For any Brit looking to put some money into Bitcoin, the answer to the question "Is Bitcoin legal in the UK?" would often determine whether they will proceed or not.
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You will definitely feel at ease to learn that it is not a crime to invest in Bitcoin; otherwise, we would have 2.6 million Britons (the number of UK residents that have bought cryptocurrencies) behind bars.
But, while that knowledge is a good start, you’ll gain more insight by reading this in-depth guide about bitcoin regulation in the UK. This guide is thorough as it goes beyond the surface question, is Bitcoin legal in the UK?
We cover every nook and cranny of the Bitcoin and cryptocurrency industry and let you know how regulations in the UK affects both business and end-consumers. To begin, here’s an overview of cryptocurrency regulations in the UK.
Cryptocurrency Regulations in the UK
Crypto regulation in the UK is fragmented. In other words, there is no single document that specifies the regulatory requirements for all industry participants. The reason is not far-fetched. The industry is still in its infancy, and imposed rules may need amendment within a short time.
Despite that unique challenge, the United Kingdom Financial Conduct Authority (FCA), the Her Majesty's Revenue and Customs (HMRC), and the Bank of England (BoE) have at one point or the other published guidance that form the basis for bitcoin regulation in the region.
In all, the FCA is the primary UK government regulator for cryptocurrencies since all businesses in the industry must apply for the requisite license and obtain approval before setting up shop. As per an FCA announcement, existing firms that refuse to comply by January 10, 2021, will face prosecution.
On the other hand, HMRC oversees crypto-related tax matters and has specified taxable events in its detailed guidance.
Next, we consider the FCA’s classification of the different types of cryptocurrencies that exist today.
Bitcoin and other cryptocurrencies
Bitcoin and other cryptocurrencies are “properties” according to the UK Jurisdictional Taskforce (UKJT), and falls into three main categories as per the FCA:
Is cryptocurrency legal in the UK? An Excerpt From an FCA Guidance on Crypto Assets
- Exchange Tokens
At the onset, we answered the question, is Bitcoin legal in the UK? The affirmative ‘Yes’ answer stems from a classification of cryptocurrencies provided by the FCA in 2019.
According to that guidance, tokens where there is usually not a single issuer to enforce rights against, as with Bitcoin fall outside of the regulator’s purview and are termed “exchange tokens.” The FCA agrees that Ether (ETH) and Litecoin (LTC) are also exchange tokens, and also mentions that some other cryptocurrencies fall under this parameter.
- Utility Tokens
The FCA classifies as “utility tokens,” tokens that give its holders access to a “current or prospective product or service.” At the same time, these tokens do not grant holders rights as those granted by specified investments.
- Security Tokens
Where a token provides its holders with rights and obligations similar to specified investments, then the FCA will regulate its distribution. Tokenised investments and such as shares or bonds fall under this category.
Coinbase Account Levels for Verified Users
With its earliest response, UK government authorities made it clear that it would apply anti-money laundering and know-your-customer (AML/KYC) requirements,
The UK government’s transposition of the EU Fifth Anti-Money Laundering Directive (5AMLD) further made it pertinent for crypto-related businesses to identify and know their customers.
Today, UK-based crypto exchanges implement these procedures, requiring that users provide a means of identification, and other personal information before they can trade freely on the platform.
Buying & Selling
UK residents who are of legal age can freely buy and sell cryptocurrencies, as long as they do so on regulated platforms.
The FCA admittedly “appreciates that people may purchase crypto-assets for speculative purposes, anticipating that their value will increase,” but require that such activities are carried out under regulatory perimeters where applicable. Businesses that wish to issue tokens that would otherwise be classed as “securities,” must publish a prospectus and seek approval from the FCA.
Regarding taxation, you don’t need to pay taxes when you buy cryptocurrencies. However, you may need to pay capital gains tax when you sell, if the profit realised from your initial investment goes beyond the tax-free allowance.
Cryptocurrencies received as payment for service rendered is considered income, and thus you may need to pay Income Tax or National Insurance contributions where applicable.
Mining: Is Bitcoin Mining Legal in the UK?
Cryptocurrency mining is legal in the UK, although you’ll have to pay a customs fee when importing the miner and cover any government-related fees associated with setting up such a business in your location.
HMRC applies an Income Tax and National Insurance tax on cryptocurrencies that are received from mining operations. An Income Tax, however, does not apply to tokens obtained from airdrops, especially those received without doing anything in return.
Argo Blockchain, listed on the London Stock Exchange (LSE) is one of the thriving cryptocurrency mining companies based in the United Kingdom.
It is legal to trade cryptocurrencies in the UK using regulated trading platforms. If you engage in this activity as an occupation, then an Income Tax, instead a Capital Gains tax would apply according to the HMRC.
However, certain cryptocurrency-related investment products (i.e. contract for differences, futures, options), and exchange-traded notes (ETNS) are available only to institutional investors. We’ll cover the FCA’s bitcoin regulation for derivatives in the next subheading.
Following a two-year consultation period, the FCA announced in October 2020 that it would permanently ban the sale of crypto derivatives products to retail investors.
The regulator cited the inherent risks associated with such products, arguing among other things that there is no “clear investment need for investment products” referencing crypto assets for that class of investors.
As Bitcourier reported, the ban will come into force on January 6, 2021, with businesses offering such products urged by the regulator to desist from doing so.
Devon’s first Bitcoin ATM is located at the Kingsbridge Information Centre
At the time of writing, there are 289 Bitcoin ATMs in the UK with London, Manchester, and Birmingham being home to more machines than other regions. Bitcoin regulation in the UK specifies that the operators of these machines must implement KYC/AML requirements, while end consumers must provide the requisite information before they can use them.
Businesses that wish to offer money transfer services and online payment processing for cryptocurrency-related transactions will have to apply with the FCA for an Authorized Payment Institutions (API) license.
London-based BCB Group became the first crypto-related firm to acquire such a license in 2020 and currently offers its services to institutional investor clients for cryptocurrency exchanges like Gemini.
See our list of Crypto-Friendly Banks in the UK.
Is Bitcoin legal in the UK? Yes, but it is not recognised as a ‘legal tender.’ This simply means that you would still have to pay taxes if after holding crypto-assets for a certain period and then spend a fraction of it to perhaps pay for goods and services. You will report profits or losses accrued over the holding period.
Crypto regulation in the UK also allows for the use of Bitcoin and cryptocurrencies for charitable purposes. However, such donations are not subject to Capital Gains Tax on them if the assets used for the gifting have not undergone a holding period.
As we mentioned at the onset, most potential investors must go past the stage of asking, is Bitcoin legal in the UK? before they can start putting their money on the line. In this article, we touched different aspects of bitcoin regulation in the UK and considered how different regulatory bodies, especially the FCA, treats cryptocurrencies.
Whether you’re a consumer or a business owner looking to launch specific products for UK users, we recommend that you also consult legal practitioners for advanced guidance. By doing so, you will put yourself in a position where you can participate in a potentially revolutionary financial system while playing within the bounds of the law.