Cryptoasset regulation: a tale of two reports – Ben Lee
Ben Lee, Crypto Tax Partner, explains why UK regulators are playing catchup on how to control the rapidly growing crypto market, in Accountancy Daily.
Ben’s article was published in Accountancy Daily, 20 June 2023.
The evolving landscape of cryptoasset regulation is constantly finding attention in media headlines. In the wake of the collapse of FTX, countries are considering their approach to the regulation of cryptoassets to protect consumers and to provide further clarity to the industry.
In April 2022 John Glen, Economic Secretary to the Treasury, announced in his keynote speech at the Innovate Finance Global Summit the UK’s aspiration to be a global hub for cryptoasset technology and recognised the need to consult on wider regulation of the cryptoasset sector.
In the last two months, two reports have been presented to Government by differing Parliamentary groups, offering recommendations on how to address the sector.
The first was released on 17 May 2023 by the Treasury Committee (TC) entitled “Regulating Crypto”.
Many will be familiar with the headline from a prior TC report in 2018, identifying the need for regulation in the market, labelling the sector as the “wild west”. The recent publication follows a similar tone, with a surprising twist: investments in unbacked cryptoassets, such as Bitcoin and Ether, should be treated as gambling and taxed as such, disregarding the recent IMF report linking Bitcoin to the stock market.
The report is also at odds with domestic and international regulatory efforts. In the UK, the Financial Conduct Authority (FCA) has acted as the money laundering regulator for cryptoasset firms since 2019. It is unclear whether the TC takes issue with the FCA’s approach. The report neglects to discuss in detail any concern with their efforts to date and provides no clarity as to how a change in regulatory treatment would provide greater benefits to the existing approach.
One day prior to the TC’s report, the European Union adopted new regulatory rules on markets in crypto-assets (MiCA) to protect consumers and allow companies to operate on an EU-wide basis. MiCA details a comprehensive framework, increasing transparency for issuers and service providers, covering issuers of utility tokens, asset referenced tokens, trading venues and wallets. More recently, the World Economic Forum (WEF) released their report “Pathways to the Regulation of Crypto-Assets” highlighting the need for jurisdictions to work together in providing uniform regulation. It is evident that the TC’s approach does not share this harmonious view.
The report fails to comment on the taxation effects of the proposed change. Treating investments in unbacked cryptoassets as gambling would create further uncertainty as to what activities or assets may fall within the new regime, and heightens the risk of non-compliance. HMRC’s first commentary on cryptoassets released in 2014 likened the activity of buying and selling cryptoassets to gambling; a sentiment which prevails amongst some taxpayers today.
The second report released on 6 June titled ‘Realising Government’s Vision for the UK to Become a Global Hub for Cryptocurrency and Fintech Innovation’, published by the All Party Parliamentary Group (APPG) led by Dr Lisa Cameron MP, offers a contrasting read. Cameron states: “Given the rapid growth of cryptocurrency and digital assets, the timing of this report is vital to protect consumers whilst ensuring the UK’s leadership in this sector can be realised”.
In contrast to the TC, the APPG recommends further, if not faster, work by current regulatory bodies within an opportunity window of the next 12-18 months to ensure leadership of the UK within the sector.
The report recognises the significant opportunities for jobs, skills and inward investment that would arise by establishing a robust framework, and provides a balanced approach discussing the benefits of the technology. These include its use as an alternative to mainstream payments, and the use case for cryptoassets in times of crisis, with the report citing the $100m donations received by Ukraine to support humanitarian efforts on the frontline following damage to critical infrastructure that prevented access to banks or ATMs.
Unlike the TC report which comments on the ‘very large amounts of energy’ this technology consumes, the APPG report notes that the sector is exploring innovative ways to address the issue, citing the Ethereum Merge as an example (Ethereum’s move to a proof-of-stake consensus reducing its energy consumption by an estimated 99.95%).
Demonstrating a clear understanding of the sector, the report does not shy away from the risks of the industry, consumer protection and economic crime. It also comments on the common myth the sector has been associated with since inception: that of illicit activity, iterating the transparency and traceability of assets the technology provides.
There is a significant risk of harm that could be caused to the UK sector by a failure to act. The APPG appreciates that the UK remains in the very early stages of regulation, but to remain competitive, action must be taken within the next 12-18 months to ensure leadership within the sector.
Amongst the 53 recommendations is the appointment of a ‘Crypto Tsar’, a position to help coordinate across departments to ensure a consistent approach across all government departments and regulatory bodies. Importantly, it calls for a renewed effort to improve public digital finance education in lieu of fraud and scams.
It is worth noting that the Government is not bound to follow the recommendations of either report, but has undertaken to respond to most committee reports within two months.
In the global race to provide regulation for this sector, it is worth noting the efforts across the pond. Recently in the US the Securities and Exchange Commission (SEC), led by chair Gary Gensler, made headlines by charging crypto exchange Binance and its founder, Changpen Zhao, with 13 offences. The next day the SEC announced a new set of charges against Coinbase, an exchange that filed a petition to the SEC in July 2022 seeking regulatory clarity. In an open statement in April, Brian Armstrong – CEO of Coinbase – stated: “If we don’t see regulatory clarity emerging in a number of years, we may consider investing more in other regions, including relocating”.
This continuing forceful approach by the SEC has led republicans Warren Davidson and Tom Emmer to introduce a new bill to restructure the SEC and remove Gensler from his position, fearing the damage being caused to the cryptoasset industry in the US and driving businesses to new shores.
It is clear from both reports that the UK is not yet in a position to make the best of the current opportunity. However, timely and continued efforts from Government bodies acting cohesively, building in line with global efforts to provide a clear and robust framework to ensure the UK remains attractive to these businesses, must be the way forward.