Crypto License in the UK

Cryptocurrency Regulations in the United Kingdom (UK)

UK crypto-asset legislation is partially compliant with European Union (EU) regulations, as the country adopted the anti-money laundering (AML) and counter-terrorist financing (CFT) requirements set out in the EU's Fifth and Sixth Directives (5AMLD and 6AMLD) before leaving the EU. UK cryptocurrency companies are required to comply with the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the MLRs), which sets out the private sector's responsibilities to combat money laundering risks. The Regulations provide requirements for customer due diligence measures that are monitored and enforced by the FCA to prevent money laundering and the financing of illegal activity through cryptocurrency business. The process for verifying a customer's identity and financial activities is set out in the Know Your Customer (KYC) guidance.

Under current legislation, the provision of crypto services in the UK requires registration with the FCA. This registration process is officially known as the FCA AML/CTF crypto asset registration regime. Although the term "license" itself is not used, registration can be considered a license, as without it, it is prohibited to provide certain crypto services in the UK. This step is mandatory if the company plans to carry out at least one of the following activities:

• crypto trading platform - cryptocurrency exchange;
• managing automated cryptocurrency exchange processes;
• conducting initial coin offerings (Initial Coin Offering, ICO);
• provision of crypto wallets - storage facilities for cryptocurrency;
• provision of crypto bank and terminal services.

In addition to the requirements of UK financial legislation, the sale or offering of cryptocurrency and related services is also subject to the Consumer Rights Act 2015 and the Consumer Protection from Unfair Trading Regulations 2008. These apply to consumers (individuals who purchase goods or services for personal use rather than as part of their business activities) and provide them with legal rights and redress mechanisms against providers of goods, services, and digital content. These laws also place additional restrictions on the types of contractual terms that can be applied to consumers.

Registration of a crypto company in the UK

To successfully register a crypto business, the following information and documents must be provided to the FCA:

1. Directors' and shareholders' resumes confirm their experience, qualifications, and competence.
2. A program of operations that describes the specific crypto asset activities the company is engaged in.
3. A detailed business plan that details consumer protection and measures to prevent money laundering and terrorist financing.
4. A risk management policy that describes the measures taken by the company to ensure the safety of customer funds.
5. A marketing plan describing customers and sales channels.
6. Company structure, including corporate structure and information on outsourcing arrangements, if such agreements apply.
7. Providing information on the key IT systems used by the company, including IT security policies and procedures.
8. Providing details of the AML/CFT system and risk assessment associated with the proposed operations, including training materials for staff.
9. Providing all public keys/addresses of crypto asset wallets used by the company in its operations.
10. Providing information on the agreements and customer onboarding process.
11. Providing documentation to support customer due diligence and enhanced due diligence procedures that comply with legal requirements.
12. Providing information on transaction monitoring procedures.
13. Providing information on record keeping and registration procedures.
14. Money laundering reporting.
15. Providing beneficial owner forms for company shareholders.

The registration process itself takes place in several steps:

1. The applicant must complete an application form and submit it to the FCA.
2. Payment of the registration fee:
   • £2,000 (about US$2,599) if the company's revenue is less than £250,000 (about US$324770);
   • £10,000 (about US$12,990) if the company's revenue exceeds £250,000.
3. The FCA appoints a supervisor who will be responsible for assessing the request of the applicant.
4. At the request of the supervisor, the applicant must provide additional information or evidence that may be necessary for the application to be considered.
5. The FCA reviews the application using various databases and information held by other regulators in the UK and overseas.
6. Assessing compliance with minimum threshold conditions, which depend on the complexity of the business.
7. If the application is successful, the FCA issues authorization for the regulated activity.
8. The FCA provides written confirmation of the decision, including an indication of the type of regulated activity authorized, the start date, and any restrictions associated with the authorization.

Once the authorization process is complete, the Financial Services Register will be automatically updated.

When applying for a cryptocurrency license in the UK, it is possible to withdraw an application during the authorization process, in which case the application fee is not refundable. Applicants usually withdraw from the process if they cannot provide all the required information, or do not meet the deadlines.

If an application is rejected, the FCA will explain the reason for its decision and refund the application fee, after which a resubmission of the application is possible.

The FCA has the right to suspend or cancel the registration of a cryptocurrency company at any time after the completion of the registration process if the company does not meet the requirements.

In addition to the registration fee, authorized companies are also required to pay a periodic fee, which is calculated using a specific formula that takes into account the application fee, the company`'s valuation, and the number of calendar months. The amount of the fee will be determined by the FCA on a case-by-case basis. In the first year, authorized companies are only required to pay a portion of the fee based on the number of months remaining in the payment year.

Taxation of cryptocurrencies in the UK

Although the UK does not yet have a detailed regulatory framework for cryptocurrencies, Her Majesty's Revenue and Customs (HMRC), the UK's tax authority, has already released a Guide to Crypto Assets, which explains all the tax obligations associated with the use of cryptocurrency under existing legislation.

Here are a few key points regarding the taxation of cryptocurrencies in the UK:

1. HMRC treats cryptocurrencies as assets rather than currency. The specific tax treatment depends on cryptocurrency-related activities such as investing, mining, or trading.
2. Capital Gains Tax (CGT). If you dispose of cryptocurrencies, such as selling or exchanging them for fiat currency or other assets, you may be liable to pay CGT. Taxable income is calculated based on the difference between the acquisition cost and the realization cost. An annual CGT exemption threshold applies and individuals are responsible for reporting and paying the tax.
3. Income Tax (IT). If you receive cryptocurrency as payment for goods or services, it is treated as taxable income. The value of the cryptocurrency received is determined by the market value at the time of receipt.
4. Cryptocurrency mining is treated as a taxable activity. The value of the cryptocurrency mined is taxable income based on its market value at the time of receipt.
5. The sale and purchase of cryptocurrencies are generally exempt from value-added tax (VAT). However, other transactions, such as exchanging cryptocurrency for goods or services, may be subject to VAT.
6. A deduction tax on the purchase of shares, land, or real estate may also apply in certain cases if the purchase is made using cryptocurrencies.

It is important to note that tax rules and guidance can change over time and it is recommended that you consult a Gofaizen & Sherle tax professional for the most up-to-date and accurate information on the taxation of cryptocurrencies in the UK.