Cryptocurrency is recently one of the most popular notions. Crypto assets cover many products, but the most commonly used types are Bitcoin, Litecoin, and Ethereum. These are designed to be used as a method of payment. The UK regulates these virtual assets for money laundering purposes. In the country, the Financial Conduct Authority (FCA) assumed oversight of the cryptocurrency's anti-money laundering (AML) and counter-terrorism financing (CTF) activities. That is why UK crypto exchange operating needs to be FCA registered, except that some crypto assets services can obtain e-licenses instead of registering for FCA.
Money Laundering and Crypto Currencies in the UK
In the UK, the FCA has the authority to permit the operation of an exchange that enables trading crypto-assets under the Markets in Financial Instruments Directive II (MiFID II). Accordingly, businesses in the jurisdiction of FCA must comply with its crypto asset regulations.
Regular consumers can easily buy virtual asset products like Bitcoin in the UK. 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 comply with FCA regulations.
It controls companies whose customers buy and sell currencies by checking to Know Your Customer (KYC) procedures in the UK.
KYC can provide businesses with personal identifying information such as customer IDs, passports, driver's licenses, and photos. So, companies can have data verifying whether the given information is valid. If they catch something that does not match, they can proceed with further verification ways or chose not to work with a suspicious customer. Of course, this depends on the companies' risk appetite and internal policies.
Likewise, with the Customer Due Diligence (CDD) procedures, customers' risks are determined, and precautions are taken according to these risks. Such measures aim to comply with anti-money laundering and terrorism financing regulations in crypto businesses.
However, cryptocurrency regulations in the UK are criticized as being very complex, and many other issues need to be addressed. Our blog below lets you reach the countries' latest approach to the point in detail.
What are the Regulatory Requirements for Crypto Businesses?
FCA has introduced arrangements to reduce and eliminate money laundering risks in trading crypto exchanges in the UK. At the heart of FCA regulations, businesses are obliged to identify and evaluate the risks related to AML and CFT. After risk assessment, developing policies and strategies to eliminate these risks are the next steps. KYC and CDD procedures should be carried out as the first processes for a robust risk assessment. FCA regularly checks whether crypto businesses comply with KYC regulations.
FCA also stated that it would take quick actions when businesses cannot reach the crypto sector's desired standards and risk market integrity. It highlights the potential misuse of speculations resulting from the crypto sector's unclarity. In January 2020, the FCA introduced regulatory arrangements that enforce crypto-asset businesses to control how they manage AML and CFT risks. After Russia invaded Ukraine, it also took extra measures regarding crypto assets.
Crypto Assets Taskforce in the UK
Current financial regulations applying to cryptocurrencies depend on what the cryptocurrency is used for. The Crypto Asset Taskforce was established in the UK in March 2018 to detect these situations that need to be regulated. The Crypto Asset Taskforce creates a chart showing the widespread uses of cryptocurrency and whether the service is within the current scope known as the "regulatory environment." According to this table, it was announced that crypto assets could be used in three different ways.
Three ways to use crypto assets:
- Use as a barter: function as a decentralized tool to enable trading goods and services or 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 creation of decentralized networks through Initial Coin Offerings (ICOs).
According to the Crypto Asset Taskforce, cryptocurrency operators that use them as an exchange tool must comply with regulators under the Payment Services Regulations 2017 (PSR). The criteria here is whether the cryptocurrency is considered a fiat fund. Also, direct investments in crypto assets fall under the regulatory framework only if they are security tokens.
Tax on Crypto Assets in The UK
In the UK, HM Revenue & Customs (HMRC) taxes crypto assets like bitcoin and Ethereum. Also, Income Tax can be applied to the commercial earnings of those engaged in trade. So HMRC uses two separate tax systems for individuals and businesses trading crypto assets. HMRC first announced tax treatments for Cryptocurrencies in 2014. Afterward, the institution updated its first tax guide. Besides, HMRC stated in the following guide published in 2018 that;
There are three different types of crypto assets;
- Utility tokens
- Security tokens
- Exchange tokens
According to HMRC, exchange tokens are the only types under taxation.
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 updated its guidance on bitcoin's crypto tax for individuals. Also, HMRC states that it will address the processing of utility and security tokens in the future direction 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 benefit the owner, such as the business's debt from a company or a dividend in the company.
- Utility tokens allow the owner to access specific products or services on a platform, often using distributed ledger technology. For example, a business will issue tokens and accept tokens as payment for those particular goods or services.
- Exchange tokens are crypto assets, a new type of intangible asset intended to be used as a payment method.
Sanction Scanner Solution for Cryptocurrency
Nowadays, Cryptocurrencies take place more and more in our lives. The development of the crypto industry brought along its regulations in this sector. With Sanction Scanner AML Solutions, crypto businesses can easily comply with local or global regulations.
Crypto operations have to implement AML regulations and controls like other financial sectors. Organizations serving in the crypto industry must fulfill their AML and KYC obligations during customer account opening. Sanction Scanner's products automate the AML compliance processes of UK crypto exchange companies with powerful and flexible API support. Besides, crypto businesses can offer their customers an excellent experience while reducing false positives and manual transactions.
They can scan customers' on Sanctions and PEP lists from more than two hundred countries. In this way, with Sanction Scanner, crypto businesses can comply with regulations and be protected from regulatory penalties.