Considering cryptocurrencies and their benefits

22 Oct 2018

The Treasury Select Committee has called for 'greater regulation' of cryptocurrencies and crypto-assets following a significant rise in their popularity. However, in order to effectively regulate cryptocurrencies, they must be defined and understood, and their benefits and disadvantages need to be considered. Here, we take an in-depth look at cryptocurrencies.

What is cryptocurrency?

Cryptocurrency is, essentially, a means of payment for goods and services, similar to any other form of payment. However, cryptocurrencies have no physical form; they are not considered legal tender; they are not supported by the government; they operate via peer-to-peer networks independent of any intermediaries, such as banks; and transactions made using cryptocurrencies are completed anonymously.

Cryptocurrencies are 'mined' and stored electronically via blockchain technology, which utilises encryption techniques. A blockchain is a shared, public database that keeps a record of cryptocurrency transactions. The first cryptocurrency to be mined was Bitcoin in 2009.

What are the benefits of using cryptocurrencies?

Utilising cryptocurrencies has many benefits. As cryptocurrencies are digital, they cannot be counterfeited, thereby helping to safeguard the user from fraud. Additionally, transaction fees often prove to be lower using cryptocurrencies than when using other forms of payment, and payment via cryptocurrency is instant. 

However, cryptocurrencies do have their drawbacks. A perceived lack of knowledge sets cryptocurrencies back, alongside the fact that cryptocurrencies aren't widely accepted as a form of payment.

It has taken a number of years for the UK public to become accepting of cryptocurrencies, as when cryptocurrencies were first introduced they quickly became associated with crime and illegal trading. Nevertheless, one good thing to come out of the popularisation of cryptocurrencies is the availability of blockchain technology, which boasts many benefits, including enhanced security and greater transparency.

Cryptocurrencies and taxation

Earlier this year, HMRC clarified its position on the tax treatment of cryptocurrencies, stating that UK tax legislation 'does not include any special tax rules for income, profits or gains arising from transactions involving cryptocurrencies, or for charges made in connection with cryptocurrencies'.

In terms of VAT, income received from cryptocurrency mining activities is generally outside of the scope of VAT, on the basis that 'the activity does not constitute an economic activity for VAT purposes'. However, VAT is due from suppliers of goods or services sold in exchange for cryptocurrency.

Whether the treatment of income received from, and charges made in connection with, activities involving cryptocurrencies will be subject to corporation tax, income tax or capital gains tax (CGT) 'depends on the parties and activities involved', according to the government.

In regard to corporation tax and cryptocurrencies, the 'general rules on foreign exchange and loan relationships apply'. HMRC stated that it 'has not identified any need to consider bespoke rules' for the corporation tax treatment of cryptocurrencies. The profits and losses of a business participating in cryptocurrency transactions would be reflected in accounts, and be taxable under the normal corporation tax rules.

Meanwhile, gains and losses incurred on cryptocurrencies are chargeable or allowable for CGT if they 'accrue to an individual'. As part of the income tax regime, the profits and losses of a non-incorporated business on cryptocurrency transactions 'must be reflected in its accounts, and will be taxable on normal income tax rules'.

Do cryptocurrencies require greater regulation?

The Treasury Select Committee recently published a report in which it highlighted the need for 'greater regulation' to be imposed on the UK cryptocurrency market, and asked whether growth of this market should be encouraged in the UK.

Commenting on the report, Nicky Morgan, Chair of the Treasury Select Committee, said: 'Given the high price volatility, the hacking vulnerability of exchanges and the potential role in money laundering, the Treasury Committee strongly believes that regulation should be introduced.'

Currently, cryptocurrencies are 'not within the scope of Financial Conduct Authority (FCA) regulation', and investors have very little protection against the risks associated with utilising cryptocurrencies. The Committee believes that any new regulations imposed should address consumer protection and anti-money laundering 'at a minimum'.

For now, the cryptocurrency market is a new field that is growing in popularity. The Treasury Select Committee stated that, with 'appropriate and proportionate regulation', the UK could become a 'global centre' for cryptocurrency activity.

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