Bitcoin (BTC) is a digital asset which governments are finding hard to control, and therefore are finding ways to regulate. Unfortunately, this process essentially removes the essence of Bitcoin and its blockchain technology, which has its foundation in decentralization and self-governance!
Europe is a critical region that may strongly impact investors’ Bitcoin when a sweeping and recently-passed law takes effect by 2024; we here at Cryptonary will explore it in more detail for you.
TLDR: Too long didn’t read
- The European Union (EU) launched the Markets in Crypto-Assets (MiCA) legislation to manage crypto-assets.
- MiCA is now law in the EU, but one that is yet to take effect (implementation begins in Q3 of 2024).
- Cryptocurrency is currently a legal but not tightly regulated asset in the UK – unlike in countries like China which have banned it – making it favourable for Bitcoin investors.
- In the UK, Bitcoin and other cryptocurrencies are subject to income and capital taxes depending on the scenario. This is due to their being classified as digital/crypto-assets by His Majesty’s Revenue & Customs (HMRC).
Hold on! Isn’t Bitcoin already regulated in the EU?
The simple answer is no, which may shock you because the crypto industry has an astounding market capitalization of $798 billion. This is changing, however, with MiCA passing into law in October 2022. It’s important to stress again that MiCA will only take effect in Q3 of 2024.
The European Union’s stand on crypto legislation
How will MiCA regulate Bitcoin?
MiCA aims to overshadow every crypto-asset regulatory framework applicable in different EU Member States, where these frameworks aren’t tied to pre-existing EU financial services laws.
The law defines Crypto-asset issuers (CAI) as legal persons who offer the public any kind of crypto-asset or pursue the admission of crypto-assets to a dedicated trading platform.
Crypto-asset service provider
A crypto-asset service provider (CASP) requires at least one EU Member State to grant it access to operate services in the EU – with the European Securities and Markets Authority (ESMA) keeping a register of these CASPs.
Crypto-asset services fall under these activities. These are:
- delivering cryptocurrency asset advice.
- placing cryptocurrency assets.
- exchanging cryptocurrency assets for legal tender fiat currency.
- executing orders for cryptocurrencies at the behest of third parties.
- exchanging cryptocurrency assets for other cryptos.
- operating a trading platform for cryptocurrency assets.
- administering cryptocurrency assets at the behest of third parties.
- receiving and transmitting orders for cryptocurrency assets at the behest of third parties.
- delivering portfolio management on cryptocurrency assets.
- administering transfer services for cryptocurrency assets at the best of third parties.
United Kingdom – a crypto dove
Cryptocurrency assets are property in the UK, and the courts are supposed to protect them. Security can be granted over these assets but not by pledge since they are not physical possessions. So here’s the thing…this means your Bitcoin is technically “safe” in the UK in situations involving fraud or insolvency.
The UK High Court established that crypto is recognized as property under UK common law, and thus subject to injunctive relief and protection orders to preserve the investor’s rights.
The Financial Conduct Authority
The UK is free from MiCA by default since it officially withdrew from the EU on the 31st of January 2020. Instead, the country has the Financial Conduct Authority (FCA) as the entity which regulates cryptocurrency.
As of January 2020, regulated cryptocurrency asset businesses – including custodian wallet and exchange providers – must adhere to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, subject to being overseen by the FCA.
Bitcoin investors are therefore required to perform customer due diligence when taking part in a “business relationship” or a “sporadic transaction (a casual one that doesn’t happen too often)”.
Crypto taxes in the EU and the UK
The EU and MiCA
In the EU with MiCA, the transparency rules call for crypto service providers to report information on cryptocurrency asset transactions to their local administrations. This will then be passed on to the EU member states, and as you guessed it… this isn’t so nice for your privacy.
The Directive on Administrative Cooperation (DAC/DAC8) contains a minimum level of penalties like a € 500,000 fine for infringing the country-by-country reporting requirements. Individuals possessing a high net worth of at least €100,000 in investable assets or wealth under management are required to mandatorily exchange tax ruling information and pricing agreements.
Crypto investors are subject to capital gains taxes, as are individuals that engage in activities like staking and mining. Business entities are also liable to income tax, stamp duty, value-added tax and corporation tax connected to their crypto holdings!
MiCA is currently one of the most comprehensive global regulatory frameworks for Bitcoin and other cryptocurrencies. Before MiCA, the crypto market wasn’t subject to legal scrutiny, but it also lacked regulatory clarity and even maturity.
Traditional players need this environment so that they can start buying and holding Bitcoin in a more trustworthy, calculated manner, and more accurately gauge risk management. This, despite the fact that buying BTC and other cryptos in the EU might get a bit more complicated. Also, the previous regulatory framework allows for the fragmentation of national regulators, which increases compliance costs.
For example, MiCA has the power to identify users merely from their transactions, and many crypto users and investors tend to immediately see a privacy-related red flag when it comes to this. However, it doesn’t seem like the EU over time is intending to tighten MiCA excessively to make holding and transacting Bitcoin too prohibitive.
Crypto assets covered by MiCA, like Bitcoin, are viewed as a safe investment, which can strengthen confidence in Bitcoin and make it attractive to the European crypto asset market – whilst disadvantaging nearby markets like the UK.
Banks, along with other established credit institutions, may also start to shift towards the cryptocurrency asset space, consequentially disrupting current markets. Hence, the UK might create a MiCA-type law in the future which may be similar.
This means directives equal to the MiCA law, and different Anti Money Laundering (AML) directives can be introduced by the current UK regime to achieve this. AML are a set of regulatory requirements issued by the political system/state to combat money laundering and terrorist financing by the respective state.
Interestingly, despite the UK’s current crypto laws, consumer research discovered that 11% of UK adults own a crypto asset, with this number expected to grow in 2023!
So, what steps could you take right now to put yourself ahead? Don’t worry, Cryptonary has got you covered…
- As an exchange, seek licenses in European countries to “passport” your services into the 27 EU countries affected by MiCA.
- As a firm, consider whether your existing activities fall within MiCA’s scope, and seek authorization as a CASP. Don’t underestimate the time it may take to apply MiCA to your business – applying for authorization and executing MiCA requirements into your systems can be daunting.
- As a Bitcoin investor in the EU/UK, this may be a good time to buy and HODL massive amounts of Bitcoin; buying this cryptocurrency under MiCA may not be as easy in a fully regulated “MiCA space.”
- Bitcoin investors in the UK should join the government’s upcoming stakeholder engagement programme to broaden their opportunities with the government.
- UK investors should seek tax and legal advice to minimize the risks, so that they may trade/hold Bitcoin with confidence.
Disclaimer: This is not investment nor investment advice. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
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