Is Cryptocurrency legal in the U.K.

• Cryptocurrency is not a recognized mode of payment in the U.K.
• The United Kingdom does not have specific legislation that comprehensively regulates or defines cryptocurrencies.
• The Financial Conduct Authority (FCA), the primary financial regulatory body in the U.K., oversees certain aspects of the cryptocurrency industry.

Cryptocurrency, a revolutionary form of digital or virtual currency, has sparked considerable interest and debate around the globe. While few countries around the world have recognised cryptos as legal tender, cryptos in the U.K. are still not considered to be a legal tender. However, in the U.K., hopes of crypto firms and investors received a boost after U.K. PM Rishi Sunak, last year in April, expressed his dream of making the U.K. “crypto hub of the world”.   

Former Chancellor of the Exchequer Sunak had outlined that included bringing stablecoins within the regulatory parameters and getting the Royal Mint, the official U.K. coin maker, to launch a nonfungible token.

This should come in as good news after a survey of 300 British fintech founders in the U.K. revealed that only 9% believe there is a future for cryptos in the country. According to the survey by Fintech Founders, nearly 20% of founders thought the regulator was “actively signalling” the U.K. wasn’t the place to start a crypto company.

Let’s look at some of the pain points that is hindering the growth of cryptos in the country.

Legal Framework making it hard to make crypto legal in U.K.

Many in the United Kingdom feel that the legal framework is making it hard to make crypto legal in the country. As a result, it doesn’t have specific legislation that comprehensively regulates or defines cryptocurrencies. Existing laws and regulatory bodies play a crucial role in governing different aspects of the cryptocurrency space.

Pushback from U.K.’s Financial Conduct Authority (FCA)

The Financial Conduct Authority (FCA), the primary financial regulatory body in the U.K., oversees certain aspects of the cryptocurrency industry. The FCA has implemented a registration regime for firms conducting crypto-asset activities. As of January 2020, any business conducting crypto-asset activities, such as crypto exchanges and wallet providers, must register with the FCA and comply with anti-money laundering (AML) regulations.

The registration process involves a thorough assessment of the firm’s AML policies, business operations, and financial soundness. The FCA’s role is to ensure consumer protection, market integrity, and financial crime prevention within the cryptocurrency space.

In fact, one of the leading cryptocurrency exchanges, Binance, was barred from operating in the country. Similarly, due to compliance challenges, several other crypto firms had to shut shop in the country.  

Consumer Protections

Cryptocurrency-related businesses in the U.K. are subject to consumer protection laws. This includes adhering to regulations safeguarding customers’ interests, and ensuring fair market practices. While the regulatory framework is still evolving, authorities are increasingly focusing on protecting consumers from fraudulent schemes and ensuring that businesses operate transparently.

Simultaneously, the U.K. tax authority, Her Majesty’s Revenue and Customs (HMRC), has provided guidance on the taxation of cryptocurrencies. As of the last update in 2022, HMRC treats cryptocurrencies as taxable assets. This means that individuals and businesses are required to report their cryptocurrency transactions for tax purposes. The taxation framework includes capital gains tax on profits made from cryptocurrency investments.

Challenges and Evolving Regulations

Despite the existing regulatory framework, challenges persist in regulating the dynamic and rapidly evolving cryptocurrency industry. The lack of a comprehensive legal framework has led to concerns about potential risks, including market manipulation, fraud, and investor protection.

Consequently, there have been ongoing discussions among policymakers and regulators regarding the need for updated legislation to address these challenges. One of the key challenges in the U.K.’s approach to cryptocurrency regulation is the presence of regulatory gaps.

The evolving nature of the industry often outpaces regulatory developments, leading to uncertainties and potential risks for market participants. Policymakers are actively exploring ways to bridge these gaps and create a more robust regulatory environment.

International Cooperation

Cryptocurrencies operate on a global scale, making international cooperation crucial for effective regulation. The U.K. government has been actively engaging with international counterparts to develop coordinated approaches to cryptocurrency regulation.

This collaboration aims to address cross-border challenges, including money laundering, terrorist financing, and other illicit activities associated with cryptocurrencies.

Introduction of Central Bank Digital Currency (CBDC) could have implications

The Bank of England has been exploring the possibility of issuing a Central Bank Digital Currency (CBDC). While not a cryptocurrency in the traditional sense, a CBDC would be a digital form of the national currency issued by the central bank. The introduction of a CBDC could have implications for the broader cryptocurrency landscape, and discussions around its potential implementation are ongoing.

Conclusion

As of the latest available information in 2022, cryptocurrency in the United Kingdom exists within a regulatory framework that is still evolving to keep pace with the industry’s dynamic nature. The FCA’s registration regime and existing financial regulations provide a foundation for oversight, with a focus on consumer protection and preventing financial crime.

However, challenges such as regulatory gaps and the need for international cooperation highlight the complexities associated with cryptocurrency regulation. As the industry matures, policymakers and regulators will likely face ongoing challenges in striking the right balance between fostering innovation and protecting market participants.