Cryptocurrency has opened the doors to innovation and new forms of investment, but it has also created an environment that is vulnerable to scams and fraud. In the U.K., work is underway to establish cryptocurrency regulations that will help protect consumers and stabilize the market.
Over the past two years, U.K. regulators have issued warnings about a significant increase in crypto scams. From April to September 2021, more than 16,000 possible scam reports were made to the Financial Conduct Authority (FCA). Of those, 3,000 were related to cryptocurrency. Moving forward, it is vital that investors, buyers, and sellers of crypto assets have a thorough understanding of what regulations are already in place and what new policies may be ahead.
How is Cryptocurrency Defined in the U.K.?
As is the case in most countries, cryptocurrency is not considered legal tender in the U.K. According to HM Revenue & Customs (HMRC), the U.K.’s government agency responsible for taxes, payments, and customs, crypto assets are not considered currency or money. However, many people who buy or exchange crypto are subject to tax laws.
HMRC defines crypto assets, tokens, or cryptocurrency as “cryptographically secured digital representations of value or contractual rights.” Owning and using crypto assets is legal in the U.K. as long as regulations are followed and the appropriate taxes are paid. Consumers involved in cryptocurrency may be required to pay income taxes or capital gains taxes when they buy, sell, or receive cryptocurrency. These rules apply to all forms of crypto tokens, including non-fungible tokens (NFTs), which have seen increased activity since 2020.
What Cryptocurrency Regulations Are in Place in the U.K.?
The U.K. has made slow progress in implementing actionable regulations. Although there is general agreement that regulatory action is necessary, the FCA has been hesitant to jump in too quickly. This is largely due to a lack of adequate funding and staffing to enforce regulations appropriately once they are put into place.
There are several indicators that the pace of developing crypto regulation may be accelerating:
- Following the crash of Terra cryptocurrencies in 2022, in which UST and LUNA lost nearly $45 billion in value within 72 hours, the FCA emphasized the need to implement “non-negotiables” in crypto regulation.
- In May and June 2022, the government held two CryptoSprint events to meet with industry leaders and discuss how to develop appropriate regulations.
- In July 2022, regulators from the U.K. and the U.S. issued a joint statement that expressed their intention to collaborate on crypto regulation.
The passage of the Fifth Anti-Money Laundering Directive (MLD5) and the court’s ruling on NFTs has also demonstrated the progress that is being made.
MLD5 was implemented prior to Brexit as an anti-money laundering (AML) measure. Under the law, crypto asset firms in the U.K. must officially register with the FCA, and registration will only be approved for those that meet three criteria:
- Demonstrate appropriate use of Know Your Customer (KYC)
- Provide evidence of source of funds
- Pass proof of funds check
Many firms have been able to satisfy the FCA’s requirements. As of July 2022, over 150 crypto firms had applied for registration but only 35 were approved. It’s important to note that the law only applies to businesses within the U.K., which means that consumers remain unprotected when working with outside firms.
NFTs and Court Documents
The U.K.’s High Court of Justice recently became involved in the debate about virtual assets when it granted an order that permitted the court to use the transfer of NFTs as a means of servicing documents of proceedings. This ruling has significant implications for victims of crypto fraud.
In many cases, it is difficult to pursue legal action against an individual or organization who engaged in criminal activity with cryptocurrency because contact details are incorrect, removed, or inactive. The court’s determination that NFTs are a valid means of engaging with these kinds of bad actors makes it possible to use a much more realistic avenue for making contact and seeking restitution.
What is the Future of Cryptocurrency Regulation in the U.K.?
The U.K. has already made important advancements in cryptocurrency regulation. However, there are additional, more expansive regulations that are expected to take effect in the near future.
FATF’s Travel Rule
In 2019, the Financial Action Task Force (FATF) developed a travel rule as an anti-money laundering and counter-terrorism financing (CTF) regulation. It requires virtual asset service providers (VASPs) to share originator and beneficiary data with one another for any cryptocurrency transaction above $1,000. This same rule applies to transactions between VASPs and banks.
To put it more simply, when a person sends a crypto asset, the sender’s VASP must provide personally identifiable information, such as a name, address, or account number, to the VASP of the recipient, and vice versa. The U.K. is expected to implement this rule, or one very similar to it, in September of 2023.
Financial Services and Markets Bill
Though it is not yet in place, the Financial Services and Markets (FSM) Bill is expected to amend existing electronic money and payment services regulations to include digital settlement assets like stablecoins. Because their price is tied to another asset, such as the dollar, stablecoins are often seen as less volatile and more predictable than other forms of cryptocurrency.
In addition, the FSM Bill would address advertising within the crypto market by aligning financial promotions with other financial products. Cryptoassets would be classified as high-risk investments, and firms that wished to mass-market their crypto services would be required to have all advertisements approved by a licensed third-party firm.
Other changes are also on the horizon. In June 2022, the European Union reached an agreement on the Markets in Crypto Assets (MiCA) framework. This is one of the broadest and most wide-ranging regulations yet, and it is likely to have a significant influence on policies within the U.K. and other parts of the world.
In addition, the FCA has stated that it is developing new technology that will make it possible to more efficiently monitor websites for fraud. This technology, in combination with improved staffing and funding, could give the agency the power that it needs to properly implement and enforce regulations.
Consumers, investors, and marketplaces have high expectations for cryptocurrency, and it has certainly demonstrated its ability to meet and exceed those expectations in the past. However, in order for the market to continue to flourish, regulations must be in place. In the U.K., it appears that the growth of cryptocurrency regulations has only begun, and there will likely be many changes to monitor in the coming months and years.