Keep calm and keep the UK closed for Web3 business
Maarten Ectors
Innovative Technologist, Business Strategist and Senior Executive | Bridging Technology & Business for Lasting Impact
Dear politicians, FCA, HMRC, … I would like to congratulate you all for keeping all UK citizens safe from blockchain and crypto. By not coming up with a specific set of crypto laws, unlike your fellow EU colleagues did with MiCA, the UK is one of the most difficult places for crypto entrepreneurs when it comes to understanding the regulation. You have anti-money laundering, tax, securities and many other regulations all pulling in different directions. Wasn’t the UK supposed to be open for business? Wasn’t Brexit about being able to get easier and faster regulation than the EU?
However nothing beats the FCA. The biggest UK fintech success, a.k.a Revolut, with 15 million customers, has been spending millions on trying to get a banking licence but has not received it (yet). If the number 1 in the class cannot get it, what about the number 30. Fintech nonetheless is lucky. They have a fintech sandbox which more or less works. Web3 has none of that. Yesterday at the StartupGrind Web3 Fundraising event, Lewis Silkin, one of the top 100 UK commercial law firms, told all attendees that to avoid problems in the UK, the FCA obliges all startups to register their business in offshore tax havens like BVI, Cayman, Panama, Gibraltar,... It would be illegal to raise funding in the UK based on tokens without a regulatory licence and top lawyers are saying that the FCA does not intend to provide any licence for crypto companies, similar to not providing licences to top banking innovators.?
HMRC is seeing all taxes go up so they must be happy. However nothing beats Web3 fundraising. If an entrepreneur sets up an offshore company in for instance BVI and raises ￡10M from a token sale, then HMRC considers these personal gains which are taxed at 45% and HMRC does not allow the entrepreneur to bring in any costs. Since when do you tax companies, who sell equity, 45% in personal gains? The funds are normally used to build a company but with this way of taxing you make sure that no UK tax resident will ever be successful in doing that.
At the same time Dubai has set up a separate crypto regulator and is fast attracting the interest of some of the cleverest Web3 entrepreneurs. Paris just overtook London as being the biggest European stock market. At the rate we are going the UK will soon be the biggest exporter of Web3 talent.
Your reply to this blog post will probably be, Revolut does not have a banking licence because they are not doing things the right way and proof of that is their recent data hack. In other jurisdictions, regulators collaborate with innovators to help them improve. They do not publicly humiliate them. Your other defence will be that FTX just went bankrupt and left many investors penniless. The Internet saw Pets.com, Geocities, Webvan,... and many others go bankrupt in the early two thousands. Many investors lost a lot of money in the dotcom bust. However Amazon, Google, eBay and many others came out of it and redefined the digital economy of the world. None of them were British. There will always be criminals and fraudsters when a new technology comes along. The natural process is that they fail sooner than later. Failure is a natural part of the innovation process. Unless you accept and anticipate failure, you will never succeed.
So what can you do? One simple solution. Make the UK the first country in the world that accepts Decentralised Autonomous Organisations [DAOs] as legal entities with its own specific regulatory body, its own tax laws, its own fundraising laws,.... DAOs are smart contracts so they do not tend to speak a human language. As such the UK Web3 regulator, should make it so that to comply with regulations these contracts can talk to the regulator’s DAO. This way stable coins can in real-time tell it how its liabilities are covered with assets. KYC and AML contracts are able to ask if a specific passport is stolen or a specific person is on a fraudster list before accepting funds. Funds raising is tracked in real-time. Conflicts are resolved via decentralised arbitration. And many more things.
The reality is that a Web3 company gets founded by 1 to 3 entrepreneurs. They struggle to raise ￡150K via SEIS. So you cannot assume they are able to pay for top lawyers and tax consultants to set up offshore companies with cross charging to UK companies. You need to offer Web3 sandboxes to test out new ways of working and to control failure. However the process of getting admitted to such a sandbox should be automated. No humans should get harmed with having to study hundreds of pages of laws, when DAOs are more effectively regulated via programmable code. Never has there been a technology which can make financial transactions so easily traceable. So if you really want to protect UK retail investors, then Web3 is a great solution. Can we keep calm and open the UK for Web3 business??
I hear the frustration, Maarten! It's a shame that this area is still uncertain, but thanks to Lewis Silkin and StartupGrind for bringing the subject to life and providing the forum for so many good conversations. It all underscores how much earlier in the development process the regulatory (and therefore tax) questions need to be addressed than in other sectors. Hopefully the Law Commission's recent call for evidence on DAOs will lead to the beginnings of a useable framework for that structure.
Partner at Andersen | Head of Web3 & Disruptive Tech | Crypto & Digital Assets | Citywealth Top 50 Crypto Advisor 2022-2024
2 年Part 2 of 2 The issue of a Simple Agreement for Future Tokens (SAFT) or a token issuance is NOT ordinarily an EQUITY raise. Most accounting principles treat this as revenue (unless the token issuance is effectively a security and can only be used as such, i.e. no other utility). These anti-avoidance rules are NOT therefore taxing equity. Whilst the creation of the tax haven entity is purely because of the UK regulatory landscape and not to avoid tax, these tax rules nonetheless kick in. Their effect may be easily mitigated by bringing the income of the BVI company back into the UK through licence and / or service agreements with the UK development company. This ensures that revenue from the token raise is subject to corporation tax at 19% (increasing to 25% from 1 April 2023) instead of 45% income tax rates. If a project is looking to mitigate tax on their fund raise, then they need to do it as equity not a token issuance (or a combination of the two). Happy to discuss! Z
Partner at Andersen | Head of Web3 & Disruptive Tech | Crypto & Digital Assets | Citywealth Top 50 Crypto Advisor 2022-2024
2 年Part 1 of 2 Hi Maarten, thoroughly enjoyed our discussion last night. A few clarifications on the tax point... A UK resident individual is taxable on his worldwide income and gains. There is anti-tax avoidance law that has existed since the 1970s that prevents such individuals from setting up a company in a tax haven and parking income and gains there to avoid UK tax. Almost all jurisdictions have this anti-tax avoidance law - it is not unique to the UK. Ours is called Transfer of Assets Abroad. The US versions are called controlled foreign companies (CFC), Passive Foreign Investment Companies (PFIC) and Global Intangible Low Tax Income (GILTI) rules. Australia, Canada, Portugal, Germany, France, for example, all have similar rules (typically referred to as CFC rules).
Partner and Head of Financial Services Regulatory at Lewis Silkin
2 年Good to meet you?last night,?Maarten.? Whilst I appreciate the overall sentiment you are seeking to convey in your article, as a financial services regulatory lawyer I do just need to address a few technical points of detail: Whilst it is an area of legal uncertainty, a company carrying on business in the UK that raises funds by issuing security tokens could potentially be considered to be acting as a cryptoasset exchange provider which would require FCA registration under the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), and indeed such registration is very difficult to obtain. The jurisdictional scope of the MLRs captures persons carrying on business in the UK.?Therefore companies could choose to carry on business outside the UK and thereby still target UK investors without requiring FCA registration under the MLRs, albeit subject to compliance with the UK financial promotion regime.
Great read! And totally agree