Crypto regulation in the U.K. is changing for the better, but can the country truly step up its game and build a blockchain friendly ecosystem?
The United Kingdom has long been a financial mecca. Ever since the Big Bang and the arrival of Thatcherism in the ‘80s, Britain has cultivated a finance-friendly environment revolving around the city of London, with deregulation inviting a wave of foreign investment and trading activity. However, while it has even been suggested that London will overtake San Francisco as the fintech unicorn capital of the world, the U.K. has been less welcoming of crypto than it has of traditional finance.
As industry bodies like CryptoUK as well as other commentators have complained, the lack of regulatory clarity and the presence of suspicion toward cryptocurrency has been holding back the U.K.'s crypto industry. However, the situation has slowly begun to change in recent months, with the Financial Conduct Authority (FCA) updating its guidelines on cryptocurrencies, and with a series of consultations on crypto regulation due to begin toward the end of the year.
While these are only preliminary steps, they will most likely go a long way in establishing the kind of standardized, rule-bound environment that will provide investors and the general public with the confidence that crypto is safe.
Cryptocurrency and the U.K.
At the moment, the U.K. probably sits somewhere between the middle and upper ranges of the international leaderboard for cryptocurrency regulations. It hasn't produced any specific crypto-focused legislation as of yet, but it nonetheless has taken a fairly lenient approach to crypto, despite most officials having nothing but bad things to say about Bitcoin (BTC) and other digital currencies. Most obviously, it hasn't banned crypto in general or any kinds of coins/tokens (e.g., privacy coins) in particular, while it also doesn't apply any existing financial laws too stringently to cryptocurrencies.
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For the most part, the U.K.’s government, the Bank of England and other institutions haven't seen it fit to come down heavily on crypto simply because none of them — at least, not until recently — have really believed that the industry has been big enough to warrant dedicated measures. For instance, Bank of England Governor Mark Carney declared in March 2018 that the market for cryptocurrencies isn't a threat to U.K. financial stability:
"At present, in my view, crypto-assets do not appear to pose material risks to financial stability. Looking ahead, financial stability risks could rise if retail participation significantly increased or linkages with the formal financial sector grew without material improvements in market integrity, anti-money laundering standards and cyber defenses.”
And just as British authorities and lawmakers haven't been particularly scared by the rise of crypto, the government and Her Majesty's Revenue and Customs (i.e., the British equivalent of the IRS) have been comfortable taxing the proceeds of cryptocurrency trading and crypto-related business according to the current tax regime.
For businesses, for example, income tax is chargeable to the profits and losses that arise from transactions involving cryptocurrencies, while the U.K. also charges capital gains tax to anyone who makes a profit via crypto trading of over 12,000 British pounds (about $14,500). Added to this, a value-added tax (VAT) is also chargeable if anyone sells goods or services in the U.K. for cryptocurrency.
Gaps and uncertainties
Still, even though the cryptocurrency industry has been able to gain an initial foothold in the U.K. within the present legislative environment, industry groups and figures believe that specific crypto-focused regulation needs to be introduced, in order to provide greater clarity and support for anyone operating an exchange in the U.K. or holding an initial coin offering (ICO). Toward the end of July, CryptoUK wrote an open letter to the newly installed Chancellor of the Exchequer, Sajid Javid, in which the trade body's chairman, Iqbal Gandham, cited three reasons why the U.K.'s crypto industry was "falling behind other countries."
The first of these was the difficulty crypto exchanges and other platforms have encountered in opening bank accounts in the U.K., which derives largely from the fact that many aren't currently licensed by any regulatory body (there are a handful of exceptions, however). Gandham wrote in the letter:
"In our recent survey of crypto businesses, we found that 73% of firms have opened a bank account in another country due to complications with banking in the UK. More than half of those who tried to open an account have been rejected, with half receiving no reason from the bank."
Most significantly for the viability of the U.K.'s cryptocurrency sector, there is also the aforementioned lack of regulatory certainty, given that no specific regulations or laws have been introduced that directly address digital currencies. Gandham continued on:
"Secondly, we need a proportionate, well-designed regulatory regime for crypto assets in the UK to support the sector’s growth. Whilst the UK Government has made positive noises, other countries such as Japan and Switzerland have grasped the initiative more strongly. As the Government seeks to compete on the global stage post-Brexit, we urge you to take the lead in attracting crypto companies to base themselves here in the UK."
Lastly, Gandham ended CryptoUK's letter by urging Javid and the British government simply to be more proactive in nurturing the crypto and blockchain industry. And while Gandham reaffirmed that the industry "needs regulatory certainty to reach its full potential in future," he nonetheless told Cointelegraph that several positive developments have occurred in recent months, beginning with the FCA's July guidance on crypto assets.
In these new guidelines, the financial regulator confirmed that it wouldn't be regulating Bitcoin and Ethereum as assets and securities, although it would be regulating security tokens and some utility tokens as such, since they often confer investor rights comparable to shares and debt instruments. Gandham told Cointelegraph:
"The FCA’s recent update to its guidance on cryptoassets is broadly a step in the right direction. Following last year’s Cryptoassets Taskforce report, CryptoUK called for additional clarity to be added to the FCA’s taxonomy and a more comprehensive explanation of how the existing regulatory perimeter applies. We were pleased to see that the regulator’s updated guidance reflected our call for a separate category to cover tokens which constitute e-money under existing regulation."
Individual members of CryptoUK are also in agreement that the new guidelines are, in general, a welcome step forward. CEO and founder of the U.K.-based CEX.io exchange, Oleksandr Lutskevych, explained to Cointelegraph that industry players were involved in formulating the FCA's latest advice, saying:
"The current guidance implements the experience and knowledge gathered by crypto businesses from the international market over the last few years and represents the position of the major cryptocurrency businesses in the UK. It lays well on top of the existing financial regulations."
Encouragingly, Lutskevych also stated that the FCA was open to suggestions from the industry itself, and that it is listening to figures within it and trying to act on their advice. According to Lutskevych:
“When CEX.IO was consulting the FCA on possible ways to classify digital tokens, our experts proposed putting crypto assets meeting the definition of e-money into a separate category called ‘e-money tokens’ and placing them in the regulatory perimeter. We highlighted this in our submissions to the FCA and in consultations on crypto assets. We are delighted that the latest version of the guidance reflects our recommendation in full.”
More work ahead
Still, as with CryptoUK as a whole, CEX.io believes that more work needs to be done to improve the regulatory situation for cryptocurrency businesses. Because even with the new guidance, the environment is still confused and complicated for exchanges, platforms and other related businesses, with Lutskevych suggesting that the industry has been neglected in the understandable push to protect consumers:
"To us, 'fair' regulation protects customers and clears obstacles to crypto businesses who proactively cooperate with regulators and obey the rules. So far, the FCA has done a great job protecting customers. We are expecting the next steps to help businesses.”
Lutskevych also argues that some areas of the cryptocurrency industry are being neglected by recent advances, particularly those areas that relate to token sales and ICOs:
"While security and e-money tokens and the operators that deal with them can now play according to known rules provided by the MiFID (Market and Financial Instruments Directive) and EMD (e-money directive), there are components of the industry for which regulation must be rethought from the ground up. For example, we think it would be bad practice to apply crowdfunding regulations to ICOs."
But while the U.K. cryptocurrency industry is still being hobbled by an absence of supportive legislation and/or regulation, there is general agreement that, even beyond the latest FCA guidelines, things would appear to be slowly improving. The European Union and its member states will begin enforcing the fifth Anti‑Money Laundering Directive beginning in January 2020. While it's likely that the U.K. won't be a member of the EU by this time, it will still abide by the directive, with exchanges and other crypto-processing firms being required to register with the FCA and submit suspicious activity reports. The directive would introduce regulations for crypto wallet and exchange firms, forcing them to register with their local authorities.
This would go a long way in helping U.K.-based exchanges apply for bank accounts. At the same time, Gandham points out that several consultations on cryptocurrencies are due to take place in the U.K. toward the end of this year, which could ultimately also make the situation for crypto-related businesses considerably easier. Gandham added:
"This will determine the outlines of future crypto regulation and is the opportunity to ensure this is done in a way which is proportionate, fair and future-proofed. We would expect to see this lead to a Regulated Activity Order to specify cryptoassets as a new regulated activity, introduced through secondary legislation."
For the crypto industry, those planned consultations cannot come soon enough. It's hard to say how such consultations — such as one regarding a ban on the retail sale of crypto derivatives — will pan out, but given the emergence of Facebook's Libra, it's likely that U.K. authorities will now proceed with extra impetus and resolve. Gandham hopes regulations come soon so that the U.K. would not lag behind the rest:
"The launch of business models with the scale and ambition of Libra illustrates why it is so important for jurisdictions like the UK to get crypto regulation right now, to create the right environment for encouraging innovation and protecting consumers, rather than attempting to regulate later in a retroactive way."
Likewise, Lutskevych agrees that the entry of massive corporations like Facebook into the crypto industry has convinced U.K. regulators that crypto is not only big, but will get bigger with every passing month and year. According to Lutskevych:
"If launched, Libra would have enormous implications on global finance, and local governments cannot ignore this. As a result, regulators at all levels are likely to adopt more specific rules on digital assets for organizations like Facebook. For example, the US already reviews a proposal to ban big tech companies from issuing digital money."
Related: Reasons Why US Government Won’t Ban Libra Cryptocurrency
Taken together, such developments indicate that the days of crypto being largely unregulated in the U.K. are severely numbered. To take another example, Her Majesty's Revenue and Customs recently began requiring crypto exchanges operating in the U.K. to provide it with user data so that it could crack down on potential cases of tax evasion involving cryptocurrencies.
If nothing else, this underlines how the British government has begun recognizing crypto as a significant and substantial presence in the U.K.'s financial landscape, one that could, at the very least, make a difference to the nation's tax receipts. And assuming that the cryptocurrency industry continues its steady rise to mainstream prominence, it's only a matter of time before crypto in the U.K. receives the regulation it has long demanded.