Treasury written question – answered on 6th September 2021.

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Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham

To ask the Chancellor of the Exchequer, what estimate he has made of the potential value of Capital Gains Tax liability owed by UK residents in respect of Bitcoin trading and Decentralised Finance assets for each tax year from 2013-14 to date; what discussions he has had with representatives of the (a) Bank of England, (b) Prudential Regulation Authority (PRA) and (c) Financial Conduct Authority (FCA) on the potential merits of introducing a sterling-based cryptocurrency; what assessment he has taken of the potential effect of Bitcoin trading and Decentralised Finance on Money Supply measurements (i) M1, (ii) M2 and (iii) M3 and how that effect is measured; what assessment he has made for the implications of his Department’s policies on how the (A) PRA and (B) FCA will manage and control the Decentralised Finance transfer mechanisms in respect of the potential flow of assets and cash leaving the UK instantly; whether he plans to review the FCA’s regulatory (I) mechanisms and (II) performance in enforcing the banning of sales of cryptoasset derivatives to retail consumers; whether the FCA has introduced an authorisation and registration scheme for cryptoasset derivatives; what assessment he has made of the potential effect of the time taken to register cryptoasset derivatives with the FCA; what steps he is taking to ensure tax deriving from Bitcoin trading and Decentralised Finance is collected effectively; whether his Department has conducted an assessment of the potential merits of the FCA restricting UK banks from participating in the Decentralised Finance; what comparative assessment he has made of US and European financial firms’ participation in Decentralised Finance compared with that of UK firms; and for what reasons Euro clearing of financial instruments is moving out of the City of London.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

No estimate has been made on the potential value of capital gains tax (CGT) that are due on gains from cryptoassets held as investments or any tax liabilities arising from decentralised finance (also known as DeFi). The self-assessment form does not currently separate capital gains made on cryptoassets from other assets. As a result, a reliable estimate for CGT due from cryptoassets would only be available at a disproportionate cost.

The recently released cryptoassets manual, one the most detailed publications from any tax administration, explains the tax consequences of different types of transactions involving cryptoassets for both business accepting them as well as individuals using them. HMRC has taken action, including using powers provided by Parliament to gather data, to identify and investigate those that have failed to declare their tax liabilities.

Regarding the possible merits of a sterling-based stablecoin, I refer the Honourable Gentleman to the answer given to PQ UIN 37102.

On the issue of money supply, Bitcoin trading or decentralised finance will need to become a significant source of lending to the real economy in the UK before they have a notable impact on money supply measurements.

Regarding the Financial Conduct Authority (FCA) and the Prudential Regulation Authority’s (PRA) role with respect to decentralised finance, I refer the Honourable Gentleman to the answer given to PQ UIN 37103.

With regards to the FCA’s cryptoasset derivatives ban for retail consumers, the FCA stated that it found these products to be ill-suited for retail consumers due to potential harms, including the high risk of suffering losses. The FCA has noted that it will keep this prohibition under review. The FCA is an independent body and its decision to take the ban forward after consultation is based on powers granted to the FCA under statute, pursuant to the FCA’s objectives which include protecting consumers, enhancing market integrity and promoting competition.

Regarding the possible merits of the FCA restricting UK banks’ access to decentralised finance, the FCA is an independent regulator, and considers the risks of banks engaging in decentralised finance as one of the many risks it considers. Most decentralised finance activities are not regulated in the UK. Accordingly, the Government does not have accurate information on the number of entities operating in the UK in comparison to the EU and the US.

On the issue of clearing, the EU has granted a temporary equivalence decision to UK Central Counterparties (CCPs) which lasts until June 2022.

Therefore, without any further action by EU authorities, certain UK CCPs may need to begin offboarding EU clearing members by the end of March 2022 in order to be ready for equivalence expiring in June 2022.

However, letting equivalence expire in June next year would raise the cost of clearing for firms, particularly EU ones, and present significant financial stability risks. The Government therefore hopes that equivalence would not be allowed to expire in June 2022. As it stands, the Government has seen limited evidence of activity moving.

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