The regulatory framework around cryptocurrencies is one of the most contentious issues in finance today. Most retail investors are left without clear guidelines about what they can and can’t do. Regulations vary from country to country, so no general rules can be applied. These rules also change rapidly, with few countries haven’t a solid framework in place.
In the UK, investors are getting two different answers from what should be trustworthy and definite sources, leaving them without a clear idea of what they should do.
The FCA’s Position on Crypto Investments
The Financial Conduct Authority (FCA) is the financial regulator in the UK, licensing financial institutions and putting consumer protection measures in place. The latest word from the FCA is that cryptocurrency investments could pose a real risk to certain traders. The regulator believes that increased regulation is needed to keep risks in check, including disclaimers on any crypto advertisements.
The warning from the FCA details research that has been carried out by the regulator into cryptocurrency investor behavior. Their report says that most crypto investors are younger and less experienced than investors in other assets. The FCA believes that these investors are taking on excessive risk by investing in cryptocurrencies.
The FCA is already well underway in its plan to impose stricter regulations on cryptocurrency investments. Among these regulations are requirements for cryptocurrency firms to register with the FCA like any other financial institution. So far, only 32 such firms have managed to acquire FCA approval, while hundreds are known to have applied.
Tax Collection Agency Has Different View
Investors will find a different story if they consult guidelines from HM Revenue & Customs (HMRC), the tax collection agency of the UK. They treat cryptocurrency investments incredibly carefully, requiring extensive reporting requirements. The level of record-keeping that HMRC requires for crypto investors is well beyond what the investors described by the FCA would be able to provide.
The main issue comes from the treatment of taxable events. Essentially, any crypto transaction at all becomes a taxable event where the investor would be required to calculate gains or losses. This applies day trading rules in many situations where they aren’t really appropriate, making navigating crypto taxes a truly challenging task.
Are Cryptocurrencies Property or Financial Instruments?
Much of the reasoning behind the different ways that these two equally official UK regulators handle cryptocurrencies comes from the different ways they classify them. HMRC currently views cryptocurrencies as a type of property, which drastically affects the way individual transactions are handled. The FCA treats cryptocurrencies much in the same way it treats other financial instruments and investment opportunities.
This has led to the FCA banning cryptocurrency derivative assets for retail traders, claiming that these assets are more like gambling than investing. This regulation was prompted due to excessive complaints from UK citizens in regards to investment schemes such as the Quantum AI crypto trading software. HMRC is still more than happy to tax the income anyone makes on cryptocurrency derivatives, though, providing a little distinction between the two different types of investments.
Future of UK Crypto Regulations Still Unclear
While it’s clear that both the FCA and HMRC are devoting significant resources to trying to work out what’s to be done about cryptocurrencies, they don’t seem that much closer to any definite answer. There also seems to be a notable lack of cooperation between agencies, with mismatched information coming out in their guides and recommendations.
The attempts to better define UK cryptocurrency regulation have left UK investors without a clear path forward at the moment, but the attempt at progress provides some hope. Where other countries are moving backward and instituting complete bans for cryptocurrencies, the UK is slowly but steadily moving toward a more comprehensive regulatory framework.
