Cryptocurrencies and the Law of Compliance in the United Kingdom

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Cryptocurrencies such as Bitcoin and Ethereum currently exist in what is perhaps the most peculiar legal grey area in the international market for speculation. These cryptocurrencies are not issued, regulated, or monitored by the central bank of any nation but rather by a democratised network of peer-to-peer users from around the world. Today, these cryptocurrencies are a topic of heightened interest as the value of some cryptocurrencies as well as speculation in these currencies has skyrocketed. In the past year alone, the market cap of Bitcoin, the largest cryptocurrency by market cap, has gone from circa US$15 billion to circa US$60 billion and there seems to be no end in sight for this growth[1]. Naturally, with increased investment pouring into these currencies, questions are being raised regarding compliance laws and where these currencies stand regarding the laws regulating securities and exchanges both internationally and domestically.  As cryptocurrencies are not regulated by a formal authority, there is significant potential for abuse in the form of money laundering, tax evasion, and other criminal activities. This article, therefore, aims to clarify to some extent the legal status of three areas of involvement in cryptocurrencies, with a particular focus on the current, albeit provisional, laws in the United Kingdom: mining,  use as currency, and finally the use of cryptocurrencies as a medium for speculation.

Mining

The laws regarding the mining of cryptocurrencies are perhaps the clearest and most consistent internationally. “Mining” is an activity wherein new cryptocurrencies are produced by users who solve complex cryptographic algorithms using their computers. As a reward for contributing computing power in the solving of these algorithms, users are rewarded with cryptocurrencies proportional to their contribution in computing power. Mining as such is not illegal in the United Kingdom. As per the Revenue and Customs Brief 9 (2014), the leading source of legal clarification issued by HMRC regarding cryptocurrencies, income received by miners will be exempt from the Value Added Tax (VAT) in accordance with Article 135(1)(d) of the EU VAT Directive because “there is an insufficient link between any services provided and any consideration received”[2]. Furthermore, when the cryptocurrencies are traded for fiat currency, currency issued by a government[3], such as Pound Sterling, no VAT will be due on the value of these cryptocurrencies[4]. Miners instead are required to account for their profits and losses in their filings, and they may be taxed on normal Income Tax rules.

Use as currency

It should come as no surprise that cryptocurrencies are used as currencies themselves – they are not simply a medium for speculation. Users can pay or receive cryptocurrencies in exchange for services rendered or goods provided. The general brief in the United Kingdom regarding VAT for these transactions reads that “in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency”[5]. Furthermore, the brief states that the VAT will be due at the sterling value of the currency at the time of the transaction. However, the clear problem with this steadfast law is that there are little means of tracing the transacting parties in cryptocurrency transactions as it is very easy to anonymously transfer these coins . This anonymity is one of the primary reasons why some users are drawn to cryptocurrencies However, this also poses significant difficulty for HMRC in tracking cases of tax evasion and money laundering. Presently there is ample potential for individuals to transact with cryptocurrencies for services or goods under a veil of anonymity and avoid paying VAT as there are no forced anti-money laundering or “know your customer” laws. However, if these transactions are proven by HMRC, the wording of the brief suggests that they would be liable for the same penalties as those avoiding VAT using fiat currency.

Cryptocurrencies as a medium for speculation

The laws regarding cryptocurrencies as a medium for speculation are their most interesting aspect. In the UK, the lines are blurred as to whether cryptocurrencies are commodities, securities, or currencies. In the United States, the Commodity Futures Trading Commission (CFTC) has defined Bitcoins as commodities, defining it in a specific way which affects how profits on speculation from cryptocurrencies are taxed[7]. However, in the UK, there has been no definition, and as such, it is unclear how these earnings will be taxed. The HMRC brief states that “Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for CGT [Capital Gains Tax] if they accrue to an individual or, for CT [Companies Tax] on chargeable gains if they accrue to a company”[8]. This seems to suggest that cryptocurrencies are considered securities, but securities are generally subject to regulation by a nation’s securities regulatory agency and Bitcoin is not as such regulated in the UK. Moreover, the brief says that some transactions might be so highly speculative that they may not be taxable or losses relievable. The brief specifically cites gambling or betting wins where, whether over cryptocurrency or otherwise, profits are not taxable and losses are not relievable. Though it may be black and white for gambling and betting, it can be argued that some new cryptocurrencies (and there are hundreds of new ones every day) are themselves so speculative that profits from them should be untaxed. This is a point in need of significantly more clarity as more and more companies begin to print cryptocurrencies and sell them in online markets in events called ICOs (Initial Coin Offerings) as it affects the way that profits or losses from these ICOs are taxed.

 What the future holds

The law of compliance regarding cryptocurrencies is in its infancy. While there are some serious concerns regarding how people may use these currencies ­– especially as conduits for nefarious activities – it is undeniable that both the speculative value and the market cap of cryptocurrencies have skyrocketed in the past few months. This is exactly why HMRC and Parliament need to stay vigilant about how they approach regulation and taxation of this market – both now and in the future.

[1] Coinmarketcap.com. (2017). Bitcoin (BTC) historical data | CoinMarketCap. [online] Available at: https://coinmarketcap.com/currencies/bitcoin/historical-data/?start=20170101&end=20170923 [Accessed 23 Sep. 2017].

[2] Gov.uk. (2017). Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies – GOV.UK. [online] Available at: https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies [Accessed 27 Sep. 2017].

[3]  Mankiw, N. (2014). Brief Principles of Macroeconomics. p.220.

[4] Martin, A. (2017). No VAT on Bitcoin, rules ECJ, but capital gains still apply. [online] Theregister.co.uk. Available at: https://www.theregister.co.uk/2015/10/22/no_vat_on_bitcoin_rules_european_court/ [Accessed 27 Sep. 2017].

[5] Gov.uk. (2017). Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies – GOV.UK. [online] Available at: https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies [Accessed 27 Sep. 2017].

[6] Bloomberg, J. (2017). Bitcoins- Blood Diamonds of the Digital Era. [online] Forbes.com. Available at: https://www.forbes.com/sites/jasonbloomberg/2017/03/28/bitcoin-blood-diamonds-of-the-digital-era/#7d1e696e492a [Accessed 27 Sep. 2017].

[7] Cftc.gov. (2015). CFTC Orders Bitcoin Options Trading Platform Operator and its CEO to Cease Illegally Offering Bitcoin Options and to Cease Operating a Facility for Trading or Processing of Swaps without Registering. [online] Available at: http://www.cftc.gov/PressRoom/PressReleases/pr7231-15 [Accessed 27 Sep. 2017].

[8] Gov.uk. (2017). Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies – GOV.UK. [online] Available at: https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies [Accessed 27 Sep. 2017].

 

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