U.K government seeks investors’ guidance for DeFi tax rules, BoE calls for tougher regulation

• British authorities seek to reduce the complexities involved with the taxation framework involved for DeFi staking and lending.
• The Bank of England (BoE) has urged strong regulatory measures before any major risks appear to the financial system.

Regulators across the globe have been struggling to come up with crypto taxation and regulatory rules. The U.K. government has decided to consult investors in order to form the taxation framework for decentralized finance (DeFi).

By undertaking this exercise, the authorities want to test whether it can reduce administrative burden and costs for the taxpayers. It also wants to test whether they can align the tax treatment to the underlying economics of transactions involved.

The U.K. government said that it will be running its call for evidence for a period of eight weeks starting July 5, 2022, to August 31, 2022. The official announcement reads:

The government is seeking views on the taxation of cryptoasset loans and ‘staking’ within the context of Decentralised Finance (DeFi). DeFi lending and staking encompasses a range of activities that reward users who deposit cryptoasset tokens into a pool or lend them to other individuals or platforms for a certain period to earn passive income returns often described as interest.

Investors, professionals, and firms involved with DeFi activities can have consultations with HM Revenue and Customs (HMRC). The goal of the U.K. government is to bring consistency for DeFi tax to the existing taxation rules.

Also, the call for evidence only involves tax treatment for DeFi lending and staking activities. Other DeFi activities are currently out of scope. More importantly, the government added: “There will also be no UK tax implications for individuals who are not UK residents but who transact with a UK-based platform”.

BoE calls for tougher crypto rules

Amid a massive correction and meltdown in the crypto space, the British central bank has demanded stricter rules in crypto regulation. The cryptocurrency market has tanked more than 50 percent losing nearly 2 trillion from its peak in late 2021.

The “extreme volatility” in the crypto space has led to huge liquidity challenges for crypto exchanges, firms, and lenders. As a result, regulators in the UK and Europe have demanded taking tough measures during these tough times.

The Bank of England’s Financial Policy Committee said that cryptocurrencies don’t pose major risks to the country’s financial system yet. However, without proper action, these risks might evolve with the growing clout of digital assets in the market. In its quarterly Financial Stability Report, the Bank of England noted:

This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets.

The Bank of England is already working to bring stablecoins into a “special administration regime”. This would give the central bank the ability to regulate stablecoins linked to a wider financial system. The British regulators have been closely following the recent market events right from the Terra crash to the insolvency of Three Arrows Capital.