Experts have long believed that the UK is poised to build an innovation economy, with London positioned as a global financial hub and a place for technological innovations, with huge foreign investments. According to a 2018 analysis by jointly DAG Global, Deep Knowledge Analytics and Big Innovation Centre, Britain has the necessary industrial resources as well as government interest to emerge as a blockchain leader or a crypto economy by 2022.
Bank of England (BoE) Governor, Mark Carney, wants to set the central bank on a path of modernisation, with his positive stance on digital currencies. Carney insists that London-based financial institutions need to evolve with the times, in order to remain relevant in the global economy. Although the BoE has rejected any plans to create its own cryptocurrency, it is keen to regulate products launched by the private sector.
However, despite the enthusiasm of the Central Bank chief, the UK crypto industry seems to have gotten into some trouble recently. Let’s understand why.
Until quite recently, the UK did not have any crypto specific laws, but didn’t ban cryptos entirely either. Although not declared legal tender by the BoE, exchanges involved in crypto trading and brokers offering crypto-based derivatives required authorisation from the FCA. Gains and losses incurred via crypto trading are subject to capital gains tax by the UK tax authority, Her Majesty’s Revenue and Customs (HMRC) department. But income tax laws have precedence over capital gains tax, even for income that comes through crypto trading.
In June 2019, the FCA sent out a warning to cryptocurrency investors, citing market volatility, immaturity, manipulation and lack of credible information as some of the risk factors that can cause huge losses in the long term. For years, the FCA had held a progressive view of cryptocurrencies, ensuring strong vigilance and regulation of blockchain technology trials in sandbox environments. So, the warning was taken by many as an indication of a potential future ban on the digital asset class in the nation.
However, FCA officials stated that this warning only pertained to unregulated crypto investments. A broad range of activities are included in this emerging market. The financial watchdog wanted to make sure that people understood the risks of trading digital assets, which have no intrinsic value. However, uncertainty loomed over the market, which persisted right up to November 2019.
A UK Jurisdiction Taskforce, one of the six panels under the government backed Lawtech Delivery Panel (LDP), recognised crypto assets as tradable properties under British law. This is historic, given that no other government jurisdiction has taken so much time to study and regulate the industry. This removes a lot of legal uncertainties regarding the crypto industry, which the regulators believe will drive innovation in the blockchain space.
This is because the 46-page statement also recognised smart contracts as legally enforceable contracts, under British and Welsh private laws. UK entrepreneurs have welcomed this decision, which will revolutionise payment and settlement processes, property registries and much more.
The publication of this report is an indicator of Britain’s positive stance on cryptos. However, the report does not indicate any direct support from the government itself. Nevertheless, the panel contains some of the top authorities from the UK government and its judicial system, which is reassuring. The facts and guidelines provided by this panel will become critical insights on which lawmakers and regulators can base their decisions.
A clean bill like this could put the UK on the world map as a leader in crypto innovation.
Britain stays shrouded with Brexit uncertainties and its economic impacts could be huge. The OECD, along with HM Treasury, has predicted that without a deal in place, Britain’s GDP could be hit by as much as 3% until 2020. The Bank of England has also made worrisome projections, including falling house prices, lower interest rates, investment outflows, currency depreciation and loan default.
Brexit also brings in uncertainties regarding the UK’s relationship with EU-based financial institutions and the impact on cryptocurrency trading. While traditional financial houses have appropriate safeguards in place, assuring stability until further agreements are reached, the crypto industry doesn’t have any clear laws.
On the other hand, there are some industry experts who say that a no-deal Brexit could be beneficial for the UK crypto industry. This is because in the long-term, UK-based regulatory bodies will be able to create their own laws regarding crypto investments. The EU holds a lesser positive stance on the cryptocurrency industry, compared to the UK.
For EU-based users, who use the services of UK-based exchanges and wallets, or vice versa, a no-deal Brexit will have limited impact. They will be able to use the Single Euro Payments Area (SEPA) bank payments, which is used for most deposits in exchanges within the EU.
Moreover, a weakening Pound Sterling might be accompanied by an increase in prices of cryptocurrencies. By nature, crypto coins, like Bitcoin, Ethereum and Bitcoin Cash, remain unaffected by financial market movements. Investors could resort to them as safe-haven destinations, in the event of financial and political instability. Market experts predict minimal impact on trading volumes as well, along with a strong appreciation in crypto prices.
A survey conducted by YouGov in November 2018 revealed that one in five people in the UK consider Bitcoin as an important part of the payment networks of the future. The nation is considered a global fintech leader, which is why the FCA has been supportive of innovations in the blockchain space. And, in the current climate of financial and political uncertainty, it cannot risk driving out blockchain innovators by taking a strict stance on cryptocurrencies. This is why, on the whole, there are indications that the UK will spearhead the task of creating defined regulatory frameworks for digital assets. However, much also depends on the next BoE governor, since Mark Carney is scheduled to retire in January 2020.
To stay informed regarding the crypto market, it could be a good idea for traders to keep a close eye on FCA-issued guidelines related to Brexit developments.