Business

The good the bad and the ugly

As the 2021-2022 UK tax year ended on April 5, 2022, Her Majesty’s Treasury announced that it would pave the way for the UK to become a global hub for crypto-asset technology. This could mean that the hitherto not particularly crypto-friendly UK is changing its strategy and trying to make crypto investments more attractive. But what are the possible scenarios in the game?

The Financial Conduct Authority (FCA), a financial regulator in the UK, shows in their Cryptoasset Consumer Research 2021 report that around 2.3. Millions of adult UK citizens held crypto in 2021, a 21% increase from the previous year. It seems natural that with increased interest and potential crypto mass adoption, HM Treasury would reconsider its crypto regulations. This is especially true when you consider that more and more private investments in the UK are being made in crypto assets: of the 17.3 million adults owning some kind of investment product, 2.3 million are invested in crypto (according to Financial Lives) the FCA). Opinion poll).

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What did HM Treasury say?

HM Treasury packed quite a lot into this announcement, but in short: 1) stablecoins need to be regulated and accepted as a means of payment; 2) legislate for a financial market infrastructure sandbox to help companies innovate; 3) the Secretary of Commerce will set up a crypto engagement group with key regulators to advise the government; 4) there will be a review of UK crypto tax legislation to encourage further development of the crypto market (specifically 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 UK financial markets; 7) The FCA will hold a two-day “CryptoSprint” event in May to gather further insights and views from key industry stakeholders.

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It’s not yet clear exactly how these actions might affect investors, crypto exchanges, and other crypto businesses. But let me walk you through some of my predictions and speculation…

Related: Inflation spikes in Europe: what do bitcoiners, politicians and financial experts think?

The good

Stablecoins: The announcement that stablecoins could be accepted as a means of payment is big news. In order for stablecoins to function as a means of payment, they would need to be considered legal tender. While pegged to fiat currency, stablecoins are still an asset. Therefore, it stands to reason that stablecoins would need to undergo some sort of reclassification. Once stablecoins are no longer subject to capital gains tax, spending on crypto could become much more widespread and we could see the adoption of crypto as a means of payment in mainstream industries. This one is a notable game changer.

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DeFi Tax: Earlier this year, Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, 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 gains subject to capital gains tax for both lenders and borrowers. The announcement of the crypto tax review in general is great news – but since DeFi loans were specifically mentioned, investors might be hoping that HMRC could change its onerous stance in this particular area.

Related: DeFi: Who, what and how to regulate in a borderless, code-driven world?

Foreign investors: There’s also some potentially good news for foreign investors. If the Investment Manager Exemption, allowing non-UK resident investors to appoint UK resident investment managers without creating the risk of UK taxation is extended to crypto assets, this could encourage a flood of investments in the UK crypto market, a welcome post-Brexit blessing.

FCA: For the entire industry, the FCA CryptoSprint event and crypto engagement group could be great news. Under the current FCA regulation for crypto operations, many companies have not met the required anti-money laundering standards. A more coherent approach to creating comprehensive regulation could encourage many crypto exchanges to bring back UK support.

The bad

If you’re a little more skeptical about what the government says versus what they actually do, here’s the other side of the coin.

U-turn on the DeFi tax: Reviewing crypto taxation could be just another means of finding more ways to tax smaller investors. HMRC released its DeFi guidance back in February, stating that taxes must be paid on transfers to and from liquidity pools, DeFi loans and even loan collateral. Given how recent these guidelines are, it’s hard to say whether HMRC is fully committed to helping with a more appropriate DeFi tax policy.

Related: How should DeFi be regulated? A European approach to decentralization

More regulation: Cryptocurrencies being in the limelight could potentially lead to more regulation. Even with insights from key industry stakeholders, the government does not need to take these views into account when introducing new regulations. We can all hope for a more cohesive approach to crypto regulation that benefits investors by allowing greater choice and protection for consumers — whether that actually manifests itself is another question entirely.

the ugly

British coins? The announcement does not mention Specific stablecoins. Given the increased interest from governments around the world in developing central bank digital currencies, this announcement could potentially just refer to a government-approved “Britcoin” and have very little impact on the broader crypto market. While CBDCs may “sound” like crypto, they are not. There are many differences, but a key point is that crypto is taxed as an asset. CBDCs are just digital, potentially blockchain-based fiat currencies.

The announcement by the Royal Mint’s NFT Commission, vaguely positioned as “a symbol of the forward-looking approach we are committed to,” reinforces the notion that Boris Johnson’s government is less interested in pacing growth broader cryptocurrency market than being interested in redeeming and launching “Britcoin”. This is of course only speculation.

PR halo?

Brexit, COVID-19, Ukraine and the cost of living. No 10 Downing Street needs a win and a crypto wagon ride could be a preferred route. Still, crypto enthusiasts may agree that the UK hasn’t been particularly crypto-friendly so far. Will this newfound interest endure and will the positive headlines translate into positive results?

This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Tony Dhanjal, Head of Tax at Koinly, is a recognized crypto tax expert and thought leader in the space. He is a qualified Chartered Accountant with over 20 years of experience across the industry in blue chip companies, investment banking and public practice.