Although, the UK stands as the hot spot for leaders in Fintech innovation and financial entrepreneurs, with regard to cryptocurrency, the UK seems to be falling behind for the title of “world leader”. . The global cryptocurrency industry is gaining new grounds relentlessly, and the UK authorities are under immense pressure to produce a comprehensive strategy towards virtual currencies as soon as possible. The rest of the EU countries are currently way ahead in terms of their legislative support for virtual currency related projects, and in the midst of Brexit negotiations, crypto firms will need some very compelling reasons to choose the UK over the EU.
Within the UK, all activities encompassing the insurance of equity and debt are regulated by the Financial Conduct Authority (FCA), with the strategic objective of ensuring the seamless operation of relevant financial markets. It achieves such by providing appropriate protection for consumers and investors as well as promoting effective competition in markets. However, regarding virtual currencies, the FCA maintains that “crypto assets designed primarily as a means of payment or exchange would not generally sit within the scope of FCA authority.” Whilst the nature of virtual currencies does not fit easily into the existing financial regulations within the UK, they are not specifically regulated against.
The UK has adopted a positive regulatory approach towards virtual currencies. For example, the wait-and-see regulatory strategy has been recently substituted with a much-needed sandboxing programme that allows for some form of cryptocurrency regulation within the UK. Regulatory sandboxes enable blockchain startups to test their ideas, projects and solutions in the market under a controlled regulatory environment, and can be contrasted with the American model, in which no such scheme exists. In the US, different states enact different blue-sky laws and take divergent regulatory approaches. Meanwhile, various regulatory authorities hold diverse and often opposing opinions regarding the status of cryptocurrencies.
In addition, the Treasury has shown keen intention to regulate cryptocurrency traders, requiring them to abide by KYC regulations and disclose their identities as well as report any suspicious activities. This should hopefully add some sought after legal certainty within the field. However,UK banks do not express the same enthusiasm as the government, intentionally and systematically refusing to support virtual currency related transactions and business.
Regarding tax treatment of virtual currencies, Her Majesty’s Revenue and Customs (HMRC) published a guidance in 2014 which showed that the the UK was one of, if not the first country in Europe to have a clear legal position on the issue – albeit “for tax purposes only.” Worth noting here is that VAT is imposed by the EU, and according to the latest European Court of Justice decision, virtual currencies will not be subject to VAT. Furthermore, these guidelines have not been revised until the present day, even though the blockchain scene has evolved beyond recognition since 2014.
It seems that the UK policymakers are waiting to see how the other EU countries will tax virtual currencies, whilst preserving the perception as a more “light touch fiscal regime” when it comes to cryptocurrency regulation in the UK.