Home Fraud, Error and Debt HMRC steps up efforts to trace ‘suspicious’ crypto transactions

HMRC steps up efforts to trace ‘suspicious’ crypto transactions

HMRC: is using a New York City-headquartered company’s ‘cryptocurrency investigation tool’ | Credit: Ian Hall

The UK’s HM Revenue & Customs (HMRC) is boosting its efforts to trace ‘suspicious’ crypto transactions by inking a new contract with a New York City-headquartered ‘blockchain data platform’ company.

The department has agreed a one-year contract with the company, Chainalysis, for the provision of a ‘cryptocurrency investigation tool’, according to the UK government’s ‘Contracts Finder’ site. It carries a value of £844,604 and runs to 31 March 2024.

Crypto-assets – typically shortened to ‘crypto’ – comprise a diverse, quickly evolving and often controversial class of assets, including cryptocurrencies such as bitcoin, as well as non-fungible tokens (NFTs). They typically use some type of distributed-ledger technology (DLT) or blockchain.

Chainalysis provides data, software and research to government agencies, exchanges and financial institutions in more than 70 countries, according to its marketing. Its products include ‘Chainalysis Reactor’, which is described as investigation software that links real-world entities to cryptocurrency activity.

HMRC’s engagement with the company, first reported by PublicTechnology.Net, builds on a contract with the department from 1 April 2022-1 April 2023 focused on ‘Chainalysis Reactor certification for up to 300 users’ and the provision of training during which participants would ‘use real-world examples to derive actionable blockchain intelligence’. This contract was valued at £45,000.


‘One of many specialised tools’

“This [Chainalysis] tool is one of many specialised tools we have to ensure everyone is paying the correct amount of tax, including those who hold crypto-assets,” an HMRC spokesperson said in a statement to Global Government Fintech. “It is important we keep pace with new developments in finance and technology by investing in our ability to tackle illicit financial activity, including tracing suspicious crypto transactions.”

Crypto-asset activity in the UK is significant. The UK was one of just two ‘high-income’ nations, alongside the US, in the top 20 of the ‘Chainalysis 2022 Crypto Adoption Index’. But the number of reports to the UK’s Financial Conduct Authority (FCA) of crypto-asset scams has increased from 1,619 in 2019 to 6,372 in 2021.

Chainalysis already has a contract worth £399,204 with the FCA running from July 2022-June 2024 focused on the analysis of crypto-asset blockchain data. It also had a contract worth £293,988.25 (from March 2020 to March 2021) for the ‘provision of [a] cryptocurrency analytics and tracing tool’ to the Police and Crime Commissioner for Derbyshire (an elected official in a county in the English Midlands).

HMRC investigators last year seized three NFTs as part of a probe into a suspected VAT fraud involving 250 alleged fake companies. The department said three people had been arrested on suspicion of attempting to defraud it out of £1.4m. Nick Sharp, deputy director economic crime, said at the time that the first NFT seizure ‘serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC’.

Earlier this year the National Crime Agency, the UK’s law enforcement agency, confirmed plans to form a team dedicated to proactively investigating crypto crime.


Taxing times

Authorities worldwide have been under pressure to work out how existing tax rules and regulations more broadly should apply to crypto.

In the UK taxpayers will need to state crypto profits separately when filing self-assessment returns from the 2024-2025 fiscal year, according to the government’s Spring Budget 2023. HMRC also just this week launched an eight-week consultation on ‘the taxation of decentralised finance (DeFi) involving the lending and staking of crypto-assets’.

“The vast majority pay the tax due and we are looking at ways to help customers with crypto-assets get their tax right,” the HMRC spokesperson said.

The UK government is also consulting on plans to ‘robustly’ regulate crypto (the consultation closes on 30 April). Economic secretary to the Treasury Andrew Griffith earlier this month spoke about “fostering innovation by making the UK a safe jurisdiction for crypto-asset activity”.

The European Union (EU), meanwhile, is on track to become the world’s first major jurisdiction to establish a comprehensive regulatory framework for crypto. European Parliament (EP) members voted overwhelmingly on 20 April to approve the high-profile Markets in Crypto Assets (MiCA) regulation: bloc-wide new rules related to supervision and consumer protection, as well as environmental safeguards. The agreed text includes measures against market manipulation and to prevent money laundering, terrorist financing and other criminal activities. MEPs have also approved the first piece of EU legislation for tracing transfers of crypto-assets. This text aims to ensure that crypto transfers can always be traced and suspicious transactions blocked.


Representatives from the UK, including HMRC’s Rachel McLaren and the Cabinet Office’s Euan Slack, are among the speakers at the Global Government Fintech Lab 2023, being held in Dublin on Thursday 18 May 2023. The Lab, our one-day event for senior public servants interested in exploring and implementing fintech solutions, is being organised in partnership with Ireland’s Department of Finance. The event, which is free to attend for all public servants, will feature keynote speeches, panels and breakout sessions focused on fintech-related opportunities and challenges for those working in central government, agencies and other public authorities.