The UK has proposed a regulatory framework for crypto assets:
- This is both a challenge and an opportunity for accountants
- The tax implications for businesses using crypto will be more complex
- But better regulation will bolster protections and transparency
In November, the Financial Conduct Authority (FCA) unveiled its roadmap of discussion papers, policy statements and consultations to run through 2025 with the aim of establishing a new crypto asset regulation by 2026.
The UK framework will cover the entire crypto lifecycle, from issuance to intermediation to trading, to bring them in line with traditional financial services standards for the first time. It will also mandate detailed disclosure requirements to enhance transparency and protect investors, and introduce specific rules for stablecoins.
Why now?
Following many scandals in recent years – FTX, OneCoin, LUNA, Squid Game token, and Centra Tech ICO to name but a few – it is increasingly clear that there is a need for better regulation of digital assets.
Crypto investing is also seeing a resurgence, with FCA research showing that 12% of UK adults now own crypto assets, up from 10% in 2022. In response Matthew Long, director of payments and digital assets at the FCA, said: “We want to develop a sector that embraces innovation and is underpinned by market integrity and consumer trust.”
“The key, as ever, will be to ensure that the increasing visibility, adoption and use of digital assets is understood by all stakeholders but particularly regulators, and ultimately consumers.”
Karl Foster, Fintech and Financial Services Partner, Spencer West LLP
Similarly to regulations in other regions, such as the EU’s Markets in Crypto-Assets (MiCA) and the Financial Innovation and Technology for the 21st Century Act (FIT21) in the US, crypto assets will be more clearly included within the scope of taxation. This will impact accountants, who will need to take action when the changes come in to help clients understand their tax responsibilities.
New regulation could be a “culture shock”
The need for regulation signals that digital assets are moving into the mainstream, and have the potential for more consumer adoption and confidence in the retail markets. Says Karl Foster, Fintech and Financial Services Partner at Spencer West LLP, “Of course, this will be a culture shock for many participants.”
“The direction of travel – towards inclusion within the financial sector – means that many current operators within the space will need to reassess their governance and compliance frameworks against traditional viewpoints. For many, this will prove problematic.”
Accountants advising businesses in the cryptocurrency space will need to stay informed about how the evolving regulation will affect clients’ tax obligations. For example, businesses will need to report any profits, gains, or losses arising from crypto-related activities, which could involve capital gains tax or income tax.
Firms must adapt to see opportunities
Foster says: “The biggest challenge is keeping up with the regulations and to ensure the regulations keep up to date with changes. Digital assets are, by their nature, mobile and offer greater scope to develop new products and services.”
However, he adds that the regulation also provides a great opportunity for those businesses that adapt. They will make a variety of sanctions available to the authorities, including the ability to ban non-compliant companies operating within the UK. It will also bolster consumer protection by providing more scope for redress.
Clear guidance is crucial for the regulation’s success
For Ciarán McGonagle, Chief Legal & Product Officer, at Tokenovate, the development of this framework represents a transformative moment for UK-based innovation.
McGonagle sees this as a pivotal moment for businesses to leverage the convergence of legal, regulatory, and technological standards, and reshape financial systems.
However, he says: “Clear guidance and collaboration among stakeholders and experts will be essential to achieve the UK’s ambition of leading in tokenised financial markets.”
McGonagle says that greater legal and regulatory clarity will boost market confidence and attract institutional participants. However, the new regulations also imply new compliance requirements, and firms will need to be mindful of the potential for increased operational and staffing costs.
There is an opportunity for accountants to take an advisory role
The introduction of the new regulation represents an opportunity for accountants to support clients in navigating the new rules, from understanding the implications to structuring crypto transactions for tax efficiency.
The regulation will require more complex reporting, and a key role for accountants will be guiding clients through compliance procedures and setting up systems to track and report transactions accurately for tax purposes. Firms dealing with crypto assets will also face stricter anti-money laundering (AML) rules.
For McGonagle, the regulation is a welcome step in the right direction. He says that the UK’s proposed framework suggests a maturing of the industry and a desire among regulators to bring digital asset-related activities much more clearly within scope of the financial regulatory perimeter.
As Foster summarises: “The key, as ever, will be to ensure that the increasing visibility, adoption and use of digital assets is understood by all stakeholders – but particularly regulators, and ultimately consumers.”
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