Who does not talk about crypto assets these days? The most popular ones are of course Bitcoin, Ether, Litecoin, etc. Their main assignment is being a payment method. The key purpose of regulating them in the UK is the prevention of money laundering. Such activities as anti-money laundering regulations and counter-terrorism financing initiatives in the United Kingdom are overseen by the FCA, the Financial Conduct Authority. The FCA demands the crypto exchanges to obtain registration or e-licenses depending on each case.
Cryptocurrencies and money laundering
According to British legislation, crypto assets are financial instruments that fall under the regulative category of the Markets in Financial Instruments Directive II (MiFID II). Thus, businesses that work with crypto assets in the UK must be authorized by FCA and fulfill its conditions to function. Buying or selling crypto in the United Kingdom is not complicated by any means, yet it must be assured that these assets are not used for laundering money or for financing terrorism.
One of the key mechanisms of control is called Know Your Customer (KYC), which obliges crypto businesses in the UK to keep track of their customers that buy or sell currencies. Thanks to KYC businesses are provided with customer’s identification documents and photos. The next procedure, Customer Due Diligence, helps businesses to determine risks and precautions related to each customer. These are the main areas of focus, but the UK has other issues to address, too.
Requirements for crypto businesses
As mentioned earlier, KYC and CDD procedures are considered critical when it comes to regulating crypto businesses. Regularly, the FCA runs check-ups to ensure that businesses follow the rules righteously. Moreover, in 2020, the FCA introduced specialized powers dedicated to monitoring how businesses manage the risk of terrorism financing and money laundering. Nevertheless, they are not focused on managing control of client protection provided by businesses.
The Crypto Asset Taskforce
The crypto regulations do not apply identically to every type: the use purpose of cryptocurrencies defines whether it is regulated or not. To detect and judge each case the Crypto Asset Taskforce was created in the UK. Their responsibility is to form a chart that would demonstrate all kinds of crypto uses and define which of them fall under the regulations. Based on the table, cryptocurrencies can be divided into three categories:
- Investment use – by holding or trading crypto assets direct exposure firms and consumers obtain indirect profit;
- Barter use – crypto assets are used as a decentralized tool for trading goods and services as well as facilitating regulated payment services;
- ICOs – capital increase and decentralized networks use the support of crypto assets via Initial Coin Offerings.
Overall, cryptocurrency falls under the Payment Services Regulations (PSR) if it is considered a fiat fund. In addition, the regulatory framework is also applied if crypto assets are security tokens.
Taxes on crypto in the UK
Depending on the holder, HM Revenue & Customs applies taxes to crypto assets. Besides, the commercial earnings from trade are also subject to Income Tax. For the first time, HMRC announced crypto-asset taxing in 2014. Since those times, HMRC has been continuously updating the tax guide that differentiates various types of crypto assets (utility, security, exchange tokens) and has a different approach to taxing individuals and businesses.
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