Is Crypto Trading Legal in UK? Your Essential Guide to Regulations

Overview of UK Crypto Regulation

The UK government has published guidance on cryptocurrency regulations, which is crucial for businesses and consumers. While cryptocurrency is not considered legal tender, it is legal to acquire and store it, making the cryptocurrency legal status clear within the UK. The Financial Conduct Authority (FCA) is the primary regulator for cryptocurrencies in the UK. The UK has a large number of cryptocurrency users, with 4.7 million Britons having bought cryptocurrencies. The UK’s approach to crypto regulation is focused on regulating financial services and preventing financial crime, particularly in the context of cryptoassets.

Who is Affected by UK Crypto Regulation?

Affected companies can be separated into two types: crypto asset service providers and custodian wallet providers.

Crypto asset service providers include companies that conduct certain activities, such as exchanging or storing crypto assets. These providers offer various crypto asset services, ensuring compliance with regulatory frameworks like MiCA.

Custodian wallet providers include companies that provide services to safeguard and/or administer crypto assets on behalf of customers.

Companies that deal with security tokens must register with the FCA.

Regulatory Requirements for VASPs

• Virtual Asset Service Providers (VASPs) must register with the FCA and comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations.
• VASPs must implement effective AML/CFT policies and procedures.
• The FCA requires VASPs to report suspicious transactions and maintain customer protection policies.
• The FCA also emphasizes the importance of risk management policies for VASPs.

Taxation of Crypto Assets

• The gain on sold cryptocurrency is recognized by HMRC using the formula: Total revenue from sale – Cost basis (fair market value at the time of purchase) + Fees.
• Capital gains tax is due on the gain, with each crypto investor in the UK granted a capital gains allowance of £12,300 annually.
• Income tax is payable on income from staking and other crypto-related services.
• HMRC assumes that income tax is payable when a service is performed for crypto assets, and individuals may need to pay income tax when cryptocurrencies are received as payment for services.

Fiat Currency and Crypto Assets

• Fiat currency is not recognized as a legal tender in the UK, but it is legal to hold and spend.
• Crypto regulation in the UK allows for the use of Bitcoin and cryptocurrencies for charitable purposes.
• Donations are not subject to Capital Gains Tax if the assets used for gifting have not undergone a holding period.

Trading and Exchanges

UK residents can freely buy and sell cryptocurrencies on regulated platforms, but the sector remains largely unregulated.

Businesses that issue tokens must publish a prospectus and seek approval from the FCA.

The FCA requires cryptocurrency exchanges to acquire a license or receive approval for marketing campaigns.

Mining and Staking

• Cryptocurrency mining is legal in the UK, but you must pay customs fees and government-related fees.
• HMRC applies income tax and National Insurance contributions on cryptocurrencies received from mining operations.
• Income from staking requires taxation at the relative tax bracket.

Derivatives and Other Financial Instruments

• The FCA has banned the sale of crypto derivatives products to retail consumers due to inherent risks.
• The ban will come into force on January 6, 2021, and businesses must desist from offering such products.
• Certain cryptocurrency-related investment products are available only to institutional investors.

ATMs and Spending Crypto

Crypto ATMs are a convenient way for UK residents to buy and sell crypto assets. These machines are legal but must be registered with the Financial Conduct Authority (FCA) to operate. This ensures that they comply with the necessary regulations, including Anti-Money Laundering (AML) requirements. When using a crypto ATM, users can convert their digital assets into fiat currency or vice versa, making it easier to manage their crypto holdings.

Spending crypto in the UK is also legal, allowing consumers to use their digital assets for various transactions. However, it’s important to note that these transactions are subject to capital gains tax. This means that any gain made from the increase in value of the crypto asset between the time of purchase and the time of spending must be reported and taxed accordingly.

Businesses that accept cryptocurrency as a form of payment must also adhere to AML regulations to prevent financial crimes. This includes verifying the identity of their customers and monitoring transactions for any suspicious activity. By complying with these regulations, businesses can offer crypto payment options while ensuring consumer protection and maintaining the integrity of the financial system.

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Compliance and Enforcement

The FCA has been vigilant in enforcing rules, issuing hundreds of warnings and stopping unauthorised promotions. The Financial Crimes Enforcement Network (FinCEN) provides regulatory guidance on Bitcoin and virtual currencies.

The FCA has introduced new financial promotion rules for marketing cryptoassets in the UK, requiring promotions to be communicated or approved by an FCA-authorised firm.

The FCA is working to strike a balance between consumer protection and promoting responsible innovation and competition.

Future Developments in UK Crypto Regulation

The UK is gradually regulating cryptoassets to protect consumers and tackle financial crime. UK firms are impacted by the evolving landscape of crypto regulations, with the government making efforts to enhance regulation. The FCA has published a discussion paper DP23/4, covering the proposed approach to regulating fiat-backed stablecoins.

The FCA is proposing a ‘same risk, same regulatory outcome’ principle, subject to tailoring rules to consider the unique characteristics and risks associated with cryptoassets.

Conclusion

• Although cryptocurrency is legal in the UK, there are still concerns that should be taken into consideration when engaging in crypto-related activities.
• Businesses should pay attention to the legal status of cryptocurrency and adapt their payment methods accordingly.
• The UK’s approach to crypto regulation is more gradual, initially focusing on stablecoins, whereas the EU’s Markets in Cryptoassets Regulation (MiCAR) aims to comprehensively regulate the crypto industry across the EU.