Reform UK’s cryptocurrency plans are “crazy” and pose risks to the UK economy that would leave taxpayers with big bills, economists have warned.
The party’s policies will enrich Bitcoin and crypto investors, which include leader Nigel Farage and party donors, but represent a “gamble” with public money that could lead to a fall in the pound and a rise in criminal activity, experts told The i Paper.
Farage has invested £215,000 in crypto firm Stack BTC, which purchased £2m in Bitcoin last month.
The Clacton MP is being investigated by Parliament’s standards watchdog for failing to declare a £5m donation from crypto investor Christopher Harborne, who is also Reform’s biggest donor. Farage argues the payment was a gift not connected to his political activity, was given to him before he became an MP, and is needed to pay for private security.
Crypto policies that his party is considering include making Bitcoin part of the UK’s official reserves; allowing tax payments to be made with cryptocurrencies; and lowering capital gains tax on crypto sales.
Willem Buiter, an economist and former member of the Bank of England’s Monetary Policy Committee, said: “It would be crazy for the central bank and the Government to either hold Bitcoin as an investment or accept it as a means of payment for taxes. That is economic illiteracy of a spectacular kind.”
Bitcoin ‘too volatile’ for reserves
The UK’s official reserves, which include foreign currencies and gold, are managed by the Bank of England and intended to protect the economy in times of crisis.
David Aikman, director of the National Institute of Economic and Social Research, said Bitcoin is too “risky” to be part of the UK’s reserves and its value “could fall dramatically, as we’ve seen”. Bitcoin’s value has fluctuated widely over time, having experienced crashes as deep as 60 per cent.
Aikman said the UK holds big currencies such as the US dollar and the euro because their value is relatively stable and backed by consistent demand. In an economic crisis, the reserves can be sold to buy sterling, protecting the sterling’s value by increasing demand for it.
If the UK’s reserves were to plunge in value, taxpayers could be stuck paying for the shortfall, Aikman added.
Markets could also react negatively to such a decision, hurting investors’ confidence in the British economy.
“There may be a big question mark in financial markets as to why the Bank of England was doing this,” he said. “It’s essentially placing a gamble on the value of a speculative asset.”
Buiter agreed that any loss to the value of the reserves would be “borne by the taxpayer”.
Paul Mortimer-Lee, an economist who has worked at the Bank of England and International Monetary Fund, said Bitcoin is “very volatile” and would increase the “risk” to the central bank.
If the Bank of England needed to use the reserves but there was a shortfall due to a plunge in value, he said it would be likely to borrow in US dollars – which comes with interest payments – or issue more sterling to sell on the foreign exchange market to buy other currencies.
“Sterling’s value would fall in the international exchanges, and the price of imports would go up,” he added.
Buiter warned that if the central bank were forced to print more sterling in such a scenario, inflation would go up.
A ‘recipe for running into money-laundering issues’
Reform plans for HMRC to accept Bitcoin and other approved crypto for tax liabilities, using GBP exchange rates at the time of payment. Crypto that is collected would be converted into sterling or added to the Treasury’s official reserves.
According to Aikman, accepting tax payments in cryptocurrencies creates a “risk to the public balance sheet”, particularly if their value falls by the time the Treasury sells them for sterling. If the Treasury does not sell the Bitcoin and adds it to the reserves, that would also create a hole in public finances that would need to be filled by tax rises, public spending cuts or other means.
Mortimer-Lee said converting Bitcoin into sterling would also come with added costs, as transaction fees are typically added.
“You’re encouraging somebody not to use your currency, so you’re really promoting a decrease in the state, a decrease in the profits of the Bank of England, and ultimately, the profits of the Bank of England are transferred to the Treasury,” he said.
He added that the decision would signal to markets that the UK Government “doesn’t trust sterling”, and put it in the same class as developing countries such as El Salvador, which accepts Bitcoin as legal tender partly because its own currency is weak and unstable.
Aikman warned that it would also be a “recipe for running into money laundering issues” – many criminals use cryptocurrencies because payments are harder to trace. He said the Treasury could also be exposed to cyber-security risks, pointing to instances where Bitcoin wallets have been attacked.
Tax cuts for crypto investors ‘completely crazy’
Having a lower capital gains tax rate for cryptocurrencies and blockchain-based digital assets would be “nonsense” and “completely crazy”, Buiter said. Reform has proposed lowering the rate, which is paid on profits made when assets are sold, from 18 to 23 per cent to a flat 10 per cent.
Buiter said this would incentivise people to switch investments into cryptocurrencies and “undoubtedly reduce Treasury revenues”.
Aikman said: “We want people investing in UK companies and productive assets in the UK, and if you skew the tax system towards encouraging them to invest in Bitcoin, there’s a sense in which you’re defeating your purpose of boosting economic growth.”
Reform argues that it would significantly increase revenue for the Treasury because of onshoring (relocating businesses back within a home nation’s borders), increased transactions, and tax compliance – but Aikman said this was “certainly not a given”.
HMRC could also see a decline in tax revenues due to the lower tax rate, so Reform’s assertion relies on increased business offsetting the tax cut, he added.
Mortimer-Lee said it could also lead to more taxpayers wrapping their capital gains into Bitcoin or cryptocurrencies to avoid paying the higher rates. “It’s unfair to other businesses, it’s unfair to poorer people who don’t have Bitcoin gains, and it would set up pressure to reduce capital gains taxes on everything else,” he said.
A boost for Reform donors
Buiter and Aikman said Reform’s policies would benefit those who invested in Bitcoin, cryptocurrencies and their exchange platforms by boosting demand, and therefore the price of crypto, as well as offering tax cuts to those who make money from such investments.
Mortimer-Lee added: “If I held a load of Bitcoin and made money on it, and I was a prominent political figure, I might think this was a great idea.”
On top of his own investment in Stack BTC, Farage has declared £72,000 in gifts or benefits from Harborne, as well as £30,000 in earnings from Blockworks, a data and software platform for crypto markets, according to the register of MPs’ financial interests. He has received £7,400 in earnings from BTC Inc, a Bitcoin-focused media and technology company.
Reform’s donations include more than £22.1m from Harborne; £30,000 from Oscar Townsley, the founder of Bitcoin derivatives trading firm A1X; and £10,000 from Daniel Masters, the chairman of digital asset investment firm CoinShares.
Steve Goodrich, head of research and investigations at Transparency International UK, said: “When a political party proposes policies that would financially benefit its own leader and major donors, the public is entitled to ask whose interests are really being served. These proposals appear to do exactly that, raising serious questions about the relationship between political donations and party policies.”
Jim Dickson, a Labour MP on the Treasury Select Committee, said Reform’s crypto proposals were “reckless, self-interested and would put taxpayers’ money at risk”.
He added: “Investors will not welcome a more volatile landscape, created by promoting a currency with long-standing links to crime, money laundering and sanctions-busting.
“It’s Reform cosying up to its dodgy billionaire donors and ignoring the real interests of the British people. There’s also a blatant conflict of interest in Farage standing to profit from his investments in crypto whilst simultaneously using his party’s policies to boost the sector.”
Townsley said he donated to Reform because he believed “digital asset markets should be properly regulated, rather than left to operate in the shadows”.
A Reform spokesperson said: “Britain cannot afford to become hostile to emerging industries simply because Establishment figures are uncomfortable with change. We believe the UK should lead the future economy rather than regulate itself into decline. Reform UK’s Cryptoassets and Digital Finance Bill represents international best practice in a range of areas and contains robust safeguards against abuse.”
Nigel Farage, Christopher Harborne, Blockworks, BTC Inc and Daniel Masters did not respond to requests for comment.
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