Part 1 of this series discussed the basics of cryptocurrencies and the challenges tax authorities face bitcoin investment uk act they attempt to construct a tax and regulatory framework for them. Part 2 will consider how some of the world’s major economies are meeting this challenge.

Countries’ Stance on Crypto

As the transformation of cryptocurrencies from speculative investment to stablemate in a balanced portfolio continues to gather pace, governments around the world remain divided on how best to regulate them. The table below provides a brief overview of the cryptocurrency landscape across some of the major economies.

Please note that the tax implications mentioned above are from an investor perspective and do not cover the scenario of businesses/individuals engaged in crypto trading/exchange/mining.

U.S.

Although it is difficult to find a consistent legal approach at the state level, the U.S. continues to make progress in developing federal-level cryptocurrency legislation.

The Securities and Exchange Commission (SEC) typically views cryptocurrency as a security and applies securities laws to digital wallets comprehensively in an approach that affects both exchanges and investors. The Commodity Futures Trading Commission (CFTC) recognizes Bitcoin and Ethereum as commodities and allows bitcoin investment uk act virtual and cryptocurrency derivatives to trade publicly on exchanges that it regulates or supervises. The U.S. Treasury calls cryptocurrency a currency, and the Internal Revenue Service (IRS) treats it as digital property.

Crypto exchanges in the U.S. fall under the regulatory scope of the Bank Secrecy Act (BSA) and must register with the Financial Crimes Enforcement Network (FinCEN). Along with BSA regulations, they are also required to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations. Accordingly, bitcoin investment uk act, cryptocurrency exchange service providers must obtain the requisite license from FinCEN, implement an AML/CFT and sanctions program, maintain appropriate records, and submit reports to the relevant authorities.

The U.S. Treasury is cognizant of the urgent need for the creation of crypto regulations to combat global and domestic criminal activities. The Justice Department continues to coordinate with the SEC, CFTC, and other agencies over future cryptocurrency regulations to ensure effective consumer protection and smoother regulatory oversight. U.S. lawmakers remain keen to bring cryptocurrencies under regulatory consideration, given the potential destabilizing effect they may have on the globally dominant U.S. dollar and also the impact that private and centrally banked currencies might have.

Canada

Canadian regulators have been fairly proactive in their stance toward crypto and digital currencies. In FebruaryCanada became the first country to approve a Bitcoin exchange-traded fund. Furthermore, the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada have clarified that crypto trading platforms and dealers in Canada must register with provincial regulators.

As early asCanada brought entities dealing in virtual currencies under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Also, bitcoin investment uk act, in a bid to protect the public, Canada classifies crypto investment firms as money service businesses and requires that they register with the Financial Transactions and Reports Analysis Center of Canada. The Canada Revenue Agency treats cryptocurrency in a similar way to other commodities and has taxed cryptocurrencies since

While regulations in Canada are bitcoin investment uk act, there are currently no signs of significant additional legislation on the horizon.

U.K.

In the U.K., cryptocurrency exchanges must register with the Financial Conduct Authority and are prohibited from offering crypto derivatives trading, bitcoin investment uk act. The U.K. has also introduced cryptocurrency-specific requirements how to make a paper money cake to know-your-customer, bitcoin investment uk act, alongside the abovementioned AML and CFT.

The country’s approach to cryptocurrency regulations has been measured but has matured in the post-Brexit financial landscape. Although there is no definitive policy towards the taxation of crypto assets (including cryptocurrency) in the U.K., bitcoin investment uk act, the national tax authority, Her Majesty’s Revenue & Customs (HMRC), published two policy papers in and relating to the taxation of crypto assets for individuals and businesses. Cryptocurrency is considered to be property but not legal tender. Although investors still pay capital gains tax on crypto trading profits, taxability depends on the crypto activities undertaken and who engages in the transaction.

Having left the EU init remains to be seen if the U.K.’s cryptocurrency regulations will remain largely consistent with the EU’s crypto-regulatory landscape. Currently, there is no specific U.K, bitcoin investment uk act. crypto legislation approaching, although H.M. Treasury guidance, issued in January via the Crypto Asset Task Force, emphasizes the U.K.’s intention to consult on bringing certain cryptocurrencies under the scope of “financial promotions regulation.” In Februarythis guidance was updated to include information relating to the taxation of cryptocurrency transactions involving decentralized finance.

Japan

Japan currently has the world’s most progressive regulatory climate for cryptocurrencies, bitcoin investment uk act. It is the world’s largest market for Bitcoin and considers cryptocurrencies to be legal property under the Payment Services Act. Japan’s Financial Services Agency governs all the cryptocurrency trading platforms in Japan and ensures compliance with AML/CFT obligations.

Under the Payment Services Act, only a business with bitcoin investment uk act competent local financial bureau is allowed to operate as a cryptocurrency exchange, bitcoin investment uk act. However, in keeping with Japan’s progressive stance, foreign cryptocurrency exchanges are permitted to register where they are permitted to display an equivalent registration standard in their host country.

In Japan, exchange-based regulations are primarily focused on protection of market integrity, users and investors. Exchanges must observe bitcoin investment uk act record-keeping requirements and provide the Financial Services Agency with an annual report, including checking customer identification and covering custodian services providers.

In AprilJapan became the first country to self-regulate. It formed two self-regulatory bodies—the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering (STO) Association. All exchanges are members of the JVCEA while five major Japanese financial institutions collaborated to establish the Japan STO Association. The JVCEA and the STO Association work to provide assistance to unlicensed exchanges and promote regulatory compliance.

From a taxation perspective, Japan treats trading gains generated from cryptocurrency as “miscellaneous income” and taxes investors accordingly. However, nonresidents are taxed at a flat 20% rate on income, which they need to bitcoin investment uk act upon leaving Japan.

Australia

Australia has a progressive approach in its implementation of crypto regulations.

Exchanges can operate in the country provided they register with the Australian Transaction Reports and Analysis Bitcoin investment uk act (AUSTRAC) and meet specific AML/CTF obligations. Inthe Australian Securities and Investments Commission introduced regulatory requirements for initial coin offerings (ICOs) and banned exchanges from offering privacy coins.

Inthe Australian government declared that cryptocurrencies were legal and therefore subject to section 5 of the Anti-Money Laundering and Counter-Terrorism Financing Act and associated rules. Parliament acknowledged that Bitcoin (and cryptocurrencies that shared its characteristics) should be treated as property and subject to capital gains tax. It also resolved the controversial issue of double taxation under Australia’s goods and services tax.

InAUSTRAC announced the implementation of more robust cryptocurrency exchange regulations.

Singapore

Singapore has been in the front line of technology adoption and advancement. With regard to crypto, it has reflected a positive attitude, and is considered Asia’s leading cryptofinance hub. Singapore classifies cryptocurrency as property but not legal tender. The Monetary Authority of Singapore (MAS) licenses and regulates exchanges as outlined in the Payment Services Act, bitcoin investment uk act. The Blockchain and Cryptocurrency Regulation was enacted to regulate cryptocurrency and accelerate its adoption.

In Singapore, cryptocurrency exchanges and trading are legal. The Inland Revenue Authority of Singapore treats Bitcoin as “goods” taxable under its goods and services tax. Singapore’s reputation as a crypto-friendly regulatory environment is based on strong government support and on its status as a safe tax haven: Long-term capital gains are not taxed. However, gains made by companies that regularly transact in cryptocurrency are taxed as income.

As the Payment Services Act has only recently taken effect, there will inevitably be an adjustment period as crypto businesses adapt to the new legislative environment. The Act in many ways is aligned with the Financial Action Task Force’s most recent recommendations. However, MAS is likely to follow up with additional regulations in an effort to further align its position. Indeed, in JulyMAS proposed new financial sector regulations with consequences for the crypto industry: Under the proposals MAS is seeking to introduce stronger AML/CFT standards for cryptocurrency service providers and stricter requirements for technology risk management in financial institutions.

South Korea

In South Korea, crypto exchanges are legal, but not cryptocurrencies. The South Korean Financial Supervisory Service oversees crypto exchange regulation. In MarchSouth Korea passed legislation to strengthen the supervision of digital assets, bitcoin investment uk act, mandating that all cryptocurrency exchanges must register with the Korea Financial Intelligence Unit.

So, cryptocurrencies are neither legal tender nor financial assets: Hence, cryptocurrency transactions are exempted from taxes. However, South Korea is expected to launch a revised framework for taxing crypto transactions inand is also expected to align its framework for cryptocurrencies with its anti-money laundering policies.

China

China does not class cryptocurrencies as legal tender, but classifies them as property for the purposes of determining inheritance. Inthe People’s Bank of China (PBOC) banned crypto exchanges from operating in the country, reasoning that they facilitated public financing without approval, and it went further in by banning ICOs and domestic cryptocurrency exchanges.

The world’s largest crypto exchange, Binance, initially launched in China, eventually had to relocate its headquarters to the Cayman Islands in following the crackdown, bitcoin investment uk act. Also, in Maybitcoin investment uk act, China banned bitcoin mining, forcing many to close their operations entirely or relocate to jurisdictions with a more favorable regulatory environment.

There is no sign that China intends to lift or loosen its ban on cryptocurrencies any time soon, but recent developments suggest that the government intends to position the country catanai money making a leader in the crypto space. These developments consist of statements by Chinese government officials endorsing blockchain technology, bitcoin investment uk act, the extensive trial and testing of the central bank’s e-CNY digital currency (the digital yuan), and a joint venture with SWIFT (the international payment and cross-border payment gateway).

China’s central bank has been working on introducing its official digital currency sinceand efforts have apparently accelerated: To this end, in latethe Chinese government drafted a law that conferred legal status on the PBOC’s digital yuan.

The Chinese government has also expressed support for the implementation of a global regulatory framework for cryptocurrencies.

India

Currently, there is no regulation of, or any ban on the use of, cryptocurrencies in India. Cryptocurrencies are not legal tender. Inthe Reserve Bank of India (RBI) banned banks and financial institutions from transacting in virtual currencies. The RBI also prohibited the trading of cryptocurrencies on domestic exchanges and gave existing exchanges until July 6,to wind down. In a landmark decision, however, bitcoin investment uk act, the Supreme Court ruled the ban unconstitutional, reversed the prohibition and allowed exchanges to reopen.

On Feb. 1,Finance Minister Nirmala Sitharaman, presenting the Union Budget for –23, proposed taxing virtual digital assets. The proposals include a definition of such assets, their bitcoin investment uk act, deductions and losses, taxation of gifts of bitcoin investment uk act assets, and the imposition of a withholding tax (tax deducted at source) on such transactions.

A special tax rate of 30% will be imposed on income or gains from the transfer of any virtual asset, irrespective of how long it has been held. No deduction will be allowed in respect of expenses incurred, bitcoin investment uk act, besides the cost of acquisition. Also, losses on account of such investments will not be allowed to be set off or carried forward. Gifts of virtual assets will be taxed in the hands of the recipient.

The finance minister also proposed the introduction, starting in –23, of a digital rupee, using blockchain and other technologies, to be issued by the RBI. This is expected to boost the digital economy and reflects the government’s solid plan to create a public digital currency for India. However, ambiguity still exists in the government’s stance on the issue of private cryptocurrencies being traded in the market.

The introduction of a digital rupee based on blockchain technology and the inclusion of virtual digital assets in the tax net, such as cryptocurrencies and non-fungible tokens, can be seen as the first steps on the road to crypto’s eventual legal bitcoin investment uk act by the government.

The government has indicated that it wants to foster innovation in crypto and ensure that all kinds of experiments can take place in the why should i invest in xrp world. Its endeavors appear to be in tandem with an evolving global framework for cryptocurrency. In the meantime, however, there is a need to ensure consumer protection and also to tax cryptocurrency transactions. In DecemberPrime Minister Narendra Modi, at the “Summit for Democracy” hosted by U.S. President Joe Biden, called for united efforts to shape global norms for social media and cryptocurrencies so that they could help “empower democracy and not … undermine it”.

EU

Although the EU was one of the first to make cryptocurrency legal, bitcoin investment uk act, euro-backed member states may restrict the introduction of their own cryptocurrencies. There is no specific regulation passed by the EU that governs crypto activities, but the AML Directive directs crypto exchanges to follow the bloc’s anti-money laundering regulations.

The EU is actively exploring further cryptocurrency regulations. The European Central Bank is exploring the possibility of issuing its own digital currency, and bitcoin investment uk act promoting the adoption of a single AML/CFT rule book which member states would be obliged to follow without exception.

At the beginning ofthe European Commission announced a public consultation initiative, bitcoin investment uk act, seeking guidance on where and how crypto assets fit into the EU’s existing regulatory framework. In Septemberthe Commission followed up with a new proposal which was termed the “Markets in Crypto-Assets” Regulation. The proposal sets out draft regulatory measures for cryptocurrencies, including the introduction of a new licensing system for crypto-asset issuers, industry conduct rules, and new consumer protections.

Mexico

Inthe Mexican government published, in the Official Federal Gazette, the Fintech Law that regulates financial technology institutions. The purpose of this new law was solely to regulate cryptocurrencies within Mexico’s financial system.

Switzerland

Switzerland has been recognized as adopting a progressive stance towards cryptocurrency regulations. Cryptocurrencies are legal and are accepted as payment in some contexts.

Crypto and virtual currencies are classified as assets/property. Exchanges are legal, and depending on the nature of the assets and investor protections, virtual currency exchanges and bitcoin investment uk act are considered equivalent to financial institutions, so they must ensure compliance with local AML/CTF and consumer protection obligations. The Federal Tax Administration considers cryptocurrencies to be assets; they are subject to Swiss wealth, income, and capital gains taxes and must bitcoin investment uk act declared on annual tax returns.

However, it is important to note that capital gains arising from a private wealth asset are exempt from income tax. This rule also applies to capital gains from cryptocurrency. The gains realized from the disposal of cryptocurrency are therefore not subject to tax and, conversely, any losses bitcoin investment uk act from the disposal of cryptocurrency assets are not tax-deductible.

Switzerland’s government has indicated that it will keep working towards a regulatory environment that is friendly to cryptocurrencies. In latethe Department of Finance commenced a consultation on new blanket cryptocurrency regulations that would enable it to take control of blockchain technology without stifling innovation.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anshu Khanna is a Partner with Nangia Andersen LLP, a member bitcoin investment uk act of Andersen Global.

The author may be contacted at: www.oldyorkcellars.com@www.oldyorkcellars.com

UK policy thinking in relation to cryptocurrencies is still actively developing.  It was first set out by the UK Cryptoassets Taskforce in its Final Report¹ (the “Taskforce Report”), published in Octoberand has subsequently been developed through further work by the Taskforce authorities (HM Treasury, the Bank of England and the UK Financial Conduct Authority (“FCA”)).

The Taskforce Report identified cryptocurrencies bitcoin investment uk act a subset of the broader category “cryptoasset&rdquo.  It defined the latter as “a cryptographically secured digital representation of value or contractual rights that uses some type of [distributed rsitez money making technology (“DLT”)] and can be transferred, bitcoin investment uk act, stored or traded electronically&rdquo.²  Within this overarching category, the Taskforce Report identified three sub-categories and offered the following (non-legislative) definitions:

“A. Exchange tokens — which are often referred to as ‘cryptocurrencies’ such as Bitcoin, Litecoin and equivalents.  They utilise a DLT platform and are not issued or backed by a central bank or other central body.  They do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment.

B. Security tokens — which amount to a ‘specified investment’ as set out in the Financial Services and Markets Act () (Regulated Activities) Order […].  These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.  They may also be transferable securities or financial instruments under the EU’s Markets in Financial Instruments Directive II […].

C. bitcoin investment uk act tokens — which can be redeemed for access to a specific product or service that is typically provided using a DLT platform.”³

Although UK financial regulators have issued warnings in relation to investment in cryptoassets,⁴ they are not subject to a blanket prohibition or ban in the UK.  However, as indicated by the definitions set out in the Taskforce Report, some cryptoassets will be subject to financial regulation (see Cryptocurrency regulation below).  UK payment services and electronic money regulation may also be relevant, and the UK anti-money laundering (“AML”) regime has been extended to capture activities relating to most cryptoassets (including cryptocurrencies), regardless of whether they are otherwise subject to financial regulation (see Money transmission laws and anti-money laundering requirements below).  Cryptoassets (including cryptocurrencies) are not considered money or equivalent to fiat currency in the UK.

As noted above, the Taskforce authorities have continued to conduct further substantive work in relation to cryptoassets since the publication of the Taskforce Report.  In particular:

• The FCA consulted on⁵ and published⁶ regulatory guidance in relation to cryptoassets (including cryptocurrencies) (the “FCA Guidance”).  It also consulted on⁷ and introduced⁸ from 6 January a ban on the sale, marketing and distribution of derivatives and exchange-traded notes referencing “unregulated transferable cryptoassets” in or from the UK to retail customers.
• At the time of writing, responses are expected to two consultations on cryptoassets by HM Treasury: the first relating to changes to the UK financial promotions regime with a view to bringing otherwise unregulated cryptoassets (including cryptocurrencies) into scope (see Sales regulation below); and the second relating to the UK regulatory approach to cryptoassets more generally, with a focus on stablecoins (see Cryptocurrency regulation below).
• Although it has not decided on whether to introduce a central bank digital currency (“CBDC”),⁹ the Bank of England has published a discussion paper on what such a CBDC would look like and has jointly created a Central New penny stocks to invest in 2022 Digital Currency Taskforce with HM Treasury to coordinate the exploration of a potential UK CBDC.¹⁰

As noted above, there is no blanket prohibition or ban on cryptocurrencies in the UK.  Nor does the UK have a bespoke financial regulatory regime for cryptoassets (notwithstanding that certain elements of the UK AML bitcoin investment uk act apply specifically in relation to cryptoasset business).  Accordingly, whether or not a given cryptocurrency is subject to financial regulation in the UK depends on whether it falls within the general financial regulatory perimeter established under the Financial Services and Markets Act (“FSMA”) or, bitcoin investment uk act, as discussed in Money transmission laws and anti-money laundering requirements below, within the UK AML regime or the payment services and electronic money regime established under the Payment Services Regulations (“PSRs”) and the Electronic Money Regulations (“EMRs”).

This is reflected in the cryptoasset “taxonomy” set out in the FCA Guidance, which broadly follows the definitions set out in the Taskforce Report, but which has been refined by the FCA as follows:

In summary, the FCA Guidance taxonomy splits cryptoassets into regulated and unregulated cryptoassets.  The Taskforce Report definitions of exchange tokens and utility tokens are retained, and these two sub-categories of cryptoassets comprise “unregulated tokens” in the FCA Guidance taxonomy.  Cryptoassets that constitute electronic money are split out from the Taskforce Report sub-category of security tokens, and are instead labelled as “e-money tokens”, and these two sub-categories of cryptoassets (i.e., security tokens other than e-money tokens and e-money tokens) comprise “regulated tokens” in the FCA Guidance taxonomy.

The kinds of instruments that are regulated under FSMA are set out in an exhaustive fashion in the Financial Services and Markets Act (Regulated Activities) Order (“RAO”).  These are known as “specified investments” and include instruments such as shares, bonds, fund interests and derivative contracts.  Therefore, in order to determine whether a given cryptocurrency is subject to financial regulation in the UK, it is necessary to analyse whether it matches the definition of a specified investment in the RAO.  Those cryptoassets that do are labelled “security tokens” in the FCA Guidance and will typically be subject to UK financial regulation.

As stated by the FCA: “Any tokens that are not security tokens or e-money tokens [as to which see Money transmission bitcoin investment uk act and anti-money laundering requirements below] are unregulated tokens.”¹²  In practice, this analysis proceeds predominantly on the basis of an “intrinsic” assessment of a given cryptocurrency, focused on the rights or entitlements granted to holders, bitcoin investment uk act, rather than being based on “extrinsic” factors, such as the intended or actual use of the relevant cryptocurrency or other contextual factors relating to the cryptoasset (such as whether a platform to which the cryptoasset relates is currently operational or whether the network underlying the cryptoasset is decentralised).¹³

Although characterisation of cryptocurrencies in this way must be undertaken on a case-by-case basis in order to determine definitively whether they are subject to UK financial regulation, bitcoin investment uk act, the FCA Guidance provides useful indicators of the likely outcome of any such analysis.  “Classic” cryptocurrencies (such as Bitcoin, Litecoin and Ether), which are not centrally issued and give no rights or entitlements to holders, are labelled “exchange tokens” in the Taskforce Report and “unregulated tokens” in the FCA Guidance.  As explained in the FCA Guidance, exchange tokens “typically do not grant the holder any of the rights associated with specified investments&rdquo.¹⁴  Accordingly, in the FCA’s view:

“Exchange tokens currently fall outside the regulatory perimeter.  This means that the transferring, bitcoin investment uk act, buying and selling of these tokens, including the commercial operation of cryptoasset exchanges for exchange tokens, are activities not currently regulated by the FCA.

For example, if you are an exchange, and all you do is facilitate transactions of Bitcoins, Ether, bitcoin investment uk act, Litecoin or other exchange tokens between participants, you are not carrying on a regulated activity.”¹⁵

It is therefore clear that activities related to Bitcoin, Litecoin and Ether are currently unlikely to trigger licensing requirements in the UK (although registration under the recently extended UK AML regime may be required).  Cryptocurrencies with substantially similar features (i.e., those that are not centrally issued and do not grant any rights or entitlements to holders) are also currently unlikely to trigger licensing requirements in the UK (although, again, bitcoin investment uk act, registration under the UK AML regime may be required).  The bitcoin investment uk act is also true for utility tokens.  The fact that these kinds of cryptoassets may be used for speculative investment purposes in addition to being used as a means of exchange or to redeem a service should not impact this conclusion.

Stablecoins are an increasingly popular type of cryptoasset that are typically more difficult to characterise for financial regulatory purposes than classic cryptocurrencies.  Broadly, a stablecoin is a cryptoasset that by design seeks to maintain a stable market value, typically through pegging the value of bitcoin investment uk act stablecoin to underlying assets or currencies (such as gold or USD).  Often, stablecoins are primarily intended to be utilised as a means of exchange much like classic cryptocurrencies.  Pegging the value of a stablecoin to an underlying asset or currency can be achieved in a variety of ways, and the precise structure adopted by a given stablecoin will determine whether it is classified as a specified investment in the UK.  For example, a “fully collateralised” stablecoin issued by a central issuer that is pegged to an underlying reference asset through the issuer holding the relevant underlying reference asset is bitcoin investment uk act to constitute a specified investment (or, indeed, electronic money) if holders of the stablecoin have rights or entitlements in relation to the underlying reference asset.  On the other hand, so-called “algorithmic” stablecoins, which seek to maintain a stable value through the use of algorithms to control supply without any backing by a reference asset, may be unregulated tokens.

HM Treasury is currently consulting¹⁶ on potential changes to the UK bitcoin investment uk act regulatory framework to establish “a sound regulatory environment” for stablecoins.  The potential changes proposed in the consultation constitute part of the UK government’s “staged and proportionate approach” to cryptoasset regulation in the UK and HM Treasury notes that “[f]uture regulation of a potentially wider set of tokens and services” will be informed by the government’s continuing strategic assessment of new and emerging risks in cryptoasset markets.  For now, however, the potential changes are focused on seeking to ensure that cryptoassets that could be reliably used for retail or wholesale transactions are subject to minimum requirements and protections as part of a UK authorisation regime.  The consultation is limited to defining the scope of the regulatory perimeter with respect to such stablecoins and establishing the high-level objectives and principles that should frame the detailed requirements that would be applicable to persons falling within the scope of the new authorisation requirement (the consultation states that the UK’s financial services regulators will consult on detailed firm requirements should the government adopt the approach set out in the consultation).  In-scope cryptoassets for the purposes of the new authorisation requirement would only include those stablecoins that rely on a link to underlying currencies or assets in order to stabilise their value.  Exchange tokens, utility tokens and algorithmic stablecoins are therefore likely to remain outside the authorisation perimeter for the time being (but may nevertheless be subject to other aspects of UK financial regulation such as AML regulation or, bitcoin investment uk act, if extended, financial promotions requirements – see Money transmission laws and anti-money laundering requirements and Sales regulation below).  Interestingly, the consultation suggests that the definition of in-scope cryptoassets for these purposes may not specify that DLT and cryptography are necessary features, which would be a significant departure from the definition of cryptoasset set out in the Taskforce Report and in UK AML regulation (see Money transmission laws and anti-money laundering requirements below).  This may also give rise to potential overlap with the existing UK regulatory framework governing payments and electronic money under the PSRs and EMRs (and although this possibility is partially acknowledged in the consultation, bitcoin investment uk act, it does not include any firm proposals on how this will be addressed).  The activities relating bitcoin investment uk act in-scope cryptoassets that the consultation envisages being subject to the new authorisation regime are: issuing, creating or destroying in-scope tokens; value stabilisation and reserve management (including providing custody services in relation to reserve assets); validation of transactions (which could include, bitcoin investment uk act, for example, the activities of nodes bitcoin investment uk act miners); providing services or support to facilitate access by participants to the network or underlying infrastructure; transmission of in-scope tokens; providing custody and administration of in-scope tokens for third parties; executing transactions in in-scope tokens; and exchanging in-scope tokens for fiat currency.  Finally, the consultation also notes that bitcoin investment uk act government is considering the possibility of expressly applying UK payment systems regulation to stablecoin networks that reach a systemically important scale.  The potential changes included in the consultation therefore represent significant proposals to clarify and expand the application of the general UK financial regulatory perimeter to certain kinds of stablecoins.

Notably, even if a given cryptocurrency is not a specified investment other than electronic money (i.e., not a security token following the FCA Guidance), certain activities in relation to such cryptocurrencies can currently still be subject to UK financial regulation, and cryptoassets that constitute electronic money (i.e., e-money tokens following the FCA Guidance) are subject to regulation.  For example, offering to enter into derivative contracts that reference unregulated cryptocurrencies as their underlying bitcoin investment uk act as cryptocurrency contracts for differences or Bitcoin futures) by way of business is likely to constitute a regulated activity in the UK for which a person would require authorisation from the FCA.  Indeed, such derivatives are also the subject of the FCA ban on their sale, marketing and distribution to retail customers.  Establishing, operating, marketing or managing a fund that offers exposure to unregulated cryptocurrencies by way of business may also be subject to UK financial regulation.  Furthermore, money transmission laws and AML legislation may also apply to activities carried out in relation to unregulated cryptocurrencies (see Money transmission laws and anti-money laundering requirements below).

The principal sales regulation that is potentially applicable to sales of cryptocurrencies in the UK falls into three broad categories: (i) UK prospectus requirements; (ii) the UK restriction on financial promotions; and (iii) consumer protection and online/distance selling legislation.

UK bitcoin investment uk act requirements

FSMA, in conjunction with the “onshored” UK version of the Prospectus Regulation, imposes requirements for an approved prospectus to have been made available to the public before: (a) transferable securities are offered to the public in the UK; or (b) a request is made for transferable securities to be admitted to a regulated market situated or operating in the UK.¹⁷  Unless an exemption applies (public offers made to qualified investors or fewer than persons in the UK are, for example, exempt), a detailed prospectus containing prescribed content must be drawn up, approved by the FCA and published before the relevant offer or request is made.

However, these requirements only apply to offers or requests relating to transferable securities.  Transferable securities for these purposes are anything that falls within the definition of transferable securities in the “onshored” UK version of the Markets in Financial Instruments Regulation, which captures, for example, shares, bonds and depository receipts (and instruments that give their holders similar rights or entitlements). 

Therefore, in order to determine whether these requirements apply to the sale of a given bitcoin investment uk act in the UK, it is necessary to determine whether the cryptocurrency is a transferable security.  Referring back to the FCA Guidance, only cryptocurrencies that are security tokens (i.e., bitcoin investment uk act those cryptocurrencies that amount to a specified investment under the RAO other than electronic money) may be transferable securities.¹⁸  Classic cryptocurrencies (such as Bitcoin, Litecoin and Ether) and cryptocurrencies with substantially similar features to classic cryptocurrencies are likely to be regarded as exchange tokens, rather than security tokens.  Accordingly, bitcoin investment uk act, the UK prospectus requirements should not apply to the sales of such cryptocurrencies.  Similarly, utility tokens should not amount to transferable securities.

UK restriction on financial promotions

FSMA contains a restriction on financial promotions that applies independently of the UK prospectus requirements.  In summary, a person who is not appropriately authorised must not, in the course of business, bitcoin investment uk act, communicate an invitation or inducement to engage in investment activity in a way that is capable of having an effect in the UK unless the communication is approved by an appropriately authorised person or an exemption applies.  Following a consultation in July ,¹⁹ HM Treasury has indicated that the government proposes to amend FSMA “when parliamentary time allows” so that in the future, unauthorised persons will only be able to communicate financial promotions that have been approved by an authorised person that has obtained consent from the FCA to provide such approval.  Notably, however, the government does not intend this to apply to authorised persons approving the financial promotions of an unauthorised person within the same group, or to the approval of authorised persons’ own promotions for communication by unauthorised persons.

For these purposes, the concept of engaging in investment activity is further defined by reference to “controlled activities” and “controlled investments”, which are set out in exhaustive fashion in the Financial Services and Markets Act (Financial Promotion) Order (“FPO”).  Therefore, in order to determine whether the restriction on financial promotions applies to particular activities relating to a given cryptocurrency (including, for example, the sale of that cryptocurrency), it is necessary to determine whether the activities involve a controlled activity or a controlled investment by reference to the definitions of each that are set out in the FPO.  Although distinct and subtly different, the controlled activities and controlled investments set out in the FPO closely resemble the list of specified activities and specified investments set out in the RAO bitcoin investment uk act in Cryptocurrency regulation above).

Typically, therefore, sales of classic cryptocurrencies (such as Bitcoin, Litecoin and Ether) and cryptocurrencies with substantially similar features to classic cryptocurrencies should not currently engage the UK restriction on financial promotions, although analysis of the sale in question must be undertaken on a case-by-case basis in order to determine definitively bitcoin investment uk act this is the case (and related offerings, such as funds providing exposure to unregulated cryptocurrencies, may well trigger the restriction).  The same is also currently true for utility tokens (which, for the time being, are unlikely to constitute controlled investments) and e-money tokens (since electronic money is notably not a controlled investment, and so promotions in relation to electronic money are generally not within the restriction on financial promotions). 

However, by way of a consultation in July ,²⁰ HM Treasury proposed to widen the regulatory perimeter by adding otherwise unregulated cryptoassets to the list of controlled investments and increasing the list of controlled activities to include activities relating to the buying, selling, subscribing for or underwriting of such cryptoassets.  Although a response bitcoin investment uk act this consultation from HM Treasury is still awaited at the time of writing, if these proposals are adopted, bitcoin investment uk act, then marketing in relation to certain activities relating to otherwise unregulated cryptocurrencies would only be permissible if conducted by an authorised firm, if approved by an appropriately authorised person or if an exemption applies.  With respect to the latter option, a number of potentially helpful exemptions exist, of which the most likely to be relevant are those relating to financial promotions given to investment professionals, sophisticated investors and high-net-worth individuals/entities.

General advertising, bitcoin investment uk act, online/distance selling and consumer protection legislation

In addition to sales regulation that arises out of the UK financial regulatory framework, there is a raft of general advertising, online/distance selling and consumer protection legislation that is potentially applicable to sales of cryptocurrencies or the offering of services related to cryptocurrencies (such as exchange or wallet services) in or from the UK.

Some of this legislation, like the Consumer Rights Act or the Consumer Protection from Unfair Trading Regulationsonly applies in relation to consumers (typically defined as individuals acting outside of their trade, business, craft or profession), but where it does, bitcoin investment uk act, provides consumers with significant statutory rights and remedies against supplies of goods, services and digital content and imposes restrictions on the kinds of contractual terms that can be enforced against consumers.  Other legislation, like the Electronic Commerce (EC Directive) Regulationsis of more general application and imposes requirements on businesses that offer or provide goods or services digitally.  The application of such legislation may also depend on whether or not the business being conducted is subject to UK financial regulation.

Currently, there are no bespoke UK tax rules applicable to cryptoassets (including cryptocurrencies).  Therefore, existing tax principles and rules apply generally (although some uncertainty remains as to their application).

The UK tax authority HM Revenue and Customs (“HMRC”) considers that cryptoassets are cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically (i.e., bitcoin investment uk act, the definition adopted by the Taskforce).  HMRC has identified four types of cryptoassets: exchange tokens; utility tokens; security tokens; and stablecoins.  However, HMRC will look at the facts of each case and apply the relevant bitcoin investment uk act provisions according to what has actually taken place.  The classification of cryptoassets is not necessarily determinative of their tax treatment, which will depend on the nature and use of the cryptoasset in question.

Although there is no definitive policy for the taxation of cryptoassets (including cryptocurrency) in the UK, HMRC has published two policy papers, one relating to the taxation of cryptoassets for individuals, bitcoin investment uk act, published in December (and updated in December ), and the other relating to the taxation of cryptoassets for businesses, published in December (notably, the position in these papers may not be binding on HMRC).  The positions set out in the policy papers, and HMRC’s guidance in general in relation to the taxation of cryptoassets, bitcoin investment uk act, are contained in HMRC’s Cryptoassets Manual, which at the time of writing was last updated on 8 April

In the Cryptoassets Manual, HMRC states that the tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in bitcoin investment uk act cryptoassets are used.  As such, HMRC stresses that the facts of each case need to be established before applying the relevant tax provisions according to what has actually taken place (rather than by reference to terminology).

The policy papers and Cryptoassets Manual focus on the taxation of exchange tokens.  For security tokens and utility tokens, the guidance may provide the starting principles, but different tax treatments may need to be adopted and further HMRC guidance may be published in due course.

Taxation of individuals

Cryptoassets: tax for individuals²¹ sets out HMRC’s views about how individuals who hold exchange tokens are to be taxed.  This policy paper includes the following helpful general points:

• Capital gains tax (“CGT”) and income tax (“IT”) may apply bitcoin investment uk act dealings in cryptocurrencies depending on the circumstances.  HMRC has clarified that it does not regard cryptocurrencies as currency or money, and that it does not consider buying and selling cryptocurrencies to be the same as gambling (which largely rules out arguments that cryptocurrencies could be exempt from taxation).  Cryptoassets are likely to be property for the purposes of inheritance tax.
• In most cases, HMRC expects that buying and selling of cryptocurrencies by an individual will amount to personal investment activity, meaning that individuals will typically have to pay CGT on any gains they realise upon disposal of the cryptocurrencies (which includes not only selling them for fiat currency but also using them to pay for goods and services, giving them away to another person and exchanging them for another kind of cryptoasset).
• If an individual is engaged in a trade of dealing in cryptocurrencies (an exceptional case, in HMRC’s view, bitcoin investment uk act, and one to be determined in accordance with the existing approach taken towards determining whether an individual is engaged in trading securities and other financial instruments for tax purposes), IT would take priority over CGT, being applied to the individual’s trading profits. 
• Individuals will be liable to pay IT and National Insurance contributions on cryptocurrencies that they receive as a form of payment from their employer.  If the cryptocurrencies are considered readily convertible assets (“RCAs”), the IT liability will need to be accounted through Pay-As-You-Earn (“PAYE”), and employer National Insurance contributions will also be due.  Cryptocurrencies that are not RCAs are still subject to IT and National Insurance contributions, but employers do not have to operate PAYE.  The individual must declare and pay HMRC the IT due on any amount of employment income received in the form of cryptoassets.  The employer should treat the payment of cryptoassets, which are not RCAs, as payments in kind for National Insurance contributions purposes, and pay any Class 1A National Insurance contributions to HMRC.  Broadly, a cryptocurrency will be an RCA if trading arrangements exist, or if such arrangements are likely to come into existence.
• A charge to CGT may also arise if an individual subsequently disposes of cryptocurrencies received from their employer, or tokens received as a result of mining activity or airdrops (regardless of whether or not IT was payable on their receipt).
• A person who is not trading and receives tokens from mining must complete a self-assessment tax return (in pound sterling), treating those tokens as “other taxable income”, unless they have received cryptoassets worth less than GBP 1, bitcoin investment uk act, or other untaxed income of less than GBP 2,
• If a person is resident but not domiciled in bitcoin investment uk act UK and claims the remittance basis of taxation, income and gains that have a source outside the UK are usually only taxed if they are remitted to the UK.  HMRC has taken the view that throughout the time an individual is a UK resident, the exchange tokens they hold as beneficial owner will be located in the UK.  As a result, UK resident individuals (whether UK or non-UK domiciled) will be subject to UK tax if they carry out a transaction with their tokens that is subject to UK tax.
• Notably, bitcoin investment uk act, some cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.  The onus is therefore on the individual to keep separate records for each cryptoasset transaction, bitcoin investment uk act, and these must include:
  1. the type of cryptoasset;
  2. the date of the transaction;
  3. whether the cryptoasset was bought or sold;
  4. the number of units;
  5. the value of the transaction in pound sterling (as at the date of the transaction);
  6. the cumulative total of the investment units held; and
  7. bank statements and wallet addresses, if needed for an enquiry or review.

Taxation of businesses

Cryptoassets: tax for businesses²² sets out HMRC’s views about how transactions involving cryptoasset exchange tokens that are undertaken by companies and other businesses (including sole traders and partnerships) are to be taxed.  This policy paper includes the following helpful general points:

• As HMRC does not consider any of the current types of cryptoassets to be money or currency, any corporation tax (“CT”) legislation that relates solely to money or currency does not apply to exchange tokens or other types of cryptoassets (e.g., bitcoin investment uk act, the foreign currency rules, the Disregard Regulations relating to exchange gains and losses, and designated currency elections).
• Where the buying and selling, or mining, bitcoin investment uk act, of exchange tokens amounts to a trade, the receipts and expenses of the trade will form part of the calculation of the trading profit of that business for CT purposes.  For example, if a company carrying on a trade accepts exchange tokens as payment from customers, or uses them to make payments to suppliers, bitcoin investment uk act, the token bitcoin investment uk act or received will need to be accounted for within the taxable trading profits.  Similarly, in respect of mining, if a business purchases a bank of dedicated computers to mine exchange tokens, as opposed to mining that uses excess home computer capacity, the mined cryptoassets will probably amount to trade receipts and be taxed in accordance with CT principles.
• If the activity concerning the exchange token is not a trading activity, and is not charged to CT in another way (such as the non-trading loan relationship or intangible fixed asset rules, both discussed below), then the activity may be the disposal of a capital asset.  Any gain that arises from the disposal would typically be charged to CT as a chargeable gain.  A disposal for these purposes includes not only selling tokens for fiat currency, but also using tokens to pay for goods and services, giving tokens away to another person and exchanging tokens for another kind of cryptoasset.
• Companies that account for exchange tokens as “intangible assets” may be taxed under CT rules for intangible fixed assets if the token is both an “intangible asset” for accounting purposes and an “intangible fixed asset&rdquo.  This requires that the relevant exchange token has been created or acquired by a company for use on a continuing basis.  Exchange tokens that are bitcoin investment uk act held by the company, even when held in the course of its activities, will not meet this definition.  If these conditions are met, the CT rules for intangible fixed assets (Corporation Tax Act Part 8) have priority over the chargeable gains rules.
• A company has a “loan relationship” if it has a money debt that has arisen from a transaction for the lending of money.  HMRC does not consider exchange tokens to be money.  In bitcoin investment uk act, there is typically no counterparty standing behind the token; as such, bitcoin investment uk act, the token does not seem to constitute a debt.  This means that exchange tokens do bitcoin investment uk act create a loan relationship.  If exchange tokens have been provided as collateral security for an ordinary loan (of money), a loan relationship exists, and the loan relationship rules will apply (whether the company is the debtor or bitcoin investment uk act tax (“VAT”) is due in the normal way on any VAT-able goods or services sold in exchange for exchange tokens.  The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.  However, bitcoin investment uk act, no VAT will be due on the supply of the token itself (despite HMRC’s prevailing view that cryptocurrencies are not currency or money for direct tax purposes).  In addition, the exchange of traditional currencies for non-legal tender such what is investing in stocks on cash app Bitcoin (and vice versa), as well as a supply of any services required for this type of exchange, bitcoin investment uk act, constitute financial transactions that are exempt from VAT.
• Stamp duty and stamp duty reserve tax (“SDRT”) will not usually be chargeable on the transfer of exchange tokens.  HMRC’s view is that existing exchange tokens are unlikely to meet the required definition of “stock or marketable how to invest in us stock market from abroad or “chargeable securities&rdquo.  However, each exchange token will need to be considered on its own facts and circumstances in the context of the definitions of “stock or marketable securities” or “chargeable securities&rdquo.
• In terms of exchange tokens being given as consideration for purchases of “stock or marketable securities” or “chargeable securities”, SDRT requires that chargeable consideration is “money or money’s worth&rdquo.  Exchange tokens constitute “money’s worth” and are therefore chargeable for SDRT purposes.
• Stamp duty land tax (“SDLT”) will not be payable on transfers of exchange tokens, since HMRC does not consider such transfers to be land transactions.  As with SDRT, chargeable consideration for SDLT purposes includes anything given for the transaction that is “money or money’s worth&rdquo.  Accordingly, if exchange tokens are given as consideration for a land transaction, the tokens would fall within the definition of “money or money’s worth” and bitcoin investment uk act be chargeable to SDLT.

Money transmission laws

The principal UK laws relevant to money transmission are the PSRs and EMRs.  Together, the PSRs and EMRs establish a regulatory framework applicable to persons performing payment services (including, for bitcoin investment uk act, money remittance) and issuing electronic money in the UK, which includes authorisation, organisational, regulatory capital, safeguarding and conduct of business requirements.  Whether this framework applies depends on whether a service involves payment services or the issue of electronic money as defined by the PSRs and EMRs, respectively.

Payment services as defined by the PSRs necessarily involve funds.  Cryptocurrencies are generally not considered funds for these purposes.  Therefore, products and services involving only cryptocurrency (such as a crypto-to-crypto exchange) will not normally involve payment services.  Important exceptions are products or services relating to what the FCA Guidance terms “e-money tokens&rdquo.  Take, bitcoin investment uk act, for example, a stablecoin structured in a way that means it constitutes electronic money – issuing such a stablecoin would likely trigger the application of the EMRs, and providing wallet services in relation to such a stablecoin would likely trigger the application of the PSRs (since electronic money is a form of funds for the purposes of the PSRs).

Conversely, bitcoin investment uk act, where fiat currency is involved (e.g., in the context of a fiat-to-crypto exchange) there will be funds, bitcoin investment uk act, and so further analysis would need to be conducted to determine whether payment services are being provided and, if so, the precise application of the regulatory regime established by the PSRs. 

Anti-money laundering requirements

UK AML requirements are principally contained in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (“MLRs”).

The MLRs implement the Fourth EU Money Laundering Directive in the UK and impose various requirements on businesses that are within their scope, including: the requirement to perform a firm-level AML risk assessment; organisational requirements relating to AML (including systems and controls and record-keeping requirements); customer due diligence obligations when establishing a business relationship with a customer or when transacting above a certain threshold; and ongoing monitoring obligations.  The MLRs only apply to those businesses that have been identified as the most vulnerable to the risk of being used for money laundering or terrorist financing. 

On 10 Januarythe MLRs were amended to incorporate the Fifth EU Money Laundering Directive (“MLD5”) into UK law.  This change brought cryptoasset exchange providers (“CEPs”) and custodian wallet providers (“CWPs”) within the scope of the MLRs.  As such, the MLRs impact any person conducting cryptoasset business of a kind that is captured by the new definitions of CEP or CWP in the UK (including, for example, existing UK authorised financial services firms that carry on relevant cryptoasset business).

For the purposes of the MLRs, CEPs, CWPs and cryptoassets are defined as follows:

•    CEP: “a firm or sole practitioner who by way of business provides one or more of the following services, including bitcoin investment uk act the firm or sole practitioner does so as creator or issuer of any of the cryptoassets involved, when providing such services—

1. exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets,
2. exchanging, or arranging or making arrangements with a view to the exchange of, one cryptoasset for another, or
3. operating a machine which utilises bitcoin investment uk act processes to exchange cryptoassets for money or money for cryptoassets.”

•    CWP: “a firm or sole practitioner who by way of business provides services to safeguard, or to safeguard and administer—

1. cryptoassets on behalf of its customers, or
2. private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets,

when providing such services.”

•    Cryptoasset: “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, bitcoin investment uk act, stored or traded electronically.”

Significantly, a person may be a CEP or CWP regardless of whether they are otherwise regulated in the UK if they carry on cryptoasset business of a kind that is captured by the new definitions.  As such, bitcoin investment uk act, the requirements relating to cryptoasset business in the MLRs apply to both regulated and unregulated cryptoasset businesses in the UK.  Notably, the definition of a CEP goes beyond the requirements of MLD5, capturing crypto-to-crypto exchange (in addition to crypto-to-fiat exchange).  The CEP definition may also capture market participants that would not ordinarily be regarded as exchanges in the strict sense.  For example, cryptoasset brokers that buy and sell cryptoassets for their customers or for their own account when executing client orders are likely to be captured by the definition, in addition to exchanges that facilitate interactions between buyers and sellers of cryptoassets.  Issuers of cryptoassets may also be captured in certain circumstances.

Typically, providers of non-custodial cryptoasset wallet software will not be captured by the CWP definition.

CEPs and CWPs are required to register with the FCA before carrying on relevant cryptoasset business in the UK.  The FCA clarified that existing UK authorised persons (including existing UK banks, investment firms, electronic money institutions and payment services businesses) undertaking relevant cryptoasset business must apply for registration.  Registration must be completed via the FCA’s online system, Connect, and applicants must provide a significant amount of information relating to their business and all staff who hold relevant functions to allow the FCA to assess whether or not the applicant is fit and proper.  An applicant for registration must provide various information, including: a programme of operations; a business plan; a description of the applicant’s structural organisation; a detailed guide to the applicant’s IT bitcoin investment uk act and controls; and details of relevant individuals, beneficial owners and close links.

In addition to the ordinary AML requirements that apply generally to businesses within the scope of the MLRs (including CEPs and CWPs), there is a specific additional requirement that a business whose relevant cryptoasset activity does not fall within the scope of the Financial Ombudsman Service or the Financial Services Compensation Scheme must inform its customers of this fact before entering into a relevant business relationship or transaction.  There are also specific reporting requirements that apply to CEPs and CWPs (see Reporting requirements below).

Relatedly, the Joint Money Laundering Steering Group²³ published sector-specific guidance relating to cryptoasset business in July   The guidance clarified the scope of the Bitcoin investment uk act in relation to cryptoassets, bitcoin investment uk act, discussed the money laundering and terrorist financing risks pertinent to the sector, assessed these risks and provided guidance on how CEPs and CWPs might interpret the AML requirements under the MLRs (e.g., bitcoin investment uk act, customer due diligence, transaction analysis, record-keeping and sanctions screening) as would be appropriate to the cryptoasset sector.

At the time of writing, HM Treasury is consulting²⁴ on the extension of the so-called “travel rule” (the requirement for financial institutions to send and record information on the originator and beneficiary of a wire transfer, and for this information to remain with the transfer or related message throughout the payment chain) to CEPs and CWPs.  In its consultation, HM Treasury states that the government considers that “the time is now right” to begin planning for the implementation of the travel rule to cryptoasset transfers (tailored where appropriate to reflect the nature of the underlying technology involved), after previously deciding to defer the implementation of bitcoin investment uk act travel rule for such transfers in order to allow compliance solutions to be developed.  However, the consultation acknowledges that “the process of integrating these requirements into a firm’s business practices may take time”, and that the government therefore proposes to allow firms a grace period after the amendments to the AML regime are made, to allow for the integration of compliance solutions.  The length of this proposed grace period is not set out in the consultation, and respondents are invited to give their views on how long it should be.  Legislation giving effect to the relevant changes is currently expected to be introduced in Spring

In Novemberthe FCA established an Innovation Division, which encompasses initiatives that the regulator has developed in recent years relating to innovation in financial services.  Notably, the following areas fall under the Innovation Division in relation to promotion and testing:

• The FCA’s Regulatory Sandbox, which allows both authorised and unauthorised businesses that meet certain eligibility criteria to test innovative financial services propositions in the market with real consumers.  Firms that successfully apply to participate in the Sandbox may benefit from the various Sandbox “tools” that the FCA can deploy to facilitate real-world testing, such as restricted authorisation, individual guidance, informal steers, waivers and no-enforcement action letters.
• The Global Financial Innovation Network, which grew out of the FCA’s proposal to create a global Sandbox.  The Network seeks to provide a more efficient way for innovative firms to interact with regulators, bitcoin investment uk act, helping them navigate between countries as they look to scale new ideas.  The Network is for firms wishing to test innovative products, services or business models across more than one jurisdiction.
• The FCA’s Innovation Hub, which offers direct support from the FCA to eligible innovative businesses by providing a dedicated contact for businesses that are considering applying for authorisation or a variation of permission, need support when doing so, or do not need to be authorised but could benefit from FCA support.

In the interests of improving legal certainty with respect to ownership and transfer of cryptoassets, the England and Wales Law Commission is in the process of consulting²⁵ on digital assets.  The Law Commission’s work will involve surveying the current state of English private law (i.e., not including regulatory, taxation, data protection, criminal, settlement finality or AML issues) relating to digital assets, as well as making recommendations as to possible changes to such law with respect to digital assets.  The focus of the Law Commission’s work is therefore on questions such as: whether and how cryptoassets can be characterised as personal property; whether cryptoassets should be amenable to concepts such as possession and bailment; whether and how security interests may be granted over cryptoassets; and how cryptoassets should be treated for the purposes of UK insolvency law.  In this regard, the Law Commission endorses and intends to build on the Legal Statement²⁶ published by the UK Jurisdiction Taskforce (“UKJT”) of the UK government’s LawTech Delivery Panel in November covering similar topics.  In its Legal Statement, the UKJT concluded that cryptoassets are capable of having all the legal characteristics of property under English law and are therefore capable of being treated as a form of property.  Indeed, since the publication of the Legal Statement (which in itself is not legally binding), it has been adopted by the High Court of England and Wales, which has held in more than one case that particular cryptoassets were capable of being a form of property.²⁷  The Law Commission also starts from the premise that the law will treat certain cryptoassets as property, where those cryptoassets satisfy the legal characteristics of property under English law.

As to licensing requirements, whether or not a person requires authorisation to perform their activities in relation to cryptocurrencies in the UK will depend on whether they are conducting “regulated activities” as defined by FSMA, or payment services/e-money bitcoin investment uk act that require authorisation under the PSRs or EMRs.  The registration requirement for cryptoasset businesses under the MLRs must also be kept in mind.  As noted in Cryptocurrency regulation above, a person’s activities in relation to cryptocurrencies may still be subject to UK financial regulation even where the underlying cryptocurrency involved is not a specified investment.  For example, establishing, operating, marketing or managing a fund that offers exposure to unregulated cryptocurrencies by way of business is the kind of activity that may well trigger licensing requirements in the UK.  For the time being, cryptocurrencies are also unlikely to be permissible for inclusion in fund products (e.g., exchange-traded funds) that require approval from the FCA: the Taskforce Report makes clear that the FCA will not authorise or approve the listing of a transferable security or fund that references exchange tokens unless it has confidence in the integrity of the underlying market and that other regulatory criteria for funds authorisation are met.

Mining cryptocurrencies is permitted in the UK, and as noted above, there is no bespoke financial regulatory regime for cryptocurrencies in the UK that expressly regulates this activity.  Mining of cryptocurrencies is also unlikely to fall within the existing UK financial regulatory perimeter (e.g., mining Bitcoin is not currently subject to UK financial regulation).

There are currently bitcoin investment uk act border restrictions or requirements to declare cryptocurrency holdings when entering the UK.  Individuals carrying cash in excess of EUR or GBP 10, must declare this to HMRC upon entering the UK from certain countries, but cryptocurrencies are not regarded as cash for these purposes.

Depending on the nature of the cryptoasset and the business activity in question, general reporting requirements that arise as a result of existing financial regulation (e.g., transaction reporting) or AML legislation (e.g., the requirement to submit suspicious activity reports to the National Crime Agency) could apply in bitcoin investment uk act to cryptocurrency transactions.

In addition, the MLRs now contain a broad reporting requirement that applies to CEPs and CWPs, under which they must provide to the FCA “such information as the FCA may direct” relating to compliance with the MLRs or that is “otherwise reasonably required by the FCA in connection with the exercise by the FCA of any of its supervisory functions&rdquo.  Such reports must be made “at such times and in such form, and verified in such manner, as the FCA may direct&rdquo.  The FCA has consulted on²⁸ and extended²⁹ to CEPs and CWPs the requirement to provide an annual financial bitcoin investment uk act report, which previously only applied to certain authorised firms.  Otherwise, bitcoin investment uk act, no guidance has been forthcoming as to how the FCA intends to utilise its powers in relation to reporting by CEPs and CWPs under the MLRs, bitcoin investment uk act, and so it remains to be seen what kinds of reports the FCA will require in this regard.

There are no specific rules as to how bitcoin investment uk act are treated for the purposes of estate planning and testamentary succession; therefore, the normal relevant legal principles apply.  Consequently, cryptocurrencies are likely to fall within the broad definition of property for the purposes of inheritance tax³⁰ and will likely be subject to taxation should a chargeable transfer arise.  Prior to death, a testator will need to instruct their personal representative on how to obtain the relevant cryptographic keys and details of the wallet service provider (where relevant), as without such means of dealing with the cryptocurrency it will be rendered effectively worthless.

Endnotes

1. Cryptoassets Taskforce: Final Report (26 October ) (Hyperlink) (accessed 27 September ).
2. Final Report (n 1), bitcoin investment uk act,
3. For example, at the time of writing, both the FCA and Bank of England websites warn that anyone investing in cryptoassets (including cryptocurrencies) should be aware that they are very risky, volatile investments and should be prepared to lose all of the money invested (Hyperlink), (Hyperlink) (accessed 27 September ).
4. FCA, CP19/3: Guidance on Cryptoassets (23 January ) (Hyperlink) (accessed 27 September ).
5. FCA, PS19/ Guidance on Cryptoassets (31 July ) (Hyperlink) (accessed 27 September ).
6. FCA, CP19/ Prohibiting the sale to retail clients of investment products that reference cryptoassets (3 July ) (Hyperlink) (accessed 27 September ).
7. FCA, PS20/ Prohibiting the sale to retail clients of investment products that reference cryptoassets (6 October ) (Hyperlink) (accessed 27 September ).
8. “We have not yet made a decision on whether to introduce CBDC.”  Bank of England website (Hyperlink) (accessed 27 September ).
9. Bank of England, Central Bank Digital Currency – opportunities, challenges and design (March ) (Hyperlink), (Hyperlink) (accessed 27 September ).
10. As set out here: (Hyperlink) (accessed 27 September ).
11. (Hyperlink) (accessed 27 September ).
12. This is consistent with the approach taken in the FCA Guidance.  See, for example, paragraphs 42, 45, 49 and 65 to 67 of the FCA Guidance: PS19/22 (n 6), Appendix 1.
13. PS19/22 (n 6), Appendix 1
14. Ibid., 43 to
15. HM Treasury, bitcoin investment uk act, UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence (7 January ) (Hyperlink) (accessed 27 September ).
16. The FCA maintains a list of UK regulated markets (Hyperlink) (accessed 27 September ).
17. Electronic money does not fall within the definition of transferable securities.
18. HM Treasury, Regulatory framework for approval of financial promotions: consultation (20 July ) (Hyperlink) (accessed 27 September ).
19. HM Treasury, Cryptoasset promotions – consultation (20 July ) (Hyperlink) (accessed 27 September ).
20. HMRC, bitcoin investment uk act, Cryptoassets for individuals (19 December ) (Hyperlink) (accessed 27 September ).
21. HMRC, Cryptoassets for businesses (20 December ) (Hyperlink) (accessed 27 September ).
22. JMLSG, Guidance for the UK financial sector – Part II: sectoral guidance (amended July ) (Hyperlink) (accessed 27 September ).
23. HM Treasury, Amendments to the Money Laundering, bitcoin investment uk act, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations Statutory Instrument consultation (22 July ) (Hyperlink) (accessed 27 September bitcoin investment uk act Commission, Digital assets: call for evidence (30 April ) (Hyperlink) (accessed 27 September ).
24. UK Jurisdiction Taskforce, Legal Statement on cryptoassets and smart contracts (November ) (Hyperlink) (accessed 27 September ).
25. AA v Persons Unknown [] EWHC (Comm) (17 January ); Ion Science Ltd v Persons Unknown (unreported, 21 December ).
26. FCA, CP20/Extension of Annual Financial Crime Reporting Obligation (24 August ) (Hyperlink) (accessed 27 September ).
27. FCA, bitcoin investment uk act, PS21/4: Extension of Annual Financial Crime Reporting Obligation (31 March ) (Hyperlink) (accessed 27 September ).
28. HMRC, Inheritance Tax Manual: structure of the charge: what is property? (updated 14 September ) (Hyperlink) (accessed 27 September ).

In AprilChancellor 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 bitcoin investment uk act 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, bitcoin investment uk act. 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 bitcoin investment uk act practicalities of doing so.”[2] Following Brexit, bitcoin investment uk act, Her Majesty’s Treasury has also sought consultation regarding how cryptoassets should be regulated in the future. Such consultation period ended in March [3]

Regulations in the Bitcoin investment uk act 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, 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, bitcoin investment uk act, the FCA has banned the sale, marketing, and distribution of contracts for differences (CFDs), bitcoin investment uk act, 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]

Inthe “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, bitcoin investment uk act, (e) trading platforms and exchanges, (f) liquidity providers, bitcoin investment uk act, (g) payment and merchant service providers, and (h) wallet and custody service providers.[7]Beginning January bitcoin investment uk act,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 Bitcoin investment uk act 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 Julythe FCA released the final PS19/22 Guidance on Cryptoassets, which governs firms issuing, creating, bitcoin investment uk act, holding, marketing, bitcoin investment uk act, 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, bitcoin investment uk act, 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), bitcoin investment uk act, 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,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 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, bitcoin investment uk act tax, bitcoin investment uk act, 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, bitcoin investment uk act, the United Kingdom has the most machines in a European country, with over 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, bitcoin investment uk act, 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 bitcoin investment uk act to schedule a consultation or call () to discuss your cryptocurrency and blockchain technology concerns.

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The regulation of cryptocurrencies as investment opportunities is a complex area, both for would-be issuers and prospective investors.

If you, or your organisation, are involved in the establishment of a new cryptocurrency, an understanding of the current framework would be an advantage.

The cryptocurrency landscape

A cryptocurrency is a digital asset that provides a medium of exchange. It uses cryptography to:

• Secure transactions;
• Control the creation of additional units; and
• Verify the transfer of assets between users.

Cryptocurrencies, such as Bitcoinseek to operate independently of a central bank by decentralising control through a blockchain, bitcoin investment uk act. A blockchain is a public transaction database, functioning as a distributed ledger. Generally, cryptocurrencies gradually decrease production of coins, thereby making the total amount of any given cryptocurrency that will ever be in circulation finite. This mimics precious metals and renders central bank functions such as printing extra money or fractional reserve banking redundant.

Cryptocurrencies are mainly used outside existing banking and governmental institutions and are usually exchanged over the internet. Exact numbers are difficult to ascertain, but recently published data suggests that, as of Septemberthe total market capitalisation of cryptocurrencies exceeded USD billion and record daily trading volumes exceeded USD billion. It’s estimated that there are over 2, digital currencies in existence and this number is growing, bitcoin investment uk act.

So, despite its rapid growth and volatile nature, the cryptocurrency market, with its disruptive effects and decentralised construction, is an attractive proposition for many stakeholders.

Cryptocurrencies are not actual currencies or money in the traditional sense. Units of an issued cryptocurrency may be divided into two categories:

• Coins – these are the pure form of cryptocurrency, issued and operating on their own native blockchain. While the blockchain on which the coin is issued may be capable of giving the coin functionality (and with it a specific utility) the issuer will have given the coins one utility only – to act simply as stores of value; and
• Tokens – a token can represent any assets or utilities that are interchangeable and tradeable, such as from commodities to loyalty points to other cryptocurrencies. They can achieve this by attaching smart contracts to a coin. Smart contracts are computer protocols that automate transactions. They’re self-executing, trackable and irreversible, with the terms of the agreement written into lines of code.

Launching a new cryptocurrency

A new cryptocurrency launch typically involves an initial fundraising process followed by a public sale process by way of initial coin offering (ICO) or token sale.

These steps give the cryptocurrency issuer an opportunity to pursue initial development, offset development costs and fund future projects. They’re also an opportunity to attract a critical mass of interested parties to buy (and subsequently trade) the cryptocurrency.

A diverse pool of holders is the key to creating interest and building a market for any new cryptocurrency, bitcoin investment uk act. However, before they get to the ICO stage, an issuer may need to do some pre-ICO fundraising activity, bitcoin investment uk act. Pre-ICO fundraising is used to pay for the final development steps that allow the new offering to operate successfully on a cryptocurrency exchange. Pre-ICO fundraising can also help an issuer assess - and generate - interest in the cryptocurrency before the ICO itself takes place.

Pre-ICO fundraising – who’s protected?

In the pre-ICO fundraising stage, a prospective cryptocurrency issuer will seek funding from backers in order to develop and ultimately launch the product. Pre-ICO fundraising can, therefore, be characterised as reward crowdfunding whereby many direct investments in a project are aggregated, with those contributing promised a form of return on their investment.

If the coin itself is not sold as an investment or security and if the fundraising is not conducted in a way that attracts financial regulation, pre-ICO fundraising within the UK to UK targets will fall outside the remit of the FCA.

This is because the FCA does not regulate reward-based crowdfunding. UK consumer protection rules will apply, however, bitcoin investment uk act, and these may entitle backers to a full refund on their investment for up to 14 days after delivery, provided the backer is classified as a consumer as defined in the Consumer Rights Act

"A consumer is an individual acting for purposes which are wholly or mainly outside that individual's trade, business, craft or profession."

Under this definition, a company or a limited liability partnership cannot be a consumer. Indeed, any funder in the pre-ICO phase that is a body corporate will not be considered a consumer and is therefore not entitled to consumer protections.

Furthermore, where an issuer receives more than EUR 10, in cash from third parties, anti-money laundering provisions will apply, and where it receives personal information from third parties, data protection provisions will apply. This is true even when no other regulations are in force.

Regulation of cryptocurrencies in the UK

On 19 Septemberthe House of Making money young goon Treasury Committee called for crypto-assets to be regulated by the UK Financial Conduct Authority (FCA) as a matter of urgency, bitcoin investment uk act. However, as at the date of this article, the FCA does not regulate cryptocurrencies.

However, UK, individuals and firms do need to be authorised and regulated by the FCA if they carry out "regulated activities". Section 19 of the Financial Services and Markets Act (FSMA) provides that:

"No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is an authorised person or an exempt person".

The Financial Services and Markets Act (Regulated Activities) Order (SI /) (RAO) sets out what constitute regulated activities under FSMA. The list of investments to which regulated activities may apply is an exhaustive one, however cryptocurrency is not a specified investment on this list. Again, if cryptocurrency itself is not the "investment" opportunity for these purposes, activities relating to it are unlikely to constitute regulated activities and so will fall outside the general prohibition.

Section 21 of FSMA states that:

“A person must not, in the course of business, communicate an invitation or inducement to engage in investment activity" unless an authorised person has signed-off or approved the content and communication.

The “invitation or inducement” here is referred to as financial promotion. To "engage in investment activity" means entering or offering to enter into an agreement that involves a controlled activity or exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

The Financial Services and Markets Act (Financial Promotion) Order (SI /) includes an exhaustive list of controlled activities and investments under FSMA. Similarly to regulated activities, cryptocurrency coins are unlikely to fall within any of the controlled investments for these purposes and, accordingly, communications relating to such coins should not constitute financial promotions.

A token, however, could fall within the definition of an investment under English law depending on the nature of the application it is intended for, bitcoin investment uk act. For example, bitcoin investment uk act, a token might be bitcoin investor seriö s 0 2 a forward contract if it entitled the holder to purchase a particular asset at a particular time in the future at a particular price. Equally, a contract for difference (CFD) with a cryptocurrency as the underlying would still be subject to the regulatory oversight of the FCA since the determining factor here is the CFD element of the instrument and not the underlying. Accordingly, the nature of a specific cryptocurrency and any utility it may possess will be key to determining whether it’s subject to the FCA's regulatory oversight.

Conclusion

Cryptocurrencies generally do not currently constitute an investment which would fall under the jurisdiction of the FCA and pre-ICO fundraising should not currently be subject to the oversight or regulation of the FCA. To the extent that funders in the pre-ICO phase are individuals, the provisions of consumer protection rules, anti-money laundering regulations and the data protection regime under English law will apply to such activities, bitcoin investment uk act. However, if the funders in a pre-ICO phase are companies or other body corporates with their own legal status, consumer protection rules will not apply.

Legislation to bring the promotion of crypto-assets under the wing of the Financial Conduct Authority (FCA) will be introduced when parliamentary time allows, HM Treasury has announced.  Around million people in the UK are thought to own a cryptoasset such as digital coinage or non-fungible tokens (NFTs). However the Treasury said that understanding of the technology is declining, 'suggesting that some users may not fully understand what they are buying'.

The Advertising Standards Authority has taken action against several promoters for failing to highlight the risks of cryptoasset investments. 

In a response to a consultation, the Treasury says it will make the promotion of qualifying cryptoassets subject to FCA rules in line with those applying to stocks, shares, and insurance products.  

'We are ensuring consumers are protected, bitcoin investment uk act, while also supporting innovation of the cryptoasset market,' the chancellor of the exchequer, bitcoin investment uk act, Rishi Sunak MP, said. 

Government policy on cryptoasset regulation is steered by the Cryptoassets Taskforce, set up in10 years after the birth of Bitcoin. 

The new rules on promotions will be implemented by secondary legislation to amend the Financial Promotion Order, which sets out the investments and activities to which the financial promotion regime applies. Under the Financial Services and Markets Acta business cannot promote a financial product unless they are authorised by the FCA or the Prudential Regulation Authority, or the content of the promotion is approved by a firm which is. Bitcoin investment uk act that wish to promote such investments and activities must comply with rules that financial promotions must be fair, clear, and not misleading.

Legislation will be brought forward once parliamentary time allows, HM Treasury said. 

Simon Cohen, senior associate at blockchain specialist firm Ontier, said:  'The Treasury’s announcement is a clear and welcome indication that the Wild West days of digital assets are coming to an end. But the devil is always in the detail, bitcoin investment uk act, so we look forward to reviewing the government’s draft bill once published.'