The initial report from the Cryptoassets Taskforce, which comprises representatives from HMT, FCA and Bank of England, has been published. It is clear that regulators are anxious to tread carefully in the crypto-space and avoid any sudden movements that could threaten their stated commitment to promoting innovation and securing the UK’s ongoing position as a global financial hub.
The cryptoasset landscape has developed in the six months since the Taskforce first launched:
- Bitcoin and other crypto assets continue to see considerable volatility both in price and volume.
- The market has become impatient with implementation of blockchain solutions with a number of high-profile economists publicly questioning the technology’s potential.
- The significant enthusiasm for ICOs and activity during 2017 has waned considerably, with no immediate sign of recovery.
“The report is primarily a summation and confirmation of the current UK position in respect of crypto assets” Claire Rafferty, BDO Regulatory Team
The report establishes the terms of engagement and framework for future work, clarifying some contested topics. The Report:
- Defines the difference between Security Tokens and Utility Tokens, confirming that Security Tokens do amount to a specified investment under the RAO and therefore are within scope of the existing regulatory framework.
- Acknowledges that exchange tokens (i.e. cryptocurrencies) do not fit neatly within the current regulatory perimeter though they share some of the characteristics of specified investments from the consumers perspective.
- Confirms that while certain cryptoassets can be used as a means of exchange they are not considered to be a currency.
- Clarifies the expectation that the principles of SMCR are applied to unregulated cryptoasset activities carried out by regulated firms.
The Report echoes previous publications from FCA, HMT and Bank of England drawing a clear distinction between crypto-assets and DLT. The Report sets the stage for future work and announces that the Taskforce will consult on the following areas in early 2019:
- The development of a regulatory response to address the financial crime risks posed by crypto-assets.
- A potential prohibition of the sale of crypto-derivatives to retail consumers.
- Publication of guidance on how certain cryptoassets already fall within the existing regulatory perimeter.
- Whether the perimeter requires extension to explicitly capture exchange tokens with the characteristics of specified investments.
We of course need to consider the UK’s approach in the context of Brexit. HMT are unlikely to encourage the imposition of any additional requirements on financial services firms in the months around Brexit. EU convened in September this year on the topic and established a wait-and-see approach. We expect the UK’s actions to closely follow those of the EU27.
Matt Hopkins, BDO Financial Services
“Although cryptocurrencies remain unregulated - in reality a significant number of directly attributable and complementary activities already are.
There are ongoing questions in respect of accounting for cryptocurrencies – both recognition and valuation - the regulatory position is not going provide the answer to these challenges.
Money laundering remains a key focus and risk in respect of crypto regulation. The ever increasing role of global regulation in financial crime but also wider Fintech regulation cannot be underestimated,”
Claire Rafferty, BDO Regulatory Team
“In reality I would expect the majority of cryptocurrency businesses that engage with the consumer to fall within the perimeter guidance and require authorisation – whether that be as investment firms, e-money issuers or both”
David Britton, BDO Tax
“Whilst tax was outside of the Taskforce’s remit, HM Revenue and Customs (HMRC) and HM Treasury are working closely to consider the tax issues raised by cryptoassets. The collaboration has been known for a while and HMRC will be issuing an update in early 2019 to its previous guidance issued in 2014 and other announcements in 2016. There are a number of areas of uncertainty that need clarification from a tax perspective and updated guidance is required and welcomed.
The report does also refer to concerns raised by HMRC on the use of cryptoassets in tax avoidance and tax evasion and HMRC will be reviewing the range of enforcement tools. This very much aligns with current HMRC focus on tax avoidance and in particular tax evasion with the introduction in September 2017 of the Criminal Finances Act 2017. Whilst it is considered unlikely that specific legislation in this area for Cryptoassets will be introduced, those involved in Cryptoassets may see increased scrutiny from HMRC.”
With some other jurisdictions already directly regulating DLT, it is likely that the regulatory environment and oversight will continue to develop in the UK, the EU and globally. The FCA tasforce report does not alter this trajectory.
Bitcoin price index from September 2016 to September 2018 (in US dollars)
Source: statista.com - https://www.statista.com/statistics/326707/bitcoin-price-index/