The Government sets its sights on cryptocurrencies

12th December 2017 Business Crime

The UK Treasury has recently announced plans to update anti-money laundering regulations to take account of cryptocurrencies such as Bitcoin. Whilst there is currently little evidence that virtual currencies are being used to facilitate money laundering on a large scale, the UK Government believes that there is a significant risk that this could happen in the future. With the cryptocurrency arena regularly referred to as the 'Wild West', the involvement of the UK Government has been expected for some time.

According to Stephen Barclay, the Economic Secretary to the Treasury, negotiations are already underway at EU level to bring virtual currency exchange platforms that facilitate exchanges between virtual and fiat currencies into the established anti-money laundering regime. Providers of 'custodian wallets' will also be under scrutiny. Wallets are a means to store, send and receive cryptocurrencies. Organisations that fall under the anti-money laundering regime are required to carry out customer due diligence, monitor transactions and report suspicious activity. Although cryptocurrency transactions are not currently entirely anonymous, the new rules will ensure that any elements of anonymity are lost.

The value of Bitcoin has increased dramatically over the course of the year, from around £720 per coin at the beginning of 2017 to the current value of around £8,700. The value of the digital currency did however suffer a slump in September, the month in which Chinese authorities expressed concerns over cryptocurrencies and banned Initial Coin Offerings (ICOs). This drop in value was temporary and the world's most popular cryptocurrency has since recovered.

Money laundering aside, it's easy to see other reasons why the Government would like tighter regulation around cryptocurrencies. The huge increase in the value of Bitcoin could result in a tidy profit for investors, who could face a Capital Gains Tax (CGT) liability when they dispose of these assets. HMRC has already confirmed that gains made on cryptocurrencies are potentially chargeable for CGT. However, it's hard to collect taxes if you don't know who to target.

Equally, HMRC has previously made clear that businesses that receive payments in cryptocurrencies are subject to the same tax regime as if the payments had been made in fiat currencies. Given the current relative anonymity of digital currency transactions, some traders may not have declared a proportion of their income in order to pay less tax. This approach will be more problematic in the future. Of course, even without the new rules it is perfectly possible that a disgruntled customer could inform the authorities that they had paid for a service in a digital currency such as Bitcoin or Ether, and HMRC would no doubt investigate the trading activities of the business concerned.

The new rules are expected to come into force either late in 2017 or early in 2018, and will apply across the EU.

Mike Rainford, partner in JMW's Business Crime department, says 'Cryptocurrencies clearly offer new opportunities for criminals to launder money, and these criminals may involve reputable businesses in the process. Business owners and staff alike must be vigilant and avoid being drawn into the laundering of the proceeds of crime.

If you're concerned about the impact on your business of using Bitcoin or other cryptocurrencies, or you've been accused of avoiding tax due on digital currency payments, call our Manchester offices on 0800 652 5559.

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Evan Wright is a Partner located in Manchester in our Business Crime & Regulation department

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