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Are cryptocurrencies a cause for concern?27th November 2017 Business Crime
Larry Fink, the CEO of asset manager BlackRock, recently stated his belief that the dramatic growth in the use of cryptocurrencies such as Bitcoin is an indication of the scale of money laundering that takes place around the globe. This fits with the opinion held by many that the use of digital currencies is a sign of shady deals and illegal activities.
The high profile WannaCry ransomware cyber attack that affected people in over 150 countries earlier this year featured a demand for payment in Bitcoin. Bitcoin was also the ransom of choice this summer when hackers blackmailed the HBO network after a major cyber attack. Cryptocurrencies are inherent to the Dark Web, a network of hidden websites from which a multitude of prohibited goods and services can be purchased. The most famous of these websites was the Silk Road, which facilitated an estimated £131 million worth of illegal drug sales before it was shut down in 2013.
The Bitcoin network was launched in 2009. The enthusiastic take up of this digital currency may have been due in part to the belief that transactions on the Bitcoin network are anonymous. However, this is not strictly true. Users are in fact pseudonymous. In order to receive a Bitcoin payment, it is necessary to have an address on the network. Your pseudonym is therefore the address to which you receive Bitcoin. Although a user's identity is not discernible purely from the alphanumeric characters which represent the address, if the address became linked to a user in another way, such as by revealing a personal email address in correspondence with the other party, their identity could be exposed.
Bitcoin is underpinned by blockchain technology. One of the key features of this technology is that all transactions facilitated by it are recorded digitally on a public ledger. This means that anyone who knows your address can see the amount of Bitcoin you hold at this address, and which addresses you have transacted with. It is therefore possible to track the movement of a ransom paid in Bitcoin from the victim to the hacker. In the case of the WannaCry attack, the authorities monitored digital wallets holding more than £108,000 worth of Bitcoin paid by victims, and were aware when the funds were withdrawn.
Do the above issues mean that cryptocurrencies should be avoided? As with most things, it depends on what you're planning to do. Many reputable businesses both large and small are now using cryptocurrencies as part of their day-to-day trading activities. These range from the global technology company Microsoft to a London art gallery, Dadiani Fine Art. This year the gallery became the first in the UK to accept payment in Bitcoin and other cryptocurrencies, believing that such an approach will make the art market accessible to a wider variety of customers.
What is HMRC's approach to cryptocurrencies? According to a brief on their website, determining the legal and regulatory status of cryptocurrencies is an ongoing matter. The Corporation Tax, Income Tax or Capital Gains Tax treatment of activities involving cryptocurrencies will depend on the specifics of the activities involved, and each case will be considered on its own individual facts and circumstances.
However, the brief makes it clear that the use of cryptocurrencies is not a way to avoid paying the tax that would ordinarily be due if the transaction had taken place in fiat currency. For example, in cases where businesses accept payment for goods or services in cryptocurrencies, there is no change to what constitutes revenue or how taxable profits are calculated. Equally, VAT must be dealt with in the normal way by suppliers of goods or services provided in exchange for digital currency.
Initial Coin Offerings (ICOs) are a means by which companies can raise funds by creating their own cryptocurrency, and making a proportion of this currency available to the public. Investors purchase these cryptocoins in the hope that they will increase in value after the business or project has launched. In this way, ICOs are similar to Initial Public Offerings (IPOs), in which companies offer shares to the public.
However, the UK's Financial Conduct Authority (FCA) has warned that most ICOs are not regulated by them, and it is extremely unlikely that investors would be protected by schemes such as the Financial Services Compensation Scheme. Further, the FCA warns that companies involved in an ICO should carefully consider whether their actions amount to regulated activities which require FCA authorisation.
Mike Rainford, partner in JMW's Business Crime department, is optimistic about the future of cryptocurrencies. Mike says 'Cash flow is always a problem for businesses. New technology which facilitates the fast and efficient flow of funds can be a huge benefit. However, with the risk of money laundering always present, and the need to adhere to HMRC's tax regime, businesses must strive to stay informed and act within the law.'
If you've been accused of money laundering or other offences relating to your use of Bitcoin or other cryptocurrencies, call us on 0345 872 6666.