A few years ago investor Warren Buffett was quoted warning people to stay away from cryptocurrencies: “…generally, I can say almost with certainty that they will come to a bad ending”.
PayPal co-founder Peter Thiel, on the other hand, says that Bitcoin has the potential “to change the world”.
Who’s right? And what does it mean for your clients that may already be asking if they should accept payments in non-fiat currency such as crypto and non-fungible tokens (NFTs).
Digital representations of value
First, a refresher on how cryptocurrencies work.
The Financial Conduct Authority says crypto “can be thought of as ‘digital representations of value or rights’ that are secured by encryption and typically use some type of distributed ledger technology (DLT). DLT allows data to be recorded and stored across a network of participants”.
Let’s decode that.
The value or rights are stored in a unique digital ‘wallet’ that has its own code (or key) to authorise transactions. Wallets can also be kept offline (on hardware) for extra security.
In the scenario of a micro or small business accepting cryptocurrency payments, the purchaser would use a cryptocurrency platform to send instructions to transfer cryptocurrency to the business. Anyone using the network can view the message (which is one part of the appeal of the blockchain – it’s hard to forge changes).
Miners then group that transaction with other recently sent transactions into a block, and information from that block is transformed into a cryptographic code. Miners compete to find the code and, once solved, the block is added to the blockchain, the transaction is confirmed and – though it’s sounded more like a game than a transaction up to this point – the business receives the payment.
Types of cryptocurrencies
NFTs are just one form of cryptocurrency. Whereas currencies such as Bitcoin are identical units that can be replicated indefinitely, NFTs are completely unique and can be anything that can be digitalised – a piece of art, music, even a tweet. The highest price paid for an NFT so far is US$91.8m.Cryptocurrencies have no intrinsic value – they are worth only what people are willing to pay for them in the market, so they can be volatile. However HM Treasury recently announced plans to introduce regulation to mitigate that volatility risk (among others) by positioning “the UK as a safe jurisdiction for cryptoasset activity to take place, fostering innovation and providing firms clarity over the planned regulatory framework”.
Currently, it’s a choice
Zac Marks from CryptoCountancy Ltd says he offers his clients the choice of payment in either GBP or the stablecoin USDT.
“My clients include traders, investors, blockchain developers and social media influencers, and given the industry they operate in, many of their business partners are able to make payments using cryptocurrency,” Marks says.
“I have advised my clients that they have the option to receive payment in this manner, and the funds are deposited into a business digital wallet. These funds are easily accessible and can be converted into fiat currency, much like receiving income in USD or Euro.”
Marks says that for companies new to cryptocurrency, but which have a basic understanding, accepting payments into a secure digital wallet in a different currency is comparable to receiving payment via PayPal in various currencies.
Professional advice important
When it comes to tax, things get more complex.
“UK SME limited companies that engage in cryptocurrency trading or hold cryptocurrencies as assets must consider the tax implications of their activities,” Marks says.
“The tax treatment of cryptocurrencies in the UK is complex and varies depending on the specific circumstances of the SME. Ltd companies pay Corporation Tax on their chargeable gains and income received (from sales, mining, staking).”
There is also the extra reporting to consider.
“UK SME limited companies that trade in cryptocurrency or accept cryptocurrency payments may be subject to additional reporting requirements, including Anti-Money Laundering regulations. It is important for SMEs to seek professional advice and ensure compliance with the relevant laws and regulations to avoid penalties, fines and legal action,” Marks says.
Clients may also need to be guided through increased security measures if they are thinking of accepting crypto. Marks says UK limited companies should ensure that any third-party service providers they use, such as cryptocurrency exchanges or custodian wallet providers, have robust security measures in place and are compliant with relevant laws and regulations.
“UK limited companies should consider storing a portion of their cryptocurrency holdings in cold storage, such as a hardware wallet, to protect them from online attacks,” he added.
All signs point to eventual acceptance of cryptocurrency by small businesses in the UK.
HM Treasury announced last year plans to make Britain “a global hub for cryptoasset technology and investment”.
“The government intends to legislate to bring stablecoins – where used as a means of payment – within the payments regulatory perimeter, creating conditions for stablecoins issuers and service providers to operate and invest in the UK,” the announcement said, citing reliability and safety as reasons for regulation.
Register for our upcoming webinar AML Matters: How to create policies and procedures to learn how to write and maintain AML policies and procedures, from IFA Head of Practice Standards Tim Pinkney, and IFA AML Reviewers Karolina Kowalczyk and David Erichsen.
