The guidance for the treatment of crypto assets, including the lending and staking of decentralized finance (DeFi) has been updated, on 2 February 2022, by UK’s tax regulator, Her Majesty’s Revenue and Customs (HMRC). This is the first time the tax regulator has forayed into the budding industry.
The renovated guidelines aim at the treatment of crypto assets, particularly on the lending and staking of DeFi in the UK, also, if the returns or rewards from these services are regarded as capital or revenue for tax function. With the tax authorities being indecisive of the application of the existing rules, it seems like the DeFi services have fallen in a grey area.
HMRC stated that, since the loaning and staking of tokens through decentralized finance is a continuously evolving field, setting out all the instances in which the lenders or liquidity providers earn a return from their activities and the nature of that return is impossible. As an alternative, the tax regulator set up a few guiding principles.
In perspective, Ian Taylor, Executive Director of CryptoUK, the trusted voice of the UK crypto industry, said,
“HMRC treats crypto assets as property for tax purposes. However, this is inconsistent with the approach currently being adopted by Government and other regulatory bodies in the UK, including the Treasury and the FCA, who regard crypto assets as financial instruments and regulate them as in line with other financial services and products.”
Security risks in DeFi
With huge amounts of money at stake throughout various DeFi protocols, it is always important to identify its security risks. The identification of these risks in the domain of decentralized finance could help in predicting profitable protection for the humungous investments made in these protocols.
Some of the notable risks include, rug pulls and Ponzi schemes, compromised private keys, front-running attacks, wrong liquidity pools estimate, inefficient access control, so on and so forth.
Decentralized finance has captivated hordes of digital asset holders as a result of increasing returns. Nonetheless, this field’s inadequacy of required documentation to counter money laundering and clear governance framework has left regulators on the edge, globally.