The FCA published its long-awaited “Final Guidance” on cryptoassets last week, warning of the risks when investing in cryptoassets, saying investors should be wary due to the assets holding “no intrinsic value”.
In addition to the clarification, the FCA also set out which cryptoasset activity it regulates, and which tokens it is responsible for.
In its official release, the FCA said: “Consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value.”
The FCA has shown to be particularly sceptical of cryptoassets in the past, previously proposing a ban on cryptocurrency products in July.
Nick Cook, FCA director of innovation said: “We have some concerns around some of the harms that consumers can be exposed to, and the watchdog has said that its guidance will help inform the finance ministry on whether new laws and regulations are needed for cryptocurrencies.
However, the FCA’s assertion that cryptocurrencies hold no intrinsic value has caused some backlash from the crypto community.
Nicholas Gregory of CommerceBlock, a blockchain specialist, said: “In saying that Bitcoin and other cryptoassets have no intrinsic value, the FCA has displayed breathtaking naivety. Gold, diamonds, property, the Pound, Euro and US Dollar have no intrinsic value, either — their value arises from the trust that people, businesses and governments place in them.
“Being backed by a central bank, as currencies are, is no different to the immutability of Bitcoin via the blockchain, and by failing to recognise this fact the FCA is risking falling behind the curve, and quite dramatically so. It’s trying to understand digital currency through a Dickensian lens.
“To demonstrate the absurdity of intrinsic value, Lenin once remarked that he would build every toilet in Russia out of gold, but it’s a lesson, the FCA, a full century on, appears not to have learned.
“Bitcoin may not have intrinsic value but it does have value for those who believe in it and trust in its long-term trajectory and immutability, and the number of people and businesses who do so is growing by the day.”
Suchitra Nair, director in Deloitte’s EMEA Centre for Regulatory Strategy, was more positive about the clarifications given by the FCA, but said the FCA would likely have to be consulted on the matter again to develop more detailed requirements, saying: “The FCA’s clarification of the regulatory perimeter for cryptoassets will be helpful for innovators engaging in cryptoasset activities.
“Having said that, the regulatory requirements are quite nuanced. In some areas, such as custody and territoriality of security tokens, the requirements will need further work to become standardised.
“The guidance relating to stablecoins, for example, illustrates just how sensitive the regulatory treatment is to the way that a stablecoin is structured. As further use cases come to the market, we expect the FCA to be called on to develop more detailed requirements.
“Consumers’ understanding of the protections available when regulated firms issue unregulated tokens is largely untested. As the FCA has highlighted, this will be an area for regulated firms to watch closely.”
Could market uncertainty lead to Bitcoin bounce-back?
Gregory’s point that currency’s value derives from the confidence that investors have in it is something that could be tested in the coming months, with confidence in the economy weakening due to the USA’s trade war with China and the UK’s impending exit from the EU.
In December 2017, Bitcoin was at an all-time high of $19,783, but Gregory has predicted that the geopolitical climate could well see more people turn to cryptocurrency and cause the value of Bitcoin to go past the $20,000 mark.
The cryptocurrency has seen a revival in 2019, boosted by its role in major use cases across brands such as Microsoft and Twitter, Facebook’s announcement of Libra and the currency’s 10th anniversary.
Speaking on the potential of Brexit giving Bitcoin a further boost, Gregory said: “Bitcoin has rediscovered its mojo this year with multiple mini-surges but a no-deal Brexit could see a massive and unprecedented breakout.
“Not only will a no-deal departure from the EU create turmoil and volatility across two major fiat currencies, it will also trigger an identity crisis for the global system as the contingency and vulnerability of major global fiat currencies is laid bare.
“Come 2020, we expect an increasingly populist and politically unstable world to cement the safe haven status of Bitcoin and cryptocurrencies more generally.
“And if central banks revert to ramping up the money printing all over again, the case for cryptocurrencies like Bitcoin whose supply is capped will be further reinforced. Each time a central bank increases the money supply, it’s another nail in the coffin of fiat.”
In addition to the warning about risks involved in investing in cryptoassets, the FRC’s report clarified what the watchdog regulates, which tokens it is responsible for, and some definitions.
Christopher Woolard, the FCA‘s executive director of strategy and competition, said: “This is a small, complex, and evolving market covering a broad range of activities.
“Today’s guidance will help clarify which cryptoasset activities fall inside our regulatory perimeter.”
The guidance comes after a consultation in January which received 92 responses from financial service entities, including cryptocurrency exchanges, trade associations and banks.
The FCA has said that the responses supported its original proposals, with the report reading: “Following our consultation, we are proceeding with the guidance that was consulted on, with some drafting changes to improve clarity based on responses.
“This includes reframing our taxonomy of cryptoassets to help market participants better understand whether tokens are regulated, and where they fall outside our remit.”
Cryptocurrencies such as Bitcoin and Ethereum, which are defined as ‘exchange tokens’ by the FCA, are not regulated by the FCA but must adhere to anti-money-laundering regulations.
The report states that ‘security tokens’, which the FCA categorises as ‘specified investment’, will be regulated by the watchdog.
Utility tokens will fall outside of the FCA’s remit, except for when they can be defined as electronic money and fall into a new category of e-money tokens.
Meanwhile the IRS, the United States’ tax regulator, has announced that 10,000 American cryptocurrency users will receive a letter reminding them to pay taxes on earnings made from trading cryptoassets.
The IRS commissioner, Charles Rettig, warned that people should take the letter “very seriously”.
Sean Ryan, CTO of Node40, which is a platform that helps people calculate the taxes that they owe from trading cryptocurrency, has said that he believes the letters are proof that the IRS sees exchange of cryptocurrency a “taxable event”.
“If you read the IRS Letters, all three contain a statement making clear that the exchange of one currency for another is taxable,” said Ryan.
“This might be the first time the IRS has publicly stated such guidance and it came across to me as a bit sneaky.
“The reality is it has major consequences for those traders who were operating under the belief that any gains could be deferred under the transfer of property rule.
“It seems unfair to me to call someone out for not properly paying tax while at the same time making clear a point of much deliberation.”
In the UK, the sale of cryptocurrency is considered a taxable event, with Capital Gains Tax applying to any profit that is made when selling it.
However, the purchase of cryptocurrencies is not taxed, and if you are gifted cryptocurrency it is not considered a taxable event by HMRC.