As the 2021-2022 United Kingdom tax year finished on April 5, 2022, Her Majesty's Treasury announced they were paving the way for the U.K. to become a
As the 2021-2022 United Kingdom tax year finished on April 5, 2022, Her Majesty’s Treasury announced they were paving the way for the U.K. to become a global crypto asset technology hub. This could mean that the previously not particularly crypto-friendly U.K. is changing its strategy and trying its hand at making crypto investments more attractive. But what are the potential scenarios at play?
The Financial Conduct Authority (FCA), a financial regulatory body in the U.K., in its “Cryptoasset consumer research 2021” report, shows that approximately 2.3. million adult U.K. citizens held crypto in 2021, a 21% rise year-over-year. It seems natural that with rising interest and potential crypto mass adoption, HM Treasury would revisit its crypto regulations. This is especially true when considering that more and more private investment within the U.K. is located in crypto assets: Out of the 17.3 million adults who own some sort of investment product, 2.3 million are invested in crypto (according to the FCA’s “Financial Lives” survey).
What did HM Treasury say?
HM Treasury packed quite a lot into this announcement but, in brief, stated: 1) stablecoins are to be regulated and recognised as a form of payment; 2) legislation will be enacted for a financial market infrastructure sandbox to help businesses innovate; 3) the economic secretary will establish a crypto engagement group with key figures from regulatory authorities to advise the government; 4) there will be a review of U.K. crypto tax legislation to encourage further development of the crypto market (in particular, a review of DeFi loan taxation); 5) The Royal Mint has been commissioned to create an NFT this summer; 6) there will be proactive exploration of distributed ledger technology for U.K. financial markets; 7) the FCA will hold a two-day “CryptoSprint” event in May to seek further insight and views from key industry stakeholders.
It’s not exactly clear how these measures may affect investors, crypto exchanges, and other crypto businesses just yet. But let me walk you through some of my predictions and speculations…
Related: Inflation spikes in Europe: What do Bitcoiners, politicians and financial experts think?
The good
Stablecoins: The announcement that stablecoins may be recognized as a form of payment is huge news. In order for stablecoins to operate as a means of payment, they would need to be viewed as legal tender. Whilst pegged to fiat currency, stablecoins are still an asset. Thus, it stands to reason that stablecoins would need to undergo a reclassification of sorts. Once stablecoins are no longer subject to capital gains tax, spending crypto could become a lot more widespread and we could see the adoption of crypto as a means of payment in mainstream industries. This one is a game changer of note.
DeFi tax: Earlier this year, Her Majesty’s Revenue and Customs (HMRC), the U.K.’s tax agency, released guidance on the tax treatment of a variety of DeFi investments. To say it was poorly received would be an understatement. Among many other harsh tax laws, DeFi loans would mostly be treated as disposals and profits subject to capital gains tax, for both lenders and borrowers. The announcement of the review of crypto tax in general is great news — but as DeFi loans have been specifically mentioned, investors might hope that HMRC could change their onerous stance in this specific area.
Related: DeFi: Who, what and how to regulate in a borderless, code-governed world?
Foreign investors: There’s some potential good news for foreign investors in there too. If the Investment Manager Exemption, which lets non-U.K. resident investors appoint U.K.-based investment managers without creating a risk of U.K. taxation, is extended to include crypto assets, this could encourage a flurry of investment in the U.K. crypto market, a welcome post-Brexit boon.
FCA: For the wider industry, the FCA CryptoSprint event and crypto engagement group could be great news. Under the current FCA regulation for crypto operations, many companies failed to meet the required Anti-Money Laundering standards. A more coherent approach to create regulation across the board could encourage many crypto exchanges to bring back U.K. support.
The bad
If you’re a bit more skeptical when it comes to what the government says versus what it actually does, here’s the other side of the coin.
DeFi tax U-turn: The review of crypto taxation could just be another means to find more ways to tax smaller investors. HMRC released its DeFi guidance back in February, which states that tax must be paid on transfers to and from liquidity pools, DeFi loans, and even loan collateral. Considering how recent this guidance is, it’s difficult to say whether HMRC is fully prepared to assist with a better-fitting DeFi tax policy.
Related: How should DeFi be regulated? A European approach to decentralization
More regulation: Cryptocurrency being in the spotlight could potentially lead to more…
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