For several years, governments around the world have struggled to get to grips with cryptocurrency. There seems to be an under-riding fear that cryptocurrency has the potential to supplant native fiat currencies and as a result, most countries have been outwardly hostile to cryptocurrencies. The UK crypto tax reporting framework is set to launch in 2026.
A point in case about hostility would be China who has implemented an outright ban on cryptocurrency for its citizens. The UK government and the Financial Conduct Authority who oversees financial regulation has long been trying to understand cryptocurrency and create rules around investment.
Unfortunately, the government and the Financial Conduct Authority (FCA) are woefully out of touch, they fail to understand even basic concepts of cryptocurrencies and their latest framework highlights just that.
Backdrop – New UK Crypto Tax Reporting Framework
Cryptocurrency has increased in popularity over the last decade and a substantial portion of the British public now own or have owned cryptocurrency. The government estimates this figure to be 12% or roughly 1 in 10 adults.
The actual figure is likely to be a little higher as some cryptocurrency trading platforms are not going to provide governments with the data needed to establish the country of origin for investors.
It is likely the UK government bases this 12% figure on co-operative crypto exchanges like Coinbase. It is also noteworthy, you can buy and own cryptocurrency without ever using a middleman, there are going to be some crypto holders who have purchased the currency directly from other people and hold it in their private wallets.
Irrespective, cryptocurrency ownership and investment are growing and over the next 10 years, that percentage could double of triple.
What Has the FCA Said About Cryptocurrency Going Forward?
Alongside the Treasury Department, the FCA has decided to implement a new crypto framework.
The publicised goal of the regulation is to protect people from harmful investments.
Scams and Fraud in Cryptocurrency are Rife
Make no mistake, there are many elaborate crypto scams and even entire entities and countries (looking at you North Korea) who target individuals who have cryptocurrency.
Of the 12% of adults in the UK who own or have owned cryptocurrency, it is unclear what percentage of people have experienced fraud. It is a glaring omission from the data supplied by the Treasury and is instrumental in evaluating how prevalent the problem is. For example, if 0.1% of that 12% have had crypto stolen, it is a very low proportion of crypto owners – conversely, if it is 10% of that 12% – it is a legitimate issue.
Without the data, we have no way of knowing and I wonder if a) the Treasury and FCA know and b) if they would disclose the data if they did.
Scams and Fraud is Rife in Fiat
Let’s not forget, fraud and scams are not new. They didn’t suddenly appear when cryptocurrency emerged.
Scams and fraud are actually commonplace with fiat currencies in the UK. Without waffling, let’s look at the headline stats.
- 41% of all reported crime in England and Wales is fraud or scams
- 61% of all UK adults have been targeted of frauds or scams each month
- There has been a 52% increase in fraud or scam crimes in the last year.
If you live in the UK, you will know first-hand how often you receive scam emails and phone calls. Frustratingly, the government seems unprepared to act or if they are, it is having no impact to disrupt the criminals.
New UK Crypto Tax Reporting Framework for Cryptocurrency
Draw what conclusions you will with regard to comparing the rate of fraud between fiat and cryptocurrencies. And compare for yourself the kind of preventative methods the Treasury is prepared to make for fiat crime and crypto crime.
Nevertheless, the UK government has decided they MUST take steps to ‘help’ those investing in cryptocurrencies.
UK Crypto Framework at a Glance
- All crypto exchanges, dealers and agents operating in the UK will be subject to existing financial regulations.
- Stablecoins will not be subject to new rules.
- The FCA will require additional checks for crypto lending and staking.
- Rules are set to take effect in 2026 after a short consultation period.
- Individuals will not be able to borrow to buy – i.e. use a credit card to purchase Bitcoin.
Is This UK Crypto Tax Reporting Framework Good?
Those within the crypto community are not happy because they feel it limits their ability to trade freely and there will be more restrictions on how and with whom they can trade.
From a regulatory standpoint, there needed to be some action in order to bring crypto in line with traditional finance and ensure companies operating in the crypto space are doing so compliantly.
Worryingly, the action the Treasury and FCA are aiming to take is targeted at individuals and companies providing crypto services. Institutional investors are still able to act with impunity and one can argue it is institutional investors that need the closest scrutiny.
My Personal Perspective on the New Regulation
Personally, I have no problem with the framework providing the FCA treats crypto firms in the same way they treat financial firms. The reason crypto firms are resistant is because there are lot of hurdles they will now have to overcome including:
- Relevant financial qualifications for those offering investments,
- Solvency requirements if the platform is providing banking services,
- Auditing and reporting that crypto firms might be reluctant to share (think how FTX would be feeling currently had they not been exposed).
The Massive Issue with the FCA Framework
There is one major problem that makes this framework terrible for individuals.
Currently in the UK, cryptocurrency is not a supported asset for use with traditional finance products. For example, you cannot use cryptocurrency profits (even if converted to fiat) as a mortgage deposit.
You can’t use crypto assets as collateral on loans. In fact, it goes much further, most UK banks are so resistant to cryptocurrency, they prohibit people from moving funds from their bank accounts onto a platform like Coinbase.
The Treasury and FCA seem keen to level the playing field for traditional finance institutions with crypto institutions. But have not enforced any level playing field for consumers wishing to make use of both.
If the Treasury or FCA really cared about people being able to transact with crypto safely, they would ensure that approved institutions such as banks and building societies treat crypto assets or the fiat proceeds as equal to other investment products.
There is no reason someone using savings to buy Bitcoin on Coinbase, realising a profit and cashing out to their account, should be restricted from using those funds for a mortgage deposit. The only reason this is not allowed is because the banks and government do not want people using cryptocurrency.
Until that mindset changes, crypto investors will always be resistant to any regulation because there is no attempt by the powers that be to treat customers fairly – funnily enough, this is the core tenet of the FCA.