The UK market may be less active in trading cryptocurrency than its counterparts; however, its first-world status makes it an ideal spot for digital currencies. Thankfully, crypto trading remains perfectly legal in the United Kingdom. But there are some key factors that must be considered, along with the future of regulating the industry in the region.
Brief Overview of Crypto Regulation in the UK
As with many countries worldwide, the crypto market is largely unregulated in the UK. This status exists because digital currencies are decentralised in nature. Furthermore, it’s a relatively new and complex financial asset.
Even with this grey area, crypto is legal in the UK. However, the region’s primary financial regulator, the FCA (Financial Conduct Authority), does not compensate investors for any losses experienced while trading.
Still, crypto-related businesses like the OANDA crypto trading platform must register with the FCA to prevent money laundering and terrorist financing.
Crypto asset firms may also need to comply with these laws:
- The Financial Services and Markets Act 2000 (“FSMA”) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”).
- Electronic Money Regulations 2011 (“EMRs”) or the Payment Services Regulations 2017 (“PSRs”).
The FSMA (updated in August 2023) is a significant law. This framework defines crypto assets as ‘regulated activities,’ which include managing investments, issuing electronic money, and arranging investment deals.
Like many regulators, the FCA has a regularly updated warning list. This method allows traders to see firms legally and not legally authorised to operate in the United Kingdom.
Promoting crypto assets under the Advertising Standards Authority guidelines should imply their high risk and price variability. However, there is an exception based on the updated FSMA. Certain FCA-authorised persons and companies may promote without restrictions if it’s a ‘qualifying crypto asset.’
Finally, FCA-registered crypto firms cannot provide retail clients with crypto derivatives and exchange-traded cryptocurrency notes.
How Is Crypto Taxed in the UK?
Aside from the FCA, other organisations that have regulatory oversight for crypto include HM Treasury. The latter is prominent in tax affairs and guides HM Revenue & Customs (HMRC) policies.
For the average Joe, one of the primary considerations when trading crypto is taxation. The HMRC has identified four kinds of digital assets: exchange tokens, utility tokens, security tokens, and stablecoins.
Regardless of the type, capital gains tax (CGT) is the first of two primary taxes for crypto traders in the UK. This is tax paid for the gains made selling a crypto asset that is more valuable than when it was first bought.
Essentially, any selling, trading, spending or gifting of a cryptocurrency where there has been a profit is liable for CGT. Thankfully, there is currently a tax-free allowance of £6,000. Any gains beyond this point require 10% or 20% CGT.
Income tax is the second way one is taxed when trading cryptocurrency. This is where income that comes from decentralised finance (like staking) rewards, mining, airdrops, or getting paid in crypto would be taxed.
An allowance of £12,570 a year is allowed. Earnings above this are taxed at 20–45%, depending on whether the person is on a basic, higher, or additional rate band for income tax.
Impact of Stablecoins in the UK’s Regulation of Cryptocurrency
While recognising its freewheeling nature, the United Kingdom still wishes to be a global crypto hub. Organisations like HM Treasury and the FCA have made their intentions to gradually regulate digital assets over time.
Interestingly, stablecoins are at the forefront of the movement rather than Bitcoin and Litecoin. Stablecoins are, of course, the most stable, volatility-free method of using crypto while offering the speed and efficiency expected of a cryptocurrency.
The next motivator for the UK’s financial watchdogs is that people generally have to use British pounds to receive a stablecoin, which is consumer and business-friendly.
Another reason is the UK’s perceived stance of keeping up with the European Union’s Markets in Crypto Assets (MiCA) regulation. Matching its counterpart suggests that analysts expect this compatibility to enable a higher volume of digital transactions between the two regions.
The Phased Approach of Crypto Regulation in the UK
The United Kingdom is one of many places still figuring out the nuances of the crypto market before confidently regulating the industry. Stablecoins are key to more defined regulation so that the region can be on par with the rest of the world. Trading cryptocurrency is allowed as long as traders only deal with FCA-registered companies. Despite this, the regulator has clarified that no compensation exists for losses. Traders must ensure their tax affairs are in order with the HMRC.