The Legislative Landscape of Cryptocurrency in the United Kingdom Prior to 2023

Balancing Innovation and Regulation

The United Kingdom’s approach to regulating cryptoassets has evolved alongside the technology itself, with a focus on supporting innovation while protecting consumers and maintaining financial stability. The Cryptoassets Taskforce, established in 2018 and comprising HM Treasury, the Financial Conduct Authority (FCA), and the Bank of England, has been instrumental in coordinating the UK’s regulatory approach to cryptoassets and distributed ledger technology (DLT) in financial services. By April 2022, the UK government expressed ambitions to make the UK a global hub for cryptoasset technology and investment, leading to a consultation in February 2023 on a future financial services regulatory regime for cryptoassets​​.

Regulatory Frameworks

UK regulation of cryptoassets falls under two primary frameworks:

Money Laundering Risks: All cryptoassets are subject to regulation based on money laundering risks. Firms dealing with cryptoassets must register with the FCA under the Money Laundering Regulations (MLRs).

Specified Investments: The regulatory treatment of a cryptoasset also depends on whether it qualifies as a “specified investment” under the Regulated Activities Order (RAO)​​.

Financial Services and Markets Act 2000 (FSMA) and Financial Promotion Order (FPO)

The UK’s approach to cryptoasset regulation includes certain restrictions under the FSMA and the FPO. These apply to financial promotions involving “controlled investments” and “controlled activities.” The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 further expanded the scope of the FPO to include “qualifying cryptoassets”​​.

Phased Regulatory Approach

The UK government plans to integrate cryptoassets into the existing regulatory framework, contrasting with the EU’s bespoke framework. This includes legislation for qualifying cryptoassets under the FPO, regulation of fiat-backed stablecoins, and broader cryptoasset activities focusing on higher risk areas. The approach targets various activities including issuance, payment, exchange, investment, lending, custody, and governance of cryptoassets​​.

Sales Regulations and Consumer Protection

The sale of cryptocurrency in the UK falls under three categories of regulation: the financial promotions regime, prospectus regulation, and consumer protection and online/distance selling legislation. Financial promotions involving cryptoassets must adhere to strict criteria and are subject to criminal penalties for non-compliance​​.

Taxation

The UK does not have a specific tax regime for cryptoassets. However, HM Revenue and Customs (HMRC) has published guidance on the taxation of exchange tokens, indicating that standard tax rules apply to cryptoassets, but their classification does not automatically determine their tax treatment​​.

Anti-Money Laundering and Financial Sanctions

Cryptoasset businesses in the UK must comply with the MLRs, which require registration with the FCA and adherence to various obligations, including risk assessments, policies, controls, and reporting. This includes obligations under financial sanctions legislation​​.

Conclusion

In summary, prior to 2023, the UK’s legislative landscape for cryptocurrencies was characterized by an evolving regulatory approach, balancing the need for innovation with consumer protection and market stability. The focus was on integrating cryptoassets into existing financial regulations while preparing for future developments in this rapidly changing sector.