Cryptocurrency in the UK: All eyes on the FCA

18 November, 2019

Those of us in the cryptocurrency community have been paying a lot of attention to Facebook's Libra project and the goings-on in China as of late. There has also been plenty of buzz about whether Bitcoin will break through the $10,000 barrier before the end of 2019. Lost in the shuffle are some notable events occurring in the UK. The future of crypto in the UK now appears to be in the hands of the Financial Conduct Authority (FCA).

The UK is viewed around the world as a global leader in technology trends. If something new pops up in the technology world, the UK is almost always an early adopter and eventual leader. They certainly have been a leader in cryptocurrency and decentralized finance. Yet despite the country's reputation, there is a real danger the FCA could single-handedly destroy cryptocurrency there by banning consumer trading and retail activity.

No ban has been enacted as of yet. However, one was proposed in 2018. As the UK's entire financial services sector prepares for implementation of the Fifth Money Laundering Directive in January 2019, there is real concern that the FCA will implement a ban alongside the new directive. If they do, cryptocurrency will be effectively dead for the foreseeable future - at least in the UK.

The current crypto environment

One of the things that has made cryptocurrency so attractive in the UK is the hands-off approach taken by the FCA and the rest of British government. There are no explicit cryptocurrency laws in place at the current time, nor does the government seem to be in a hurry to implement them. Consumers can freely buy and sell, crypto exchanges can operate freely as long as they are registered, and blockchain businesses are left alone to develop their technologies.

Taxes on cryptocurrency are fairly lenient as well. Her Majesty's Revenue and Customs (HMRC), the UK's taxing authority, considers buying and selling cryptocurrencies as being similar to gambling. Any profits made on such transactions are subject only to capital gains tax. If cryptos are treated as assets, profits are taxed as income.

HMRC likes to look at crypto exchange records in hopes of identifying tax evaders, but they aren't exceptionally aggressive about it. Finally, cryptocurrency is not specifically mentioned in the UK's Anti-Money Laundering law. So you pretty much have a situation in which individuals and companies are free to do as they please with only minimal tax laws and exchange registration requirements to worry about.

The end result is that a lot of people in the UK own cryptocurrency. One particular survey among affluent millennials showed that 20% of them are crypto owners. That says nothing of older consumers and those who would not consider themselves affluent.

Given the government's general hands-off approach, it seems odd that the FCA would want to stick its nose in and implement a consumer ban. So what's going on? Why does the FCA believe it needs to step in and take action? For that answer, we go back to 2018.

Risk and consumer ignorance

It was the summer of 2018 when the FCA decided to take an official position warning against dealing in cryptocurrencies. Back then, their reasoning was simple: regulators believed that crypto posed too great a risk to ignorant consumers. They believed that consumers were generally ill-informed and, as a result, were unable to make wise decisions about crypto investments.

This lack of faith in consumer knowledge was the genesis for the proposed ban that emerged in 2018. In short, FCA regulators do not trust consumers to make smart decisions. Like so many other regulators, the FCA believes that consumers need to be protected from themselves. They believe they are the only ones with sufficient knowledge and understanding to decide if crypto assets are good or bad.

In its own defense, the FCA insists that its position is based primarily on a report published by the Cryptoasset Taskforce in July 2018. That report, prepared by the FCA, explains the need to "mitigate the risks to consumers and market integrity, and prevent the use of cryptoassets for illicit activity."

The question to many an astute observer is whether going after illicit cryptocurrency activity is the real impetus behind the proposed ban, with protecting consumer interests being used as a cover. If so, it wouldn't be the first time government regulators did such a thing. Protecting the common good is often used as an excuse for implementing unpopular regulations in an attempt to do something entirely different.

Ramped up investigations

One might look at the FCA's position and surmise that it is just a lot of talk without any real action. However, the action has been hot and heavy since the start of 2019. CoinTelegraph reports that FCA investigations into cryptocurrency-related issues are up some 74% compared to 2018. Those investigations have revealed more than $34 million in losses among investors who have been bilked by Forex and cryptocurrency scams.

The FCA's investigations clearly show that investors are being ripped off. But is banning cryptocurrency investment the solution? Moreover, does it really make any sense? It is not the right solution, and it makes absolutely no sense at all.

First, bear in mind that the $34 million lost so far in 2019 is not limited exclusively to cryptocurrency. The losses include both cryptocurrency and Forex trading. Yet the FCA doesn't seem to be in any push to ban the latter. If you are not sure about what Forex trading is, it is essentially trading fiat currencies in an attempt to make money off exchange rates.

Clearly there are ignorant people losing money on Forex scams. Clearly there are people who use Forex trading as a means of conducting illicit activity. So why is the Forex market okay while the crypto market is not? Singling out crypto seems a little disingenuous.

The second thing regulators do not seem to be taking into consideration is that cryptocurrency bans are likely to be ineffective. Thanks to its decentralized nature, cryptocurrency is not subject to government or central bank interference. People who want to trade crypto will find a way to do so whether they have the FCA's blessing or not.

UK investors do not necessarily have to buy and sell on UK registered exchanges. They also do not have to go directly from fiat to something like Bitcoin or Litecoin. They could start by purchasing Monero, then convert their Monero holdings to other tokens. Doing so would all but guarantee complete anonymity, thus circumventing an FCA ban.

Strange government silence

While all of this is going on, the rest of the UK government seems to be strangely silent. That's rather odd given the fact that government coffers currently benefit from cryptocurrency activity. Should the FCA go through with its proposed ban, cryptocurrency tax revenues are bound to fall. That will change even as investors start looking for workarounds.

It seems odd that the FCA would not get any push back from government bean counters. After all, why would HMRC want to lose out on significant tax revenues despite knowing full well that crypto investors are still doing what they do? And why would the FCA want to take action that it knows will reduce tax revenues?

Some have suggested that the government's reluctance to push back is rooted in the premise that nobody really knows what to do. Even the FCA seems uncertain about anything other than enacting a ban. They do not seem to know how to protect consumers in any other way.

Such is the history of government. For as long as governments have ruled over the affairs of men, leaders have identified what they believe to be a problem only to implement drastic solutions that don't make a whole lot of sense. Their solutions are born of their own ignorance and the false assumption that they need to do something - anything - rather than letting the citizenry work things out themselves.

A ban is not the solution

No one disputes the fact that consumers are largely ignorant about digital assets. No one disputes that criminals use cryptocurrency platforms to facilitate their illicit activities. But plenty of intelligent people dispute the effectiveness or practical reality of a cryptocurrency ban.

For the record, banning cryptocurrency in the UK will not prevent people from being ripped off. It will not stop criminals from using digital assets in their criminal enterprises. All it will do is take yet another choice away from average consumers who should have the right to spend and invest their money as they see fit.

If there is any good news here, it is the fact that the FCA has not yet decided if they will implement their proposed ban. They may very well put it in play when the new money-laundering regulations take effect in 2020. But then again, they may not. No one really knows at this point.

What we do know is that the future of cryptocurrency in the UK hinges largely on what the FCA decides to do. Here's hoping they do the right thing and leave cryptocurrency alone.