Excerpt from a talk delivered by Haroon Rafique, Global strategy director

UK Regulation of Crypto Assets

UK’s support for FinTech

The UK has been at the forefront of innovation and ranks at the top of the list of European countries in attracting the most deals. The FCA and Bank of England have introduced various initiatives, fintech hubs, sandboxes, to support fintech firms. There is some overlap but FCA and the PRA regulate this sector. 

Regulations governing blockchain technology and crypto assets

UK stance on regulating technology applications is neutral rather it focuses on the use and output of technology applications. Therefore, there is no direct regulation over technology however, some rules such as Article 13 of the GDPR which require the erasure of data, or the Centralised Securities Depositary Regulation which requires dematerialized securities to be held centrally causes difficulties in the context of blockchain technology which works as an immutable and de-centralized system. Crypto businesses, those that provide exchange services, digital wallets (e-money), and ICO’s are required to register with the FCA before operating. There are various classes of crypto assets and if regulated may fall within regulation either as RAO specified investments, MiFID financial instruments, or e-money or Payment Service Regulations (PSR). Exchange tokens, sometimes known as ‘cryptocurrencies’, ‘crypto coins or ‘payment tokens’, function as fiat money is not regulated. Security tokens are akin to share or debt securities. Utility tokens are not specified investments and are generally unregulated but just as other tokens may meet the definition of e-money. Stablecoins are used to manage volatility either as derivatives of securities such as CIS or commodities, backed by fiat funds, a basket of crypto assets, or algorithms that regulate supply. Stable coins may be classed as e-money or security tokens.

Digital currency exchanges and ICO offerings

Digital exchanges or brokerages must be registered with the FCA and also authorized to trade if it involves any regulated crypto assets. All ICO’s launching their business after 10 January 2020 must be registered with the FCA.

Recruiting overseas fintech staff

Individuals can work in the UK and can apply under the Tier 1 or 2 route. Tier 1 supports entrepreneurs and Tier 2 is for skilled workers who are sponsored to the UK by licensed employers.

UK licensing requirements and Regulators

Generally, activities that involve accepting deposits, dealing, facilitating, arranging, or advising on investments, setting up of collectives, payment gateways, and e-money issuance are regulated activities and are covered by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 4 (RAO). Consumer lending is regulated by the FCA, the Consumer Credit Act, and other secondary legislation although there are some exemptions where credit is given for business purposes or made to high-net-worth borrowers.

FinTech activities regulated by Collective Investment Schemes (CIS) activities

CIS activities usually involve the pooling of funds that are managed by an operator therefore, the fund/ operator must be authorized or regulated by the FCA. An Unregulated CIS (UCIS) cannot be promoted to the general public. A UCIS can be open-ended or closed-ended. There are no restrictions on the legal form of a UCIS so it can be structured as, for example, a partnership, a trust, or a company. However, as a closed-ended company cannot be a CIS, a non-corporate structure is required for all closed-ended CISs. This is why an investment trust (which, despite the name, is a listed closed-ended company) is not a CIS (and hence not a UCIS). Unauthorized persons may only promote UCIS to a certain exempt group of investors covered by the Financial Promotions Order. Authorized Persons can promote to that covered under the CIS Order, permitted under the FCA rules COBS 4.12 or Single Property Schemes s239 FSMA. A Fintech company that pools investor funds will be caught by the CIS rules unless it just provides advice or payment services.

Regulation of P2P, crowdfunding platforms, and payment services

The FCA regulates P2P activity, and if the platform is facilitating small individual loans will require permissions to enter into regulated credit agreements. Equity-based crowdfunding is not regulated in the same way as loan-based crowdfunding through equity-based crowdfunding platforms must not market to retail clients unless an appropriate exemption applies. Payment Service Providers are regulated by the Payment Services Regulations 2017 which implemented the PSD2 Directive and firms must apply for authorization. Non-bank payment providers, electronic money institutions (EMI’s), Authorised Payment Institutions (API’s) must be authorized by the FCA, and money held under these entities is not covered Financial Services Compensation Scheme. The PSD2 directives require banks to allow 3rd party providers to initiate payments whilst the Competition and Markets Authority (CMA) introduced measures that required banks to implement open banking APIs to provide access to data and stimulate competition

Provision of Robo advice services

The same rules that apply to investment advisers apply here also.

Selling or marketing insurance products

Contracting or dealing in insurance are regulated activities. Promoting, arranging, and providing insurance are regulated activities, which means firms providing these services, or insurance products must be authorized by the FCA.

Providing credit information services

These are regulated activities and firms must be authorized.

Can non-UK Fintech companies providing financial services operate in the UK?

An EEA firm that is undertaking passport-able activity may operate in the UK without local presence otherwise it must establish a local presence and obtain a license. The rules on sales and marketing of financial services are set out in Chapter 4 of the FCA’s COBS handbook. Promotion of lending and mortgages are covered in the FCA’s Consumer Credit Sourcebook 3.3 and chapter 3A of the Mortgages and Home Finance: COBS.

Taxation of Crypto Assets

Tax incentives and tax costs for Fintech companies

There are several tax incentives for Fintech companies, the most common ones are EIS/SEIS and VCT relief for investors of FinTech entities that are not directly involved in financial services. A 10% tax rate on the disposal of shares. R&D tax credits for relief on qualifying expenditure. Reduced 10% company rate on profits from exploiting patents and other IP rights. The 2% digital services tax (DST) from 1 April 2020, taxes the revenue of very large enterprises which are search engines, social media, or e-commerce platforms deriving benefit from UK users.

How are crypto-assets taxed in the UK?

HMRC defines crypto-assets as intangible assets ‘cryptographically secured digital representations of value or contractual rights that can be transferred, stored, or traded electronically. There are no specific statutory provisions other than HMRC guidance. For direct tax purposes, HMRC does not consider Crypto as everyday currency which seems counter-intuitive when we speak of Bitcoins or e-money? The position is different with VAT. Although HMRC guidance does not address the question of whether crypto assets are ‘property as a matter of law, the UK Jurisdiction Taskforce (UKJT) does. HMRC’s position is that crypto-assets, while digital and therefore intangible, count as ‘chargeable assets’ for capital gains purposes.

Conversion to fiat money

If a Bitcoin is converted to Ethereum say, taxpayers should keep a record of the fiat conversion rate at the time of the transaction.


Individuals’ profits will generally be taxed as capital gains unless there is clear evidence of trading such as mining or dealing activities.

For CGT purposes, the location of the crypto is wherever the underlying asset is located or if there is no underlying then where the beneficial owner is resident. For IHT purposes, the location of the asset follows ‘general principles applicable to private property This is an important factor for UK residents who are non-domiciled both for CGT and inheritance tax purposes. For CGT purposes, each crypto asset is treated separately and gains and losses on the same day or within a 30 days window are separated into special pools for matching of costs and disposal proceeds in calculating gains.


Profits from crypto activities may be taxed as trading income, investments, or intangible assets, or under loan relationship rules if the crypto asset is used as collateral for loans.

Stamp Duty

Stamp Duty tax will apply if tokens are given for the purchase of shares or land.


No VAT on the supply of token itself. VAT is due on the supply of services or goods in exchange for tokens. Mining activities are outside the scope of VAT. Token Exchange activities are exempt from Vat just as transactions concerning currency under group 5 of Schedule 9 VAT 1994. The treatment of other types of crypto-asset will depend on their precise nature. Transactions in or involving security tokens may, depending on their characteristics, be treated in the same way as transactions in or involving shares or securities.

Employment taxes

Exchange tokens will generally be readily convertible assets and are subject to PAYE deductions.

I have a large amount of Crypto which I would like to convert?

The ability to cash crypto successfully depends on five factors; proof of the funds to acquire the crypto, full traceability of the crypto transactions, KYC documentation on the owner, declaration of taxes through the appointment of professionals, and pre-notification to 3rd parties in the transaction which would be the Exchange/OTC and the client’s bank. If these steps can be achieved then, it should be possible to cash out.

It is advisable for security reasons, that the owner stores their cryptocurrency on their personal hot or hard wallets and off-exchange.

Crypto OTC’s will deal with large institutional volume transactions and it may be possible to consolidate several client’s crypto balances under single execution.

Haroon Rafique, FCA

Haroon has a construction, engineering, tech, and finance background and strong and wide working knowledge of financial and non-financial disciplines, familiarity with the UK, IFRS, and US GAAP Standards and Corporate Governance guidelines.

Graduated in Electronic and Electrical Engineering from University College London before going on to become a Chartered Accountant, auditor, and now a Fellow of the Institute Chartered Accountants England & Wales.

He is a director in two tax and audit boutique consultancies providing specialist advice in audit, tax, tech, and finance. Chief Finance Officer of a leading UK company that provides the temporary site and logistical services to blue-chip contractors and adviser to several FinTech companies. Member of the Personal Finance Society, The Society of Mortgage Professionals, The Chartered Insurance Institute, and Chartered Institute for Securities and Investment. He has a diploma in Islamic Finance, a Certificate in Financial Planning, a grade point A certificate in Mergers and Acquisitions from Harvard Extension School, and an RICS accredited certificate in construction Project Management and academic interests in project finance techniques.

Knowledge of key project management techniques and Lean Six Sigma Green Belt certified. Understanding of project lifecycle from start to finish and the critical steps within each stage, including how to plan, organize, and control operations. Use of problem-solving tools in a system of management employing the framework of DMA- IC, Six Sigma, Value Stream Maps, SIPOC, X-Y Matrix, Multi-Variate Charts, Six Sigma Tools, Designing Six-Sigma Processes, Control Charts, Alpha and Beta Errors, Risk Mitigation, Hypothesis Testing, Regression Analysis. A well-rounded view of managing projects with a focus on local contract practice, project finance control and reporting, project process and procedures, and risk management. Grade point A in Mergers Acquisitions and Management from Harvard University Faculty of Arts and Sciences. Knowledge of the impact of federal and international laws on M&A, common takeover tactics and defenses, M&A process, relative valuation methodologies, deal structuring; payment and legal considerations, tax and Accounting, financing transaction: private equity, hedge funds and LBOs, joint ventures, partnerships and strategic alliances, alternative exit and restructuring Strategies, Cross Border Mergers.

Legal Disclaimer

The information contained in this article is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included here without seeking legal or other professional advice. The contents contain general information and may not reflect current legal or tax developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content here

Meer & Co

Leave a reply