The Financial Conduct Authority (FCA) published a consultation setting out guidance on its regulation of cryptoassets on 23 January 2019. The consultation is available to read in full here. The consultation is a welcome move by the FCA to provide guidance on where crypto assets fall within the existing UK regulatory regime; particularly given the fast paced development that we are seeing both in the cryptoasset market and the underlying distributive ledger technology.
The FCA intends to provide some clarity to firms operating in this market, shedding some light on which activities involving this evolving technology are likely to fall within the existing UK regulatory regime.
It is worth noting that the approach of different jurisdictions to the crypto asset market has varied in this regard. Some have adopted a bespoke regulatory regime for such assets while others have sought to incorporate these into their existing regimes.
The UK proposes to adopt the second approach and incorporate cryptoassets into the existing framework.
The consultation paper considers whether certain types of cryptoassets will fall within different elements of the existing regulatory framework, namely whether they will be:
"Specified Investments" under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO);
"Financial Instruments" under the Markets in Financial Instruments Directive II;
"E-Money" under the E-Money Regulations 2011 (EMR); or
captured under the Payment Services Regulations 2017 (PSR)
Types of Cryptoassets
The FCA consultation has broadly identified three different types of cryptoassets:
"Exchange Tokens", tokens which are not issued or backed by a central authority and are intended to be used as a means of exchange only- usually as a decentralised tool for buying and selling goods and services without using traditional intermediaries and where they do not constitute e-money or operate as regulated payment services. The FCA suggests that these tokens will generally fall outside of the UK regulatory perimeter.
"Security Tokens" will include certain specific characteristics bringing them within the definition of a "Specified Investment" under the RAO (such as (i) tokens that bear similarities to shares - providing the token holder with a share of profits proportionate to their holding; voting rights and the tokens are structured such that they can easily be transferred; or (ii) tokens that bear similarities to debentures - where the token creates or acknowledges indebtedness by representing money owed by the token holder), and so these will always fall within the regulatory perimeter.
"Utility Tokens" are tokens which grant token holders rights to access current or prospective products or services and though these rights will not be the same as those granted by "Specified Investments" (rather, they may be similar to, for example, rewards-based crowdfunding) they may fall within the regulatory perimeter in certain circumstances (predominantly if they constitute "e-money" under the EMR, or are used to facilitate regulated payment services within the meaning of PSR).
The consultation and resulting impact on cryptoasset market participants must be considered alongside the upcoming Fifth Anti-Money Laundering Directive (AMLD 5), which will be transposed into UK law by the end of this year. AMLD 5 will extend anti-money laundering and counter terrorism financing regulation, and this will extend to bodies engaged in activities involving exchange of cryptoassets. So, while "Exchange Tokens" are unlikely to fall within the regulatory perimeter, they are likely to be affected by AMLD 5.
Responses and feedback
We look forward to seeing the responses the FCA receives to this consultation as firms that are using (or are considering using) cryptoassets assess the approach taken to regulating this market. You can submit responses to the consultation here. All responses are due by 5 April 2019.
We can expect final guidance from the FCA, taking account of responses, later in 2019.