Rules Britannia: a Digital Currency Investor’s Guide to the UK’s Regulatory Landscapes

Executive Brief

The UK retains its position as the top destination for Foreign Direct Investment in Europe, thanks to a regulatory set up designed to assist FDI investors to access the market. This, along with the good cryptocurrency news coming out of Britain in recent years, means the time is ripe for external investors to start thinking about the UK as a destination for digital currency investment. But while the UK itself presents numerous attractive opportunities across the digital currency industry, it may be Britain’s closest neighbors, the Crown Dependencies, which provide the best opportunities for rapid growth and big returns.

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Prudent regulation, a welcoming government, and recent investment in FinTech have made the outlook for digital currencies in the UK amongst the most optimistic in the world. This optimism is well-founded, and looks set to stimulate substantial interest among international investors in Britain’s burgeoning digital currency industries. But – like in the great federal democracies of the USA, Canada, and Australia – the economic and regulatory geography of the UK is more complex than it at first might seem. For those interested in digital currencies and their related industries, an understanding of the UK’s various regulatory and economic quirks is therefore of great importance.

As every good schoolboy and girl knows, the United Kingdom is made up of four constituent parts, the ‘Home Nations’ of England, Scotland, Wales, and Northern Ireland. While the four nations are culturally distinct, on most matters they are centrally governed from London. Most importantly, financial matters are reserved for HM Treasury, a department of the UK Government. The central government’s policy on digital currencies, therefore, applies to all parts of the UK – at least in theory. Digital currencies are also centrally regulated, by the misleadingly named Bank of England (whose jurisdiction covers the whole UK) and by the Financial Conduct Authority (FCA).

The UK government is notoriously favorable to digital currencies. Britain’s Government Office for Science has recently published a report intended to encourage positive outcomes for digital currencies and associated FinTech industries. This bodes well for a continuation of the strong start made by Chancellor George Osborne in the 2015 Budget.

Things get more complicated for digital currencies when it comes to issues such as taxation and the regulation of their associated businesses. Currently, all taxation is handled by the central government and managed by Her Majesty’s Revenue and Customs (HMRC). This may be, however, set to change. Following Scotland’s Independence Referendum a report by Lord Smith of Kelvin recommended devolution of some tax measures to the Scottish Government. Income Tax and Value Added Tax (VAT) were the main focus of that report’s recommendations, with the Scots Government able to set its own rate of Income Tax, and keep a portion of VAT receipts. However, the UK and Scottish Governments are currently negotiating on further fiscal powers for the latter, with some suggestion that Scotland might be able to set an independent rate of corporation tax or VAT. Were it able to set an independent rate of VAT, it could potentially choose to charge VAT on digital currency mining and transactions – which are currently exempt in the rest of the UK.

The same is already true of business regulation. Corporations registered in Scotland are subject to Scots Law, the centuries old independent legal structure of Scotland. This means that the Scottish Government could, in theory, adapt the way that companies registered in Scotland use digital currencies in any of the areas in which the Scottish Government has competency, and that the Scottish courts have considerable freedom in their interpretations of laws relating to digital currencies.

While Scotland is not a major issue for digital currency investors at the moment, the reticence of the Scottish authorities to make a clear statement of their position regarding digital currencies provides a stark warning that some parts of the UK may become less welcoming to cryptocurrencies than others. The same may become true of Wales, where further devolution of powers to the National Assembly (the Synedd) is currently being negotiated. It is clear, then, that differences may yet emerge in the attitudes of each Home Nation towards digital currencies. Fortunately, however, greater fiscal de-centralization is a way off just yet.

Peripheral to the United Kingdom are the Crown Dependencies: the Isle of Man and the Bailiwicks of Jersey and Guernsey. These three states, while sharing the British Monarchy and opting to operate under the UK’s protection in foreign and military affairs, are legally and politically distinct from their larger neighbor. Due to their independent legislatures and their proximity to major financial centers in the UK, they have achieved a reputation as tax havens, with many important British businesses based there. They have also been amongst the most favorable jurisdictions in the British Isles for digital currencies.

The Crown Dependencies are therefore amongst the most attractive locations for digital currency investment in the world. Foremost among them is the Isle of Man, whose government’s positive attitude towards digital currencies has earned it the nickname ‘Bitcoin Island’. The Isle of Man Government has been actively seeking to make itself attractive to digital currency investment and innovation, removing ambiguities in the regulatory environment which plague digital currencies elsewhere – including on the British mainland. In a single year, the Manx Parliament managed to pass a regulatory framework for digital currencies and began implementing it.

The UK has always been a country of contradictions: simultaneously a monarchy and a vibrant democracy, a United Kingdom with four distinct identities, an ancient land, and a tech hub. These contradictions have worked in favor of digital currency investors, as has the UK’s long and complex history. The existence of the Crown Dependencies – in many ways bizarre anachronisms – has ensured the presence of low-regulation cryptocurrency hubs in spitting distance of the financial centers in London, Manchester, Edinburgh, Belfast, Birmingham, and Cardiff. Meanwhile, on the mainland, the potential for further decentralization of fiscal responsibility presents a further contradiction: a possible opportunity, but a degree of uncertainty.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Chris Cooper

Chris Cooper is a doctoral researcher in ancient economic history at Merton College in the University of Oxford. His AHRC-funded research examines transaction costs in the ancient world, and the impact of the invention of money. But while Chris specializes in the cultures that created money in the first place, he is equally interested in digital currencies and their impact on modern societies, cultures, trade-flows and laws.

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