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Is Cryptocurrency legal in the UK?

Cryptocurrency has caught the minds and attention of investors the last few years, with the opportunity of high returns, life changing income, and the opportunity to digitally manage and transfer traditional currency.

Cryptocurrencies are decentralized cryptographic digital currencies that are used for trading, transacting and inventions.

The opportunity to create a cryptocurrency is quite simple to set up due to the lack of regulatory control, the most popular cryptocurrencies are Bitcoin and Ethereum. The total number of cryptocurrencies in circulation is around 6,700.

However, despite its popularity, there are still many questions regarding the legality of cryptocurrency in the UK.

This article will review the following:

Cryptocurrency legal in the UK
Cryptocurrency legal in the UK

1. What is Cryptocurrency?

Cryptocurrency is a decentralised virtual currency. It is decentralized digital money recorded on a digital ‘ledger’ in the form of a blockchain. A digital ledger is distributed to all users on the network, acting as a public database and all copies are automatically updated with entries as and when there is a transaction, further information on the legal issues around Blockchain Technology can be found here.

2. The legal status of cryptocurrency in the UK?

There is no specific legislation governing cryptocurrency in the UK, instead it has slowly developed through case law. Cryptocurrency is not recognized as “currency” in the UK but is considered as “property”.

Under English Law there are two types of property real property and personal property (moveable property) is anything other than land that is the subject of ownership including stocks, money, notes, patents, and copyrights as well as intangible property.

Cryptocurrency does not fall into either category technically in the UK, however a legal statement published in 2019 by the UK jurisdictional Taskforce (“UKJT”) provided guidance on a strict definition to recognize cryptocurrency as property.

In March 2018 the Chancellor of the Exchequer launched a Crypto assets Taskforce consisting of HM Treasury, the Financial Conduct Authority, and the Bank of England. The taskforce produced a report on the impacts of distributed ledger technology and crytoassets in the UK.

The recognition of cryptocurrency as property has essentially introduced a new asset class in the UK and should be considered when reviewing a person’s wealth and asset portfolio.

3. The role of the Financial Conduct Authority and warnings

The Financial Conduct Authority (“FCA”) in early 2020 was granted powers to view and supervise UK businesses involved in Cryptocurrency.

The management of money laundering and the prevention of terrorist financing are required by businesses dealing with crypto. The requirements are set by the Money Laundering Regulations and the FCA.

The role of the FCA is to regulate crypto companies have effective AML procedures. All Crypto companies should be registered with the crypto asset register.

For individuals the FCA only regulates cryptoassets for money laundering reasons. If losses are incurred due to hacks or loss of private keys, the services under the Financial Services Compensation scheme is unlikely to apply.

Exchange coins such as Bitcoin are out of their scope, similarly utility coins are also excluded.

The FCA have established the Innovation Hub and Regulatory Sandbox to support innovation in the interests of consumers. They have also published consumer guidance on cryptoassets investments and the role of the FCA in such schemes.

4. How Does HMRC Class Cryptocurrency?

HMRC recognizes cryptocurrencies as crytoassets that are subject to capital gains or income tax. HMRC classes digital assets into four categories, stable coins, utility tokens, security tokens and exchange tokens.

HMRC have published a cryptoassets manual to help people understand the tax implications from transactions involving cryptoassets.

HMRC recognizes cryptocurrencies as digital assets subject to capital gains or income tax. The guide provides that if you receive tokens as income, you will need to keep records and may need to pay income tax and national insurance contributions.

At present the guidance provides that tax is not payable when you buy tokens but when you sell them. Tokens from mining is other taxable income.

5. The future of cryptocurrency regulation

The UK has the ambition to be the world’s most innovative economy and maintain its position as a central financial hub.

According to the Chainalysis report the UK received $233 billion in raw transaction value of cryptocurrency from July 2021 to June 2022, making the UK the highest crypto transaction value of any European nation.

The report states the UK undertook the sixth largest crypto transactions in the world. There is further development of legislation to include cryptoassets such as through the Financial Services and Markets Bill, the UK government published its Economic Crime and Corporate Transparency Bill this year, which follows the Economic Crime (Transparency and Enforcement) Act.

The Economic Crime and Corporate Transparency Bill will aim to deliver additional powers to seize and recover suspected criminal crypto-assets.

Furthermore, in July 2022, the Law Commission published a consultation paper, setting out provisional proposals to amend the law to ensure that digital assets such as cryptocurrencies are both legally recognised and protected. This consultation invited responses until 4th November 2022.

Conclusion and next steps

Cryptoassets and currencies are fast evolving and a developing area of the law and regulation. With the frequency of crypto transactions increasing daily, there is opportunity for legal development.

the outcome of the Law Commission’s consultation and policy development of crypto technology as a legal asset is due in 2023.

Furthermore, the implementation of the Financial Services and Markets Bill, Economic Crime and Corporate Transparency Bill, is a step towards a full regulatory framework for cryptocurrencies and this will also provide the FCA with a significantly extended remit, which may in turn offer consumers greater security and protection.

If you are looking to set up a new cryptoasset or seeking to use your tokens or coins in the purchase transaction, contact Avinder Laroya to discuss your requirements.

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Avinder Laroya is a Senior Consultant Solicitor, Mediator and Arbitrator she is an expert in International Dispute Resolution. If you enjoyed this article you can subscribe to my newsletter below.

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