Nowadays, there are thousand different cryptocurrencies (sometimes interchangeably referred to as tokens or coins), constituting a significant asset class. In this area, the technological innovation and the rate of adoption far outpaced the development of legal and regulatory framework.
What does cryptocurrency mean?
European Banking Authority defined a virtual currency as “a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a flat currency, but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically”. Cryptocurrencies are not equivalent to currencies because they do not meet the three defining criteria of money, i.e. being a store of value, a unit of account and a medium of exchange.
What is the current regulatory framework in UK?
The UK Financial Conduct Authority (FCA) has noted that cryptocurrencies themselves (i.e. those designed primarily as a means of payment/exchange) are not currently within the UK financial services regulatory perimeter. This is because cryptocurrencies do not constitute currencies or commodities or “specified investment” under MIFID II. However, derivatives that use cryptocurrencies as the underlying investment can fall within the UK and EU regulatory framework respectively. Similarly, depending on the particular characteristics of cryptocurrency it may come within the scope of securities, funds, payments and other regimes currently in force in the UK.
For tax purposes, the HMRC guidance provides that virtual currencies will generally not be subject to VAT, but will be subject to Income/Corporation tax and Capital Gains Tax.
In the UK, the Treasury Committee has announced that it will be launching an enquiry into virtual currencies and distributed ledger technology and the FCA has indicated in its 2018/2019 Business Plan that it will respond to that enquiry. The UK Bank of England Governor, Mark Carney, has commented for the need for the crypto space to be properly regulated. The FCA, the Bank of England and HM Treasury are forming a taskforce to develop thinking and publish a discussion paper later this year outlining their policy thinking on cryptocurrencies.
It is worth to be noted that a text of the Fifth Money Laundering Directive ((EU) 2018/843) ("MLD5") was published in the Official Journal of the EU on 19 June 2018. EU member States must bring into force laws, regulations and administrative provisions necessary to comply with MLD5 by 10 January 2020. Assuming that the UK will still be required to implement EU legislation during the envisaged transitional period, MLD5 will be implemented by the UK. MLD5 will bring virtual currency exchanges within the scope of EU anti-money laundering legislation by requiring, for example, exchanges to undertake customer due diligence. This is indicative of the regulatory direction of travel and indicates a move towards increased regulation of virtual currencies and exchanges.
Virtual currencies and exchanges have recently been the subject of considerable regulatory focus in UK. Regulators will continue assessing the opportunities of cryptocurrencies against the risks they can pose to financial stability, customer protection and market integrity. Therefore, there is an imperative need for the establishment of regulatory framework regarding cryptocurrencies by UK government for the prevention of money laundering and reduce risk to investors.