Cryptocurrency regulation UK

The UK Financial Conduct Authority (FCA) has issued several warnings about the risks of cryptocurrencies but there is a tacit acceptance that the crypto asset sector is
here to stay.

The crypto market does provide some positives such as the underlying blockchain technology that supports faster payment services and transactions.

The FCA is concerned about an increase in investors putting money into cryptocurrencies – especially amid stock market volatility and poor savings rates – and has warned there is a risk of losing all your money.

It is with these factors in mind that the City watchdog is looking to regulate the sector where it can.

Here is what regulation could mean for cryptocurrency investors and
crypto-asset businesses.

Are cryptocurrencies regulated?

Unlike financial products such as savings, pensions and mortgages, cryptocurrencies are not regulated.

Customers of regulated firms benefit from Financial Services Compensation Scheme (FSCS) protection for their real or fiat currency.

That means if a company you have your savings or investments with collapses, up to £85,000 of your money will be protected.

You can also complain to the Financial Ombudsman Service if you are unhappy about a regulated service or product or if you think you have been mis-sold.

There is currently no such consumer protection when it comes to cryptocurrencies.

So if you invest in a cryptocurrency or token that subsequently closes, you may never see your money again.

It also means that there are no consumer protections if you are scammed by a fake cryptocurrency or targeted by an investment fraud using unregulated crypto tokens.

Additionally, the founders of digital currencies don’t have any responsibilities that executives at regulated firms have such as treating customers fairly and making terms and prices clear.

Most of the founders of cryptocurrencies are based around the world and outside of the UK, this makes it even harder to regulate cryptocurrencies.

As with all financial products, there is plenty of jargon associated with cryptos.

You may see terms such as cryptoassets or tokens.

Essentially, a cryptoasset is a catch-all term for all types of digital blockchain-based tools.

A cryptocurrency such a Bitcoin or Ethereum is a type of cryptoasset.

Cryptocurrencies may also be referred to as tokens.

It then gets a bit more complicated as there are tokens that can used as a means of exchange, payment or investment such as Bitcoin or Ethereum, plus there are also utility tokens.

A utility token isn’t seen as a form of investment but is used to access a specific product or service.

An example of this is fan tokens that have become popular in sport as a way of engaging with fans.

Teams will sell their own fan token that then gives supporters a say in aspects of how the club is run.

The FCA has said that both exchange and utility tokens are currently outside of its regulatory perimeter.

However, there is another type called a security token that can provide rights to a payment or value of an asset.

The FCA has said that security tokens are regulated if linked to an asset or right to payments.

Other types of cryptoassets include decentralised finance platforms that use blockchain technology to provide services such as crypto-backed loans.

Are cryptocurrency investments taxed?

While cryptocurrencies aren’t regulated, the taxman has already taken an interest in the sector.

You may need to pay tax on your returns from investing in cryptocurrencies.

Investors in cryptocurrencies or exchange tokens may need to pay capital gains tax when they sell out or dispose of some of their crypto holding.

This may be when you sell a token, exchange it for a different one or use it to pay for goods or services.

Everyone has a capital gains allowance, currently £12.300, that they can earn each year before paying tax on any profits.

If you earn more than this by selling a cryptoasset then you may have to pay capital gains tax.

It may be possible to use losses from investments in other assets and financial instruments including other cryptos to reduce your gain and tax bill.

Transaction costs may also reduce any tax due.

There may be income tax to pay if you receive cryptocurrencies.

You may have to pay tax on tokens you get from mining unless they are worth less than £1,000 or you receive under £2,500 from other untaxed income.

If your employer pays you in crypto tokens they may be classed as readily convertible assets so could be liable for income tax and national insurance payments.

You can check HMRC’s crypto tax guidance on the Gov.uk website.

Are cryptocurrency exchanges regulated in the UK?

One area where you will find some regulation is when purchasing or trading cryptocurrencies through an exchange.

Any cryptocurrency exchange providing its service to UK users must be registered with the FCA for money laundering.

All crypto asset businesses operating in the UK must register for anti-money laundering permissions with the FCA.

The FCA will only register firms where it is confident that processes are in place to identify criminal or terrorist financing activity and properly follow money laundering regulations.

This may not protect consumers, but it does aim to ensure that crypto businesses are only providing services to legitimate users and are not used for financial crime.

The FCA has taken action against crypto exchanges in the past.

It banned Binance, one of the world’s largest crypto exchanges, from operating in the UK in 2021 amid concerns about the business structure, how consumers purchase products and its legal owner.

You can see if an exchange is registered with the FCA for anti-money laundering through its cryptoasset register.

What is the Financial Conduct Authority’s role with cryptocurrencies?

The FCA doesn’t regulate or approve cryptocurrencies.

The only oversight it currently has is to check that cryptoasset firms have effective anti-money laundering procedures.

It isn’t the only regulator interested in cryptocurrencies though.

The Advertising Standards Authority (ASA) also monitors social media posts, webpages and ads to see if consumers are being misled or if risks aren’t being made clear.

For example, the ASA banned two Crypto.com ads earlier this year, claiming that the trading platform didn’t effectively show the risks of investing in cryptocurrencies.

How will cryptocurrencies be regulated in the future?

A regulatory regime is gradually developing for the crypto sector.

It may not hit virtual currencies directly but cryptoasset exchange providers could be affected.

The FCA is currently consulting on new rules on how cryptocurrencies are promoted.

That would mean exchanges, trading platforms and cryptoasset providers would need to ensure that users understand the significant risks of what they are buying.

They would have to ensure their advertising and platforms comply with rules on financial promotions that say the risks of a product must be made clear.

Retail customers may have to complete appropriateness tests and declare how much investing experience they have.

A consultation on the rules closes in March and the FCA said it plans to introduce the regulations by this summer.

Once these rules come in, any firm that fails to do this adequately could face regulatory fines or even be closed down.

That is one way that the FCA is trying to protect consumers when it comes to cryptocurrencies.

Increased scrutiny from the ASA could also protect consumers.

Financial promotions rules could also help combat crypto scams and reduce consumer harm.

A lot of investors and sometimes very vulnerable people may be tempted into the market when social media influencers promote coins.

They may promise future profits but often are being paid to promote a particular token or to share in any of the value growth.

Some influencers have also got caught up in crypto scams in the past.

For example  crypto influencer Matt Lorion had to apologise to his TikTok followers in April 2021 after he had promoted the Mando cryptocurrency to his millions of followers, which turned out to be a scam.

He invested $10,000 himself in the Star Wars-inspired coin so also lost money and has promised to conduct more checks in the future.

If there were rules on promoting cryptocurrencies then influencers may be more reluctant to promote coins.

How will regulation affect cryptocurrency?

The affect that regulation on cryptocurrencies has will depend on how far it goes.

Some countries such as Russia and China are looking to ban crypto assets.

This would typically push prices down as it essentially closes the crypto market for that country.

However, a regulated market could be a positive for crypto assets.

Confidence in the sector may be boosted if all exchanges have to follow set standards and conduct checks on cryptos that they sell on their platforms and ensure consumers understand the risks.

Sentiment is a key factor in the pricing of cryptocurrencies so if confidence in the viability of the sector increases, so could values.

On the other hand, if regulation is shown to be too prohibitive, expensive or deters users, that may push prices down as demand drops.

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