Cryptoassets cover many different types of products, but the most commonly used Cryptoassets types are Bitcoin, Litecoin, Ether, etc. These are designed to be used as a method payment. Cryptoassets like Bitcoin are regulated in the UK only for money laundering purposes. In the UK, the Financial Conduct Authority (FCA) assumed oversight of the cryptocurrency's anti-money laundering (AML) and counter-terrorism financing (CTF) activities. This is why crypto exchanges operating in the UK need to be FCA registered, with the exception that some cryptoassets services can obtain e-licenses instead of registering for FCA.
Cryptocurrency and Money Laundering in The UK
In the UK, it has to be authorized by the FCA to operate an exchange that enables the trading of crypto-assets, which are financial instruments under the Markets in Financial Instruments Directive II (MiFID II). Businesses authorized by FCA have to comply with the FCA's regulations for cryptoassets. In the UK, consumers can easily buy crypto asset products like Bitcoin. The most important factor in buying and selling crypto assets is to ensure that cryptocurrencies are not used to finance terrorism or money laundering. Therefore, crypto businesses have to register with FCA. Crypto companies applying to register with FCA have taken their responsibilities seriously to anti-money laundering of criminal proceeds in businesses.
It controls its customers who buy and sell currencies with Know Your Customer (KYC) procedures in many Crypto businesses in the UK. KYC can provide businesses with information such as customer IDs, passports, driver's licenses, photos. Likewise, with the Customer Due Diligence (CDD) procedures, customers' risks are determined, and precautions are taken according to these risks. With such measures, it is aimed at anti-money laundering and terrorism financing in crypto businesses. Cryptocurrency regulation in the UK is very complex, and many other issues need to be addressed.
What Are the Requirements of Regulations for Crypto Businesses?
In the UK, FCA has introduced some arrangements to reduce and eliminate money laundering risks in trading crypto exchanges. At the heart of FCA, regulations are businesses to identify and evaluate risks related to AML and CFT and develop policies and controls to eliminate these risks. KYC and CDD procedures should be carried out in businesses to identify and evaluate these risks. FCA regularly checks whether crypto businesses comply with these regulations.
FCA also stated that it would take quick action in cases where businesses cannot reach the desired standards in the crypto sector and pose a risk to market integrity. In January 2020, the FCA introduced new regulatory powers that allow cryptoasset businesses to control how they manage the risk of money laundering and counter-terrorism financing. However, these powers do not include controlling how cryptoassets businesses conduct business with consumers, meaning the FCA is not responsible for ensuring that cryptoasset businesses protect and not control client assets.
Cryptoassets Taskforce in The UK
Whether current financial regulations apply to cryptocurrencies depends on what the cryptocurrency is used for. The Cryptoasset Taskforce was established in the UK in March 2018 to detect these situations. The Cryptoasset Taskforce creates a chart showing the widespread uses of cryptocurrency and whether the use is within the current scope known as the "regulatory environment." According to this table, it was announced that cryptoassets could be used in three different ways. These are as follows:
- Use as a barter: function as a decentralized tool to enable the trading of goods and services or to facilitate regulated payment services.
- Use for investment: obtaining indirect risk by holding and trading crypto assets for direct exposure firms and consumers.
- Supporting capital increase and/or creation of decentralized networks through Initial Coin Offerings (ICOs).
The Cryptoasset Taskforce, cryptocurrency operators, used as an exchange tool, have to comply with regulators under the Payment Services Regulations 2017 (PSR) if the cryptocurrency is considered a fiat fund. Also, direct investments in cryptoassets fall under the regulatory framework only if the asset is a security token.
Tax on Cryptoassets in The UK
HM Revenue & Customs tax cryptoassets according to the holder. In addition, Income Tax will be applied to the commercial earnings of those engaged in trade. So HMRC uses two separate tax systems for individuals and businesses trading cryptoassets. HMRC first announced tax treatments for Cryptocurrencies in the UK in 2014. Afterward, HMRC updated its first tax guide. According to HMRC, Bitcoin and other cryptocurrencies are crypto assets, and these currencies are not taxed in the same way as built-in currencies. In addition, HMRC stated in the guide published in 2018 that there are three different types of crypto assets; utility tokens, security tokens, and exchange tokens.
On November 1, 2019, HMRC published a Policy Paper outlining its position regarding taxation transactions undertaken by businesses involving 'exchange tokens.' On December 20, 2019, it issued a similar Policy Paper that updates its guidance on the tax status of crypto assets for individuals. In addition, HMRC states that it will address the processing of utility and security tokens in future guidance, and summarizes this situation as follows:
- The value of exchange tokens is based on their use as a medium of exchange or investment.
- Securities tokens can provide benefits to the owner, such as the nature of the debt arising from a business in a business or a dividend in the business.
- Utility tokens allow the owner to access specific products or services on a platform, often using distributed ledger technology. A business will issue tokens and undertake to accept tokens as payment for those specific goods or services.
- Exchange tokens are defined as cryptoassets, a new type of intangible asset that is intended to be used as a payment method.
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