David Milliken, ‘Britcoin’ not bitcoin? UK considers new digital currency, Reuters (April 19, 2021).
[2] Huw Jones, David Milliken, ‘Britcoin’ not bitcoin? UK considers new digital currency, Reuters (April 19, 2021); Entrepreneur.
[3] HM Treasury, UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence, UK.gov (January 7, 2021); Coinfirm, UK Cryptocurrency Regulations, Coinfirm (January 11, 2021).
[4] Julie Hunt, The FCA Bans Bitcoin Derivatives: All the Details You Should Know, Face to Face Finance (n.d.); Charlie Osborne, UK ban on cryptocurrency derivatives, ETNs comes into force today, ZDNET – Finance (January 6, 2021).
[5] Gavin Brown, Bitcoin: the UK and US are clamping down on crypto trading – here’s why it’s not yet a big deal, The Conversation (October 9, 2020).
[6] Press Release FCA, FCA bans the sale of crypto-derivatives to retail consumers, Financial Conduct Authority (June 10, 2020).
[7] HM Treasury, UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence, UK.gov (January 7, 2021)
[8] News Story FCA, FCA becomes AML and CTF supervisor of UK cryptoasset activities, Financial Conduct Authority (October 1, 2020).
[9] JMLSG, Current Guidance, JMLSG (n.d.); The Joint Money Laundering Steering Group (JMLSG), Prevention of money laundering/combating terrorist financing – 2020 Revised Version, Guidance for the UK Financial Sector, JMLSG (June 2020).
[10] Policy Statements FCA, PS 19/22: Guidance on Cryptoassets, Financial Conduct Authority (January 23, 2019).
[11] UK.gov, The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, UK Government (2017).
[12] Coinfirm, 5 Steps Into the 5th Anti-Money Laundering Directive (5AMLD), Coinfirm (n.d.).
[13] HM Revenue & Customs, HMRC internal manual, Cryptoassets Manual, UK.gov (March 30, 2021); Coinfirm, UK Cryptocurrency Regulations, Coinfirm (January 11, 2021).
