U K. financial reform bill to regulate crypto assets passes into law after «Royal Assent»

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In January 2022, the government followed up on those efforts with strengthened legislation to address ‘misleading cryptoasset promotions’ and to bring cryptocurrency adverts ‘into line with other financial advertising’. The Task Force has also explored possibilities for the regulation of stablecoins which are currently banned by the FCA. At the time of writing, there is no specific tax regime to govern how cryptoasset transactions are taxed; therefore, the current tax rules must be considered and applied (although some uncertainty remains as to their application).

The Government considers that public offerings of cryptoassets (including ICOs), where a fund raises new tokens and sells them to investors, may meet the definition of a security offering. The consultation paper suggests that bringing crypto firms within the regulated perimeter of FSMA and amending the geographical scope would enable authorities to operate a single register and would align to better protect consumers. The global markets watchdog has urged the UK to regulate cryptocurrencies in the same way as traditional assets such as stocks and bonds, countering MPs’ calls last week for the risky investments to be treated as a form of gambling. Divestibility could then serve as an indicator as to whether a digital asset constitutes a data object if the transfer of the object results in the transferor being deprived of it.

«The reality is that as the market develops at pace, the UK runs the risk of being left behind if it fails to attract crypto businesses.» The rules, which draw lessons from the FTX collapse, focus on cryptoassets, such as bitcoin, and the underlying distributed ledger technology (DLT) or blockchain that underpins the sector, and seen as promising for uses such as the settlement of securities. A testator should instruct their personal representative on how to acquire the cryptographic keys and details of wallet service providers, otherwise the value of cryptoassets left to beneficiaries of an estate will be lost. Additionally, in March 2022, the Centre for Finance, Innovation and Technology (the CFIT) published terms of reference[xvi] announcing that the CFIT model will comprise a “coalitions” approach, striving to support the growth of the sector. The CFIT is a virtual body that enables enhanced connectivity across the regions and provides research and data capabilities in financial technology and innovation. The initial work of the CFIT will focus on unlocking datasets to show the potential of open finance in delivering better financial outcomes for small and medium-sized enterprises (SMEs) and consumers across the UK.

The Commission recognises that crypto-tokens and cryptoassets can generally satisfy this criterion. One of the core design principles of the new regulatory regime is “same risk, same regulatory outcome”, meaning a focus on achieving the same regulatory outcome where possible, regardless of the technology used. Moreover, the HM Treasury now proposes to monitor crypto asset activities in the United Kingdom. This would monitor activities provided by UK firms to persons based in the UK or overseas (natural and legal), as well as those provided by overseas firms to UK persons (natural or legal).

The rules cover the offering of a cryptoasset, operating a trading platform, swapping cryptoassets for currencies such as sterling, arranging investments and lending in cryptoassets and safekeeping or custody. The FCA has stated that it will consider the commercial element, commercial benefit, the relevance to other business by the relevant firm, and the regularity/frequency of activities as factors impacting its decisions on whether cryptoasset activity is carried on. Those marketing cryptoassets are also required to comply with the CAP Code and the Advertising Standards Authority (the ASA) guidelines. 6) A crypto-asset business must respond fully and without delay to a request in writing from a law enforcement authority for any information in connection to these requirements. Proof of address documents can include current bank statements or credit/debit card statements issued by a regulated financial sector firm in the UK, in addition to utility bills. The government published its response to a consultation paper issued earlier this year, which outlined recommendations on regulating the crypto industry.

Ownership and licensing requirements

«I look forward to our continued work with the sector in making our vision a reality for the UK as a global hub for cryptoasset technology.» This move by the UK government indicates a careful approach towards regulating the burgeoning cryptocurrency sector, balancing the need for innovation with consumer protection and regulatory oversight. Regarding the regulation of cryptoasset lending and borrowing activities the Government is proposing to apply and adopt existing RAO activities, while making suitable modifications to accommodate unique cryptoasset features. The Government is proposing to apply and adapt existing frameworks for traditional finance custodians under Article 40 of the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasses feature, or putting in place new provisions. With an eye on incoming regulation, this latest blog will examine what this consultation paper tells us about the future of UK crypto regulation and what are 13 key potential takeaways.

HMRC has confirmed that it considers cryptoassets to be property for the purposes of inheritance tax. UK-domiciled (or deemed domiciled) individuals (for tax purposes) are subject to UK inheritance tax on their worldwide estates. As such, cryptoassets will form part of the individual’s estate and will be subject to the standard inheritance tax rate of 40% (assuming the value of the estate exceeds the £325,000 tax-free threshold).

A UK tax-resident but non-domiciled individual who claims the remittance basis of taxation is normally only subject to UK income tax and CGT in respect of non-UK-sourced income and capital gains (arising from the disposal of non-UK-situated assets), respectively, that have been remitted to the UK. HMRC guidance treats the situs of exchange tokens as being the jurisdiction in which the individual beneficial owner of the exchange tokens is tax-resident. HMRC has published some guidance relating to the taxation of cryptoassets, focusing on the taxation of exchange tokens. It is important to note that HMRC is not bound by its published guidance; however, it is useful for interpreting how HMRC might approach a tax case that will be decided on its facts. Certain types of cryptoasset identified above may also fall within the definition of e-money under the E-Money Regulations 2011 (the EMRs).

  • This is arguably explicitly broader than the current scope and perhaps reflects the borderless nature of cryptoasset transactions and the underlying technology.
  • In 2022, the taskforce reported its conclusions, suggesting that while a UK CBDC would bring some financial advantages, it would also introduce significant challenges for the country’s financial stability and for consumer privacy.
  • Organizations serving in the crypto industry must fulfill their AML and KYC obligations during customer account opening.
  • Cryptoassets remain a tiny part of the world’s financial system, although the price of bitcoin has recovered after the collapse of crypto exchange FTX raised concerns about links to mainstream finance and harms to consumers.
  • In the Monday paper, the government said it intends to bring a number of cryptoasset activities under the same regulations that govern banks and other financial services firms.

The OPE currently allows certain international financial institutions, like multilateral trading facilities, to operate without direct regulation in the UK. However, this exclusion will not apply to cryptocurrency companies, as confirmed in the government’s response to industry feedback during a consultation on cryptocurrency regulation. To register a cryptocurrency business in the UK under the FCA’s requirements, an application for a crypto license must be submitted. Applicants must complete and submit relevant documents and information, including a business plan, risk management policy, and key employee information, and pay an application fee. Once the application is processed, the FCA will conduct an assessment and decide whether to issue a license allowing cryptocurrency activities in the UK.

A U.K. bill to recognize cryptocurrency trading as a regulated financial activity passed into law on Thursday.

The transfer of cryptoassets for the purposes of lending or staking triggers a capital disposal and potentially a “dry tax charge” under CGT rules. Moreover, returns from lending or staking cryptoassets cryptocurrency regulation in the UK are not treated as interest as HMRC does not consider cryptoassets to be money or fiat currency. How the return is taxed will depend on whether the receipt has the nature of capital or revenue.

The guidance highlights the AML risks relevant in the sector and considers how CEPs and CWPs should interpret the AML requirements in an appropriate manner relating to cryptoassets. In a recent development, the UK government has clarified its stance on applying the Overseas Persons Exclusion (OPE) in cryptocurrency. Despite its commitment to establishing the UK as a hub for cryptoasset technology, the government has decided not to extend the OPE to cryptocurrency businesses. «It’s unlikely that crypto regulation will be easily shoe-horned into the existing regulatory framework,» said Jonathan Cavill, a lawyer at Pinsent Masons.

Persons Engaging in Cryptoasset Related Activities

The FCA’s Perimeter Guidance for Cryptoassets (PS 19/22) (the Guidance) sets out more detail on the different types of cryptoassets and their interactions with the existing regulatory perimeter. The second are “custodian wallet providers,” which provide services to safeguard and/or administer crypto assets—or private cryptographic keys for holding, storing, or transferring crypto assets—on behalf of customers. FCA guidance also stresses that entities engaging in activities involving crypto assets must also comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). In January 2020, amendments to those regulations came into force, incorporating the latest Financial Action Task Force (FATF) guidelines.

cryptocurrency regulation in the UK

In the Monday paper, the government said it intends to bring a number of cryptoasset activities under the same regulations that govern banks and other financial services firms. The global body, which drew on the lessons from a series of scandals including the collapse of the FTX cryptocurrency exchange last November, said this would help create “a level playing field between crypto assets and traditional financial markets”. Promotion of cryptoassets will now fall under the regulatory scope of restrictions on financial promotion. Cryptocurrency regulations in UK have been measured, but have matured in the post-Brexit financial landscape. Although the UK confirmed in 2020 that crypto assets are property, it has no specific cryptocurrency laws and cryptocurrencies are not considered legal tender.

Singapore, Japan, Switzerland and U.K. to collaborate on digital assets pilots

Uncover the essentials of building and scaling a crypto AML program and how to navigate regulatory change. Gherson’s criminal litigation, regulatory and investigations team have also previously written a blog entitled Non-fungible token (NFT) Regulation in the UK and a blog entitled Stablecoin regulation in the UK. It controls companies whose customers buy and sell currencies by checking to Know Your Customer (KYC) procedures in the UK. «At a high level, the Treasury’s approach is broadly consistent with what we have seen in the EU,» said Sophia Le Vesconte, fintech counsel at Linklaters law firm. [6] Press Release FCA, FCA bans the sale of crypto-derivatives to retail consumers, Financial Conduct Authority (June 10, 2020).

cryptocurrency regulation in the UK

It is important to note that, in theory, CBDC will not replace cash or existing bank accounts. However, to date, the government and the Bank of England have not made a formal decision to implement CBDC in the United Kingdom. To determine whether the financial promotion regime applies to cryptoassets, it is necessary to determine whether the activities involve a “controlled activity” or “controlled investment” by referring to the FPO. Where a cryptoasset is a regulated “specified investment” (i.e., a security token), then it will likely fall within the definition of “controlled investment” and, therefore, the remit of section 21 of FSMA.

How much is a crypto license in the UK?

The FCA makes clear that businesses operating cryptoasset automated teller machines and peer-to-peer providers are in scope of the MLRs, as well as businesses that issue new cryptoassets such as initial coin offerings (ICOs) or initial exchange offerings (IEOs). In June 2023, the OECD published a revised version of CARF.[x]  Broadly, CARF contains a suite of due diligence and reporting https://www.xcritical.in/ requirements that applies to entities and individuals dealing with cryptoassets. CARF also contains a Multilateral Competent Authority Agreement on automatic exchange of information (the MCAA) to facilitate the exchange of information between signatories to the MCAA. At the time of writing, the UK has yet to announce a timeline for implementing CARF into domestic legislation.

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