Cryptocurrency Regulation UK - Is Crypto Legal?

Is Cryptocurrency Legal in the UK?

• Cryptocurrencies: Not legal tender
• Cryptocurrency exchanges: Legal, registration requirements with FCA

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.  

According to the Bank of England, since cryptocurrencies lack classical definitional characteristics, they are not considered ‘money’ and do not pose a systemic risk to the stability of the banking ecosystem. However, because the legal consequences, regulations, and status of crypto assets and currencies can change depending on their nature, type, and usage, the Financial Conduct Authority (FCA) and the Bank of England have issued a range of warnings and guidance about the use of cryptocurrency in the UK. Those warnings concern the absence of regulatory and monetary protection, the status of cryptocurrencies as stores of value, and on the dangers of speculative trading and volatility.

The regulatory uncertainty associated with cryptocurrencies prompted the UK government to create a dedicated task force in 2018. The task force defined three types of cryptocurrencies and three ways in which crypto assets are used – before setting out a requirement for additional AML/CFT and taxation considerations. HMRC issued a brief on the tax treatment of cryptocurrencies in 2021, stating that their “unique identity” means they can’t be compared to conventional investments or payments, and that their “taxability” depends on the activities and parties involved. In March 2021, the UK government published a Cryptoassets Manual which contains guidance on the tax liabilities associated with cryptocurrencies and what kind of records cryptocurrency holders may need to keep. 

Cryptocurrency Regulations UK – Exchanges

Crypto exchanges have registration requirements in the UK. Although it left the EU in 2020, the UK previously transposed the cryptocurrency regulation requirements set out in 5AMLD and 6AMLD into domestic law. Accordingly, from January 10 2021, all UK crypto asset firms (including recognized cryptocurrency exchanges, advisers, investment managers, and professionals) that have a presence or market product in the UK, or that provide services to UK resident clients, have had to register with the Financial Conduct Authority (FCA). Critically, these groups must comply with AML/CFT reporting and customer protection obligations. 

FCA guidance also stresses that entities engaging in activities involving crypto assets must also comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). In January 2020, amendments to those regulations came into force, incorporating the latest Financial Action Task Force (FATF) guidelines.

The introduction of FCA licensing requirements in the UK has not been without friction. On January 6 2021 the FCA banned retail cryptocurrency derivatives in order to protect consumers from market volatility. In December 2020, following difficulties registering crypto businesses after the introduction of licensing requirements, the FCA implemented a “temporary registration regime” because it had not been able to process all registration applications.

Future Cryptocurrency Regulations in the UK 

Although it has left the EU, it is likely that UK cryptocurrency regulations will remain largely consistent with the bloc in the short term. The UK will implement, for example, directives equivalent to the EU’s Markets in Crypto-assets (MiCA) and E-Money proposals, along with various AML directives. 

In the future, however, it is likely that the UK will diverge from EU cryptocurrency regulations to some degree. Currently, there is no specific UK crypto legislation on the horizon but HM Treasury guidance, issued via the UK Crypto Asset Task Force in January 2021, emphasized the UK’s intention to consult on bringing certain cryptocurrencies under the scope of ‘financial promotions regulation’ and to continue to consider a ‘broader regulatory approach’ to crypto assets. In January 2022, the government followed up on those efforts with strengthened legislation to address ‘misleading cryptoasset promotions’ and to bring cryptocurrency adverts ‘into line with other financial advertising’. The Task Force has also explored possibilities for the regulation of stablecoins which are currently banned by the FCA. 

In April 2021, UK Chancellor, Rishi Sunak announced that a new task force would be formed to explore the potential of a UK central bank digital currency (CBDC). In 2022, the taskforce reported its conclusions, suggesting that while a UK CBDC would bring some financial advantages, it would also introduce significant challenges for the country’s financial stability and for consumer privacy. The report concluded that there was ‘no convincing case’ for a UK CBDC.  

In February 2022, following Russia’s invasion of Ukraine, the UK joined other Western countries in imposing sweeping sanctions against Vladimir Putin’s regime. In March 2022, the UK Office of Financial Sanctions Implementation (OFSI), the Financial Conduct Authority (FCA), and the Bank of England released a joint statement reminding cryptocurrency service providers of their responsibility to contribute to sanctions enforcement. The statement urged crypto service providers to update their sanctions screening solutions and to be vigilant for ‘red flag indicators’ of sanctions evasion, including transactions involving high risk wallets, and the use of mixing and tumbling services designed to obscure customer identities. 

The ongoing financial turmoil associated with Russia’s invasion of Ukraine, and the volatility of cryptocurrency markets suggests that UK authorities will likely continue to focus heavily on crypto service providers as a regulatory priority.