Senior manager at haysmacintyre, Jon Dawson, projects on the regulatory impact of cryptoassets and robo advisory & AI entering the mainstream of financial services discourse in 2019.
In 2018 we saw the market cap of cryptocurrencies plummet, ICOs tarnished by a lack of regulation and number of frauds, and Monzo valued at more than 500 times its annual income (valued at $1bn in December 2018). In one of the world’s fastest growing and ever-changing sectors, here are five developments I forecast for Fintech in 2019.
A Cryptoasset Taskforce comprising the FCA, Treasury and Bank of England published a report in Q4 2018 calling for “robust regulation” of cryptoassets and proposed recommendations for regulation within institutions, financial services and within the public sector. I expect this will trigger reams of regulation which will in turn enable the financial institutions to start making serious moves in the sector.
HMRC kindly provided us with some holiday reading when they released their guidance for cryptoasset taxation for individuals late last year, a summary of which appears below.[*]
HMRC have suggested they will follow this up with guidance for businesses and companies and I expect we will see this issued soon.
The growth of STOs
Security Token Offerings (STO) are set to take off in 2019 and if the regulation is put in place (see above), we can expect some of the banks to adopt the technology, opening up a more transparent marketplace for assets, such as equities.
In a world where you no longer receive a share certificate when purchasing shares, the concept of a decentralised ledger keeping record of stock ownership could make sense. Expect then to see the growth of secondary markets, as we see the blockchain community adopting government security regulations.
Many believe that Brexit won’t have a significant impact on the Fintech community given the UK’s infrastructure, government support and level of investment in the space. I’m inclined to agree, although the UK leaving the EU could lead to differences in financial services regulation with both positive and negative results.
If the big financial institutions move overseas as they are suggesting they might, will this impact the Fintech start-ups trying to sell to these institutions? I don’t know the answer to that yet, but by the end of 2019, we will have a much better understanding of whether London is still the Fintech capital of the world, whether we’re in the EU or not.
AI and robo-advisers making it mainstream
In 2018 we saw the Regtech sector use AI in KYC and anti-money laundering software to make processes more efficient and we’re expecting to see increased application of AI and robo-advisers within the financial services sector this year. We’ve only brushed the surface of AI within the investment management space and I expect that in 2019, we will see more products being made available to the market which will allow man and machine to work in tandem.
We’ve seen crowdfunding grow significantly over the last three years and I believe there will continue to be a place for crowdfunding to allow the public to invest in unlisted companies. However, I expect to see a significant development in 2019 whereby several crowdfunded companies provide a profitable exit opportunity to original investors by going through an Initial Public Offering (IPO). To-date, most Fintech companies are considered ‘start-ups’ with the focus being on the product, scaling application and network rather than profits. There are now more sufficiently mature companies with management teams and investors who have a focus on profits, making them much more suitable for listing onto an exchange.
HMRC Guidance on Taxing Cryptocurrencies for Individuals
On 19 December 2018, HMRC broke their silence and issued guidance for individuals on the tax treatment of cryptoassets. The key points from the guidance appear below.
Capital Gains Tax (CGT)
- If individuals hold cryptoassets for capital appreciation in its value, or to make a particular purchase, then they will be liable to pay CGT when they dispose of the cryptoasset.
- A disposal is considered a transfer between one type of cryptoasset to another, the transfer of a cryptoasset to fiat currency, the use of cryptoassets to pay for goods or services or giving away cryptoassets to another person (other than your spouse).
- Normal CGT rules apply and hence there are allowable costs when calculating the gain/loss (transaction fees, advertising costs, valuation costs etc).
- Specific rules apply to situations where the same cryptoasset has been disposed of and acquired within a 30-day period. This is referred to as the “Bed and Breakfast” rule.
- Similarly, specific guidance is provided around ‘Blockchain forks’ and (and with most matters referred to here) you should seek advice from your tax adviser in this scenario.
- If an individual disposes of cryptoassets for less than their allowable costs, they will incur a loss. Certain ‘allowable losses’ can be used to reduce the overall gain, but the losses must be reported to HMRC first.
- If an asset is considered to have lost its value or have negligible value, then an individual may make a claim to HMRC stating the asset, amount the asset should be treated as disposed of (which may be £0) and the date of deemed disposal. A ‘negligible value claim’ treats the cryptoassets as being disposed of and re-acquired at an amount stated in the claim.
- Losing a private key does not count as a disposal for CGT purposes. However, a negligible value claim could be made if there is no prospect of recovering the private key or accessing the cryptoassets in the corresponding wallet.
- Being the victim of fraud of theft is not a disposal for CGT purposes as the individual still owns the assets, thus a loss cannot be claimed for CGT. However, if there is no realistic opportunity to get the assets back then a negligible value claim may be appropriate.
Cryptoassets as a form of salary
- Individuals are liable to pay Income Tax and National Insurance on cryptoassets which they receive from their employer (as a form of non-cash payment).
- If the cryptoasset is a Readily Convertible Asset (ie if trading arrangements exist), an employer must deduct and account to HMRC for the Income Tax and National Insurance contributions due through the operation of PAYE, based on the best estimate of the cryptoassets value.
- Employers do not have to operate PAYE on payments of earnings that are not RCAs (readily convertible assets). The individual must declare and pay HMRC the Income Tax due on any amount of employment income received in the form of cryptoassets.
- The taxable amount where the asset is not an RCA is the best estimate of the cryptoassets’ value at the time acquired, which may be hard to define if no ready market for the assets.
- Any subsequent disposal of the cryptoasset received through employment may result in a chargeable gain for Capital Gains Tax with the amount subject to income tax being the deemed cost of the asset.
- Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a ‘financial trade’ in itself.
- If it is considered financial trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business. Detailed guidance is provided on this subject here – https://www.gov.uk/government/collections/cryptoassets – and should be referred to if it’s considered that an individual is financially trading.
Other important considerations
- Individuals are liable to pay Income Tax and National Insurance on cryptoassets which they receive from mining, transaction confirmations or airdrops, unless the person did not do anything in return for benefitting from the airdrop.
- Cryptoassets will be property for the purposes of Inheritance Tax.
- HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme.
- HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.
In the case of a specific tax issue, it is recommended that professional advice is sought either from your usual professional adviser or from haysmacintyre’s Fintech experts at [email protected].