The United Kingdom is well-known in the crypto world for its strict crypto-related legislation. For a long time, the Parliament’s Treasury Committee considered trading cryptocurrencies a highly risky activity as markets are poorly secured from hackers, volatile price swings, and anonymity that can aid crime.
Still, instead of a total crypto ban, the UK finds different ways to regulate the activity in this sphere. Not so while ago the UK Treasury and Bank of England announced their plans to explore a possibility of creating a central bank digital currency (CBDC). As for now, it’s clear that the government is open to adopting cryptocurrencies, however, on its own rules.
How they define cryptocurrencies?
Until 2019, companies operating in the crypto industry did not even know if their actions were regulated in Britain. The Financial Conduct Authority (FCA) then published guidance on cryptocurrency-related activities that fall under their regulatory perimeter. So these categories are:
- E-money — would be digital representations of the fiat funds like USD, GBP, EUR.
- Security coins — those that have characteristics similar to financial securities.
- Unregulated coins — they include utility tokens (eg. Basic Attention Token (BAT), Golem (GLM)) and exchange coins (Binance Coin (BNB), Uniswap (UNI)). Lasts also include those that can be used as a means of exchange: Bitcoin, Ethereum, etc.
By the way, previously, in 2018, together with the Bank of England and HM Treasury FCA established the Cryptoassets Taskforce defining business involved in the crypto industry that has to be regulated.
Namely, there are 8 types of crypto market actors: crypto assets developers and issuers, investors, financial middlemen, miners, crypto trading platforms and exchanges, suppliers of liquidity, payment providers and merchants, wallet services, and custody providers.
What is FCA?
FCA is an independent agency, a part of the United Kingdom’s Cryptoassets Taskforce regulating financial products and services. It also investigates entities and individuals, has the authority to ban commodities and suspend assets.
The bitter truth is that cryptocurrencies are highly attractive for money laundering or other criminal activity because of their anonymous and untrackable nature.
From January 10, 2023, the FCA has been authenticated as the Anti Money Laundering (AML) and Countering Terrorist Financing (CTF) supervisor for crypto-related businesses in the UK. The further activity of the agency was targeted to make the crypto platforms explain the policies, controls, and methods they have to monitor AML and CTF risks.
Not only the policy applies to the companies offering crypto-to-fiat exchange but also to those participating in the ICOs and custodian wallet providers. So, if you’re from Great Britain and looking for a regulated crypto exchange operating in your country, pay attention to those registered with FCA or at least applied and waiting for approval.
To be successfully certified by the FCA, crypto businesses should also pay the registration fee ( £2,000 – £10,000) and pass the regular ongoing supervision by the agency. No wonder this put the start of significant compliance concerns by affected companies.
What is AML?
Anti-money laundering or AML is a worldwide term meaning internal company policies and international laws against financial crimes. It includes transaction monitoring, clients’ verification, business training, and regular reports.
The issue of derivatives
Recently, FCA officially prohibited the sale of crypto derivatives products and exchange-traded notes (ETNs) to retail customers.
They stated the next reasons for the ban:
- Digital assets don’t have a reliable basis for valuation
- High risk of abuse or financial crimes to penetrate the market (for example, the darknet)
- Ignorance or inaccurate interpretation of the nature of cryptocurrencies by retail users
- The extreme volatility on the crypto markets
- And lack of legal authority presented on the market
It’s important to highlight that they didn’t ban crypto coins and tokens. The rule applies to derivatives only. For instance, if you are a British resident, you can still use a BTC to pounds exchange and buy some crypto, for buying crypto you can use CEX.IO.
However, if you want to practice CFD trading for example, or crypto futures you’ll need to postpone this idea for better times when this activity will be allowed in the UK.
What is derivative trading?
A derivative is actually a financial instrument. In crypto, it represents a contract between the broker and user which is based on the future price of the coin or token. Say, if you want to speculate on the price of Ethereum you can purchase some ETH and sell it when prices rise.
Or, you can trade a financial instrument that is pegged to the price of ETH. The main advantage of trading derivatives is that you don’t actually have to obtain ETH tokens or other cryptos you’re interested in. You can bet for the uptrend or even the downtrend and receive the difference in price in case your prediction is right.
How about stablecoins?
Since the industry evolves, the UK government is now considering expanding the types of tokens defined in the FCA’s guidance. The recent consultation paper published by HM Treasury points out that at least in part, the state recognizes the benefits of stablecoins.
Additionally, the consultation sets out some other aspects of UK crypto regulations seeking stakeholders’ views regarding a range of related questions. Now the government reviews the possibilities of using crypto assets by retail users for investment goals and the use of distributed ledger (DLT) in the financial sphere.
What are stablecoins?
Stablecoins are designed to be the least volatile cryptocurrencies. Their value is pledged to some traditional assets like gold or fiat currencies (US dollar, EUR). Keeping all the benefits of cryptocurrencies like their anonymous and decentralized nature, they also have the advantages of fiat money.
How to trade cryptocurrencies in the UK
When you’re looking for the best place to buy and trade cryptocurrencies in the United Kingdom, consider some key points:
- The platform should be officially registered with the FCA or at least have a temporary status
- The crypto exchange should have the necessary licenses to operate with fiat payments. For instance, CEX.IO has a level 1 PCI DSS certification that evidences the high-level security of your card payments.
- Trading derivatives (CFD, futures, options) are not allowed for now.
- If you hold cryptocurrency as a personal investment, you are taxed on the capital gain at the time the cryptocurrency is sold, traded, or used for purchase.