How Cryptocurrency Payments Are Regulated in the UK

The growing reliance on online services and vendors among UK consumers has created a need for fast and secure online payment methods. The majority of these deal with traditional currencies and allow consumers to link credit cards, debit cards, and bank accounts to convenient payment platforms.

Cryptocurrencies offer an alternative to traditional fiat currencies, and improving global acceptance has seen interest grow in recent years. More industries than ever before are exploring crypto integration, with many following the lead of the online gambling industry, which was one of the first to embrace cryptocurrencies and the technologies that facilitate them.

While the UK has had some of the most forward-thinking gambling regulations in the world, the popularity of non UK online casino operations is on the rise because of the enhanced offers, wide selection of games, and variety of payment methods available to them. 

With the growing interest and use of cryptocurrencies in the UK, more consumers are interested in how they are regulated.

The Current Status and Popularity of Cryptocurrencies in the UK

Cryptocurrencies are accepted by a variety of retailers, service providers, and industries in the UK, but they are not legal tender. This means that it is entirely up to the vendor whether or not they choose to accept this payment method.

While it is legal to use and hold, it can’t currently be used to pay towards statutory obligations like taxes and fines, despite being taxable.

Existing Crypto Regulations

As a relatively new option, cryptocurrencies are not as widely regulated as traditional financial transactions. However, they do fall under the remit of the FCA (Financial Conduct Authority). The FCA oversees financial firms that deal with cryptocurrencies, including payment services and wallet providers. These businesses must register with the FCA and ensure their operations comply with anti-terrorism financing and AML (anti-money-laundering) rules.

Businesses that offer crypto services must register under the 2017 Money Laundering, Terrorist Financing, and Transfer of Funds Regulations. Responsibilities include customer verification and the reporting of certain transactions.

At present, the transfer of cryptocurrencies between wallets is not regulated like a traditional payment, as it is not recognised as a currency. However, firms facilitating payments fall into regulated activities when dealing with stablecoins that are backed by fiat currencies, or when the service being provided is involved with regulated transactions. 

AML checks include carrying out due diligence and KYC (know your customer) checks, with crypto firms also being responsible for reporting suspicious behaviour. Unregistered operations run the risk of criminal prosecution in the UK, and this will be tightened even further when new regulations are implemented.

Most existing regulations have been made applicable to cryptocurrencies as a way of protecting consumers, but the rate at which the industry is growing means that the UK government is moving to implement a more purpose-built regulatory framework for the industry.

Not only would new regulations offer consumers greater protection, but they would also provide the transparency required for the crypto industry to grow.

Future Regulatory Changes

The UK government’s plans to update financial regulations to cover cryptocurrencies are scheduled to be in place by the Autumn of 2027. The idea is that crypto firms would be fully regulated and authorised in a similar way to investment firms and banks.

The new regulatory framework will include crypto activities requiring authorisation from the FCA before they can be carried out. Operators must apply the agreed-upon customer protection safeguards and adhere to rules covering capital, governance, and market abuse.

The new regulations will also see stablecoins falling under the Payment Services Regulations when being used to make payments. Stablecoins are a cryptocurrency that pegs their value to fiat currencies as a way of providing a less volatile option for consumers.

One of the most important things that crypto holders in the UK will be hoping to see change is the lack of protection of cryptocurrencies in comparison to regulated investments and bank deposits. The FSCS (Financial Services Compensation Scheme) typically offers consumers some level of protection should financial firms fail. This same level of protection is not usually applied to crypto deposits or investments.

Taxation of Cryptocurrencies in the UK

The use of cryptocurrencies as a payment method is on the rise in the UK, but many people have already been investing for some time. Because of this, and the potential for significant changes in value, cryptocurrencies are subject to capital gains tax, and transactions must be reported when making a profit through selling or transferring crypto.

Some businesses can offer customers the opportunity to be paid in cryptocurrencies, and any crypto received as payment or as a reward for mining or staking will be liable to income tax. Accurately recording crypto payments and transactions is essential to bookkeeping among those who deal with cryptocurrencies.