The guidance highlights the AML risks relevant in the sector and considers how CEPs and CWPs should interpret the AML requirements in an appropriate manner relating to cryptoassets. In a recent development, the UK government has clarified its stance on applying the Overseas Persons Exclusion (OPE) in cryptocurrency. Despite its commitment to establishing the UK as a hub for cryptoasset technology, the government has decided not to extend the OPE to cryptocurrency businesses. “It’s unlikely that crypto regulation will be easily shoe-horned into the existing regulatory framework,” said Jonathan Cavill, a lawyer at Pinsent Masons.
The OPE currently allows certain international financial institutions, like multilateral trading facilities, to operate without direct regulation in the UK. However, this exclusion will not apply to cryptocurrency companies, as confirmed in the government’s response to industry feedback during a consultation on cryptocurrency regulation. To register a cryptocurrency business in the UK under the FCA’s requirements, an application for a crypto license must be submitted. Applicants must complete and submit relevant documents and information, including a business plan, risk management policy, and key employee information, and pay an application fee. Once the application is processed, the FCA will conduct an assessment and decide whether to issue a license allowing cryptocurrency activities in the UK.
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HMRC has confirmed that it considers cryptoassets to be property for the purposes of inheritance tax. UK-domiciled (or deemed domiciled) individuals (for tax purposes) are subject to UK inheritance tax on their worldwide estates. As such, cryptoassets will form part of the individual’s estate and will be subject to the standard inheritance tax rate of 40% (assuming the value of the estate exceeds the £325,000 tax-free threshold).
In the Monday paper, the government said it intends to bring a number of cryptoasset activities under the same regulations that govern banks and other financial services firms. The global body, which drew on the lessons from a series of scandals including the collapse of the FTX cryptocurrency exchange last November, said this would help create “a level playing field between crypto assets and traditional financial markets”. Promotion of cryptoassets will now fall under the regulatory scope of restrictions on financial promotion. Cryptocurrency regulations in UK have been measured, but have matured in the post-Brexit financial landscape. Although the UK confirmed in 2020 that crypto assets are property, it has no specific cryptocurrency laws and cryptocurrencies are not considered legal tender.
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. Notably, a person might be a CEP or CWP, irrespective of whether they are otherwise regulated in the UK, if they carry on cryptoasset business that is in scope of the new definitions. Therefore, MLR requirements for cryptoasset businesses apply to both regulated and unregulated cryptoasset businesses in the UK.
Money Laundering and Crypto Currencies in the UK
A UK tax-resident but non-domiciled individual who claims the remittance basis of taxation is normally only subject to UK income tax and CGT in respect of non-UK-sourced income and capital gains (arising from the disposal of non-UK-situated assets), respectively, that have been remitted to the UK. HMRC guidance treats the situs of exchange tokens as being the jurisdiction in which the individual beneficial owner of the exchange tokens is tax-resident. HMRC has published some guidance relating to the taxation of cryptoassets, focusing on the taxation of exchange tokens. It is important to note that HMRC is not bound by its published guidance; however, it is useful for interpreting how HMRC might approach a tax case that will be decided on its facts. Certain types of cryptoasset identified above may also fall within the definition of e-money under the E-Money Regulations 2011 (the EMRs).
Non-UK-domiciled individuals are, subject to exceptions, subject to taxation of any assets held and situated in the UK. Reporting requirements contained in financial regulation or AML legislation may apply in relation to cryptocurrency transactions. The MLRs also contain a broad reporting requirement applicable to CEPs and CWPs, which means that they must produce information that the FCA requires relating to their compliance with the MLRs.
Consumers of cryptoasset services may wish to investigate whether the relevant persons, including cryptoasset exchange providers and custodian wallet providers, are compliant with the new legislation. This is of particular importance in the cryptoasset space as non-compliance, and the related possibility of penalties and negative market sentiment, may significantly affect the value of customers’ assets. 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). Also, direct investments in crypto assets fall under the regulatory framework only if they are security tokens.
The Commission recognises that crypto-tokens and cryptoassets can generally satisfy this criterion. One of the core design principles of the new regulatory regime is “same risk, same regulatory outcome”, meaning a focus on achieving the same regulatory outcome where possible, regardless of the technology used. Moreover, the HM Treasury now proposes to monitor crypto asset activities in the United Kingdom. This would monitor activities provided by UK firms to persons based in the UK or overseas (natural and legal), as well as those provided by overseas firms to UK persons (natural or legal).
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“I look forward to our continued work with the sector in making our vision a reality for the UK as a global hub for cryptoasset technology.” This move by the UK government indicates a careful approach towards regulating the burgeoning cryptocurrency sector, balancing the need for innovation with consumer protection and regulatory oversight. Regarding the regulation of cryptoasset lending and borrowing activities the Government is proposing to apply and adopt existing RAO activities, while making suitable modifications to accommodate unique cryptoasset features. The Government is proposing to apply and adapt existing frameworks for traditional finance custodians under Article 40 of the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasses feature, or putting in place new provisions. With an eye on incoming regulation, this latest blog will examine what this consultation paper tells us about the future of UK crypto regulation and what are 13 key potential takeaways.
- The global body, which drew on the lessons from a series of scandals including the collapse of the FTX cryptocurrency exchange last November, said this would help create “a level playing field between crypto assets and traditional financial markets”.
- Certain types of cryptoasset identified above may also fall within the definition of e-money under the E-Money Regulations 2011 (the EMRs).
- CARF also contains a Multilateral Competent Authority Agreement on automatic exchange of information (the MCAA) to facilitate the exchange of information between signatories to the MCAA.
- The MLRs apply to businesses identified as being most vulnerable to the risk of being used for money laundering and terrorist financing purposes.
The European Union has already started deploying the world’s first set of comprehensive rules specifically for cryptoasset markets in June, which are attracting crypto firms keen for regulatory certainty to set up base in the bloc. Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining. In order to operate in the United Kingdom, crypto exchanges must register with the FCA, or, alternatively, apply for an e-money license. Similarly, bitcoin ATMs are legal in the United Kingdom, provided that they are licensed and regulated by the FCA.
The future of crypto regulations in the UK
The FCA makes clear that businesses operating cryptoasset automated teller machines and peer-to-peer providers are in scope of the MLRs, as well as businesses that issue new cryptoassets such as initial coin offerings (ICOs) or initial exchange offerings (IEOs). In June 2023, the OECD published a revised version of CARF.[x] Broadly, CARF contains a suite of due diligence and reporting requirements that applies to entities and individuals dealing with cryptoassets. CARF also contains a Multilateral Competent Authority Agreement on automatic exchange of information (the MCAA) to facilitate the exchange of information between signatories to the MCAA. At the time of writing, the UK has yet to announce a timeline for implementing CARF into domestic legislation.
Additionally, the UK’s willingness to engage with the cryptocurrency market in a regulated manner may encourage other countries to follow suit. The UK’s decision to regulate cryptocurrencies in 2024 carries significance not only for the domestic market but also for the global cryptocurrency landscape. As one of the world’s leading financial hubs, the UK’s regulatory approach is likely to influence international standards and practices. KYC can provide businesses with personal identifying information such as customer IDs, passports, driver’s licenses, and photos.
It is important to note that, in theory, CBDC will not replace cash or existing bank accounts. However, to date, the government and the Bank of England have not made a formal decision to implement CBDC in the United Kingdom. To determine whether the financial promotion regime applies to cryptoassets, it is necessary to determine https://www.xcritical.in/ whether the activities involve a “controlled activity” or “controlled investment” by referring to the FPO. Where a cryptoasset is a regulated “specified investment” (i.e., a security token), then it will likely fall within the definition of “controlled investment” and, therefore, the remit of section 21 of FSMA.
The most important factor in buying and selling crypto assets is to ensure that cryptocurrencies are not used to finance terrorism or money laundering. The FCA maintains a register of crypto asset providers that fall under UK money laundering regulations (MLR cryptocurrency regulation in the UK 2017 with amendments) and issues guidelines. In 2021, Chancellor of the Exchequer Rishi Sunak instructed the Bank of England to organize a research paper on the introduction of a potential central bank digital currency (CBDC) or national cryptocurrency.
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The rules cover the offering of a cryptoasset, operating a trading platform, swapping cryptoassets for currencies such as sterling, arranging investments and lending in cryptoassets and safekeeping or custody. The FCA has stated that it will consider the commercial element, commercial benefit, the relevance to other business by the relevant firm, and the regularity/frequency of activities as factors impacting its decisions on whether cryptoasset activity is carried on. Those marketing cryptoassets are also required to comply with the CAP Code and the Advertising Standards Authority (the ASA) guidelines. 6) A crypto-asset business must respond fully and without delay to a request in writing from a law enforcement authority for any information in connection to these requirements. Proof of address documents can include current bank statements or credit/debit card statements issued by a regulated financial sector firm in the UK, in addition to utility bills. The government published its response to a consultation paper issued earlier this year, which outlined recommendations on regulating the crypto industry.