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Is HM Treasury about to regulate Bitcoin in the UK?

It is looking increasingly likely that HM Treasury will soon announce their intention to regulate Bitcoin – possibly in conjunction with the EU - to combat fears the virtual currency is being used for money laundering purposes and, more worryingly, for financing terrorism.

Although there is currently little formal evidence that Bitcoin is being used in this way, an increasing number of experts believe it is the case and a statement from the Treasury clearly states they expect the number of reported cases to increase which is the reason for them taking direct action:

"The UK government is currently negotiating amendments to the fourth Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas.  The government supports the intention behind these amendments. We expect these negotiations to conclude at EU level in late 2017 or early 2018."

Once regulation is in place it is expected that the online platforms through which cryptocurrencies are traded will be obligated to perform stringent checks if a suspicious or very high value transaction is made. 

The value of Bitcoin has rocketed recently.  This is not only persuading more people to get involved but also means that profits are rising just as quickly.  However, even though more money is being made, there is still some confusion as to the tax status of those profits so it is felt regulation will also provide a quick win for the taxman. 

At the moment HMRC are reliant on traders reporting trading profits so that they can be assessed for Income Tax (IHT) or traditional capital gains which would be liable for Capital Gains Tax (CGT).  The only problem is many traders are classing their profits as gambling wins which are not subject to tax.  This seems a somewhat flimsy defence given the understanding and calculation that sits behind the vast majority of trades but it appears to be an accepted explanation in an unregulated environment.

Senior accountants operating within the cryptocurrency sector have said they feel the likely outcome of regulation would be that, as the trades are based on the buying and selling of assets, HMRC will count trading profits as capital gains and profits will therefore be subject to CGT.

Most of all though regulation should afford legitimate investors with a much needed additional layer of security.  Many very well-known names – including the European Central Bank, JP Morgan, The Financial Conduct Authority and the European Securities and Markets Authority – have openly warned people about the potential dangers of trading crypto-tokens or participating in initial coin offering (ICOs), an increasingly popular way for entrepreneurs to raise finance to launch a new business that has been pounced on by fraudsters.

Richard Howlett, a partner at Selachii LLP and an internationally recognised expert on the legal issues related to cryptocurrencies, has been watching progress with great interest as he has long advocated the need for greater regulation as the popularity and value of cryptocurrencies has continued to rise.

Aside from the additional security regulation will offer market participants. Richard also believes there are a number of other benefits that will come to light as a result of the changes. 

The first is that official regulation could well finally persuade banks and other institutional investors to finally accept Bitcoin because as Richard says:

“Institutional investors have to work within parameters and rules.  As of yet, there are little to no rules for crypto which leaves it outside of the acceptable investments an institutional investor can consider.  Regulation will bring crypto into the sights of investors who will be keen to have some of their portfolios crypto based.”

Richard also expects the new regulatory framework will have a significant and positive long-term effect on the value of Bitcoin:

“In the short term, a percentage of crypto investors will be keen to sell before any regulations are in place.  However, I am of the opinion that percentage will be minute in comparison to the new investment that will come into crypto and any price drop should soon recover when the industry understands the positive implications of regulation.”

And finally Richard believes regulation – and it must be regulation rather than full on control – will provide the springboard required to take crypto to the next phase of its development:

“Crypto is out of infancy and requires regulation now to take it onwards and upwards.   The previous benefits of it being unregulated are now far outweighed by the arguments in favour of regulation.  The fact that the UK Treasury is now seeking to regulate is, in itself, recognition of how far crypto has come.   I firmly believe regulation will ultimately increase the value of crypto as it will open it up to a wider audience.  Meanwhile all the risks everyone is so keen to purport will be mitigated and investors will be able to bring crypto into their portfolios which will increase demand further still.”


If you are thinking about making an investment in Bitcoin or any of the others cryptocurrencies or are interested in participating in an ICO and want to find out what you need to look for and what you need to do to minimise the potential risks, call us today on 020 7792 5649 or email us at info@selachii.co.uk


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