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Articles | crypto

AML & regulatory matters for Crypto accounting & Crypto tax providers

In this webinar, Digital Accountancy teamed up with Koinly to provide listeners with a fascinating insight into anti-money-laundering and regulation surrounding cryptocurrency. Tony Dhanjal, Head of Tax at Koinly, sits down with Ben Symons, Barrister at Law at 36 Commercial, to discuss the rise of cryptocurrency, its future, and its impact on accountancy firms.

Panellists include:

  • Dan Cockerton, Founder of the Digital Accountancy Show
  • Tony Dhanjal, Head of Tax at Koinly
  • Ben Symons, Barrister at Law at 36 Commercial

Top Takeaways:

Why Blockchain and Digital Ledger Systems are the Future

Ben Symons believes that blockchain is the future for a couple of reasons. As he states, “It offers an alternative to the current banking system.”

The current system is based on trust. When you buy from a shop, you know the correct amount will be deducted from your card, thanks to the intermediaries between your purchase and your bank.

The problem with intermediaries is that they often incur very high fees, sometimes as much as 20% of the transaction.

With blockchain, there is no need for intermediaries; instead, the trust comes from cryptographies, resulting in lower fees. 

Cryptography is a form of protecting data using codes, to ensure only those that should be able to read the content can do so.

These reduced fees lead to cheaper products, which is why they attract consumers.

The current issue is no one has managed to do it at scale. “The Bitcoin network processes eight transactions per second, and the visa network processes 1,700.” Ben points out. “That is why we are not seeing widespread adoption.”

However, the current trust deficit is keeping the cryptocurrency dream alive. Blockchain offers transparency as anyone can access the ledger and see an entire list of transactions for every payment on the network.

Critical Considerations for Dealing with AML Within Cryptocurrency 

Every organisation has a legal requirement to comply with anti-money-laundering regulations, including accountancy firms.

Ben Symons explains that there are three critical considerations:

Identity Verification: You must know your client’s identity, including a bill and form of ID.

Cryptocurrency Owner: You need to know who the owner of the cryptocurrency account is, to ensure they are not restricted by sanctions or have a criminal past.

Know the Source of the Wealth: Measuring wealth can be tricky due to owners using several wallets, but understanding the source of wealth is essential.

Tony advises viewers to search for transactions from unknown exchanges rather than well-known ones.

Ben recommends preparing a suspicious activity report and sending it to the HMRC and the National Crime Agency if you suspect foul play.

The Central Bank and Governments’ Will Get Involved in Crypto and Stablecoins

“It’s inevitable the central banks and FCA get involved in the regulation of stablecoins as they pose a potential threat to traditional banking systems,” says Ben Symon.

Algorithmic stablecoins offer a lot of potentials, so long as they deliver on what they say they promise. 

A stablecoin is any cryptocurrency created to have a reasonably stable price, often pegged to a particular currency or commodity.

Consumers need certainty that stablecoins have sufficient reserves to back their product. Without the necessary financial backing, the model will collapse. 

DeFi Staking is Taxable, and it’s Very Confusing

Every DeFi offers a transfer of ownership of the coin from the lender to the exchange, also referred to as staking. 

Decentrilised finance (DeFi) is a growing financial technology based on safe distributed ledgers. The DeFi system removes the control a bank or institution normally has on currency.

Due to this, each stake is a taxable event, making it highly tax-inefficient and a taxation nightmare.

Regular transactions can be a minefield for tax accountants. Fortunately, the HMRC has noticed this, taken the feedback onboard, and is trying to simplify the taxation on staking. Keep an eye on any changes to this soon.

The HMRC is toying with a couple of ideas. They are considering creating new taxation codes, specifically for staking crypto. Or possibly treating staking similarly to the no gain no loss system used to give money to spouses. These changes will significantly impact the anti-money-laundering process that accountants need to follow.

Is Crypto Here to Stay?

Ultimately, both Ben and Tony believe that cryptocurrency is here to stay. Despite recent dips in the value of market-leading coins, the demand for cryptocurrency is still extremely high, and there is still plenty of funding for the future of cryptocurrency.

Businesses and consumers are still interested in the lower transaction costs, and trust within the current banking system has never been lower.

The constant technological advancements in cryptocurrency will lead to further anti-money-laundering requirements for accountancy firms, some of which cannot even be thought of currently. You must keep up to date with the evolution of cryptocurrency to ensure you meet legal requirements.

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