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FCA Guidance on Cryptoassets



In preparing its guidance the FCA examined whether the various types of cryptoassets and tokens can fall within the existing regulatory framework as:

· specified investments under the Regulated Activities Order

· financial instruments under the Markets in Financial Instruments Directive (MiFID)

· e-money under the E-Money Regulations

· a payment service within the scope of the Payments Services Regulations.


The FCA recognises that cryptoassets and tokens can take many forms, may be structured in different ways and may even move between categories during their lifecycle. Assessing whether a cryptoasset or token is within the regulatory framework can only be done on a case-by-case basis with reference to many different factors. Against that background, the FCA has identified a clear distinction between those categories of tokens that are likely to be unregulated and those that are likely to be regulated.


Unregulated tokens

Unregulated tokens are tokens that do not provide rights or obligations similar to specified investments such as shares, debt securities and e-money. Unregulated tokens can be privacy tokens, fungible utility tokens, non-fungible tokens, or access tokens and can centrally issued, decentralised, used as a means of exchange or grant access to a product or service. Essentially, any token that does not fall within the definition of a security token or an e-money token is an unregulated token. The FCA has identified three broad categories of unregulated tokens – exchange tokens, utility tokens and stablecoin tokens.


Exchange tokens

Exchange tokens are used in a similar way to traditional fiat currencies, the best known example being Bitcion. While exchange tokens can be used as a means of exchange they are not currently recognised as legal tender in the UK and so are not considered to be a currency or money. As exchange tokens currently fall outside the FCA’s regulatory framework the transferring, buying and selling of them are not regulated by the FCA so, for example, an exchange can facilitate transactions in Bitcoin or Ether or other exchange tokens without carrying out a regulated activity.


Utility tokens

Utility tokens provide consumers with access to a product or service and often grant rights similar to pre-payment vouchers. Utility tokens can be traded on secondary markets and be used for speculative investment purposes.


Stablecoins

Stablecoins are a type of token whose value is stabilised by being backed by or linked to the value of another asset or currency. They may, for instance, be linked to a fiat currency such as the USD or EUR, a basket of cryptocurrencies, an asset such as gold or stabilised through algorithms that control the supply of the tokens to influence the price. From the regulatory aspect, stablecoins are something of a hybrid and whether or not they are regulated depends upon their characteristics and the rights or obligations attached to them. If, for instance, they grant token holders a right to payments from profit or income generated from holding, buying or selling the token or the underlying asset then they may be specified investments and thus regulated as security tokens or e-money tokens.


Regulated tokens

The FCA has identified two broad types of regulated tokens:

· Security tokens

· E-money tokens


Security tokens

Security tokens provide rights and obligations similar to the traditional types of specified investments regulated by the FCA and so include, for instance, shares, debentures or units in a collective investment scheme. The key characteristics of security tokens indicate ownership in an entity, a creditor relationship with an entity or other rights to ownership or profit. Security tokens may:

  • represent ownership or control of a corporate body or give token holders similar rights to shares such as voting rights, a dividend payment from profits or a right to the distribution of capital on liquidation

  • create or acknowledge indebtedness of money owed to the token holder in the form of a debenture

  • grant token holders the right to subscribe for tokens in the future

E-money tokens

E-money is electronically stored monetary value as represented by a claim on the issuer of the electronic money which is:

  • issued on receipt of funds for the purpose of making payments

  • accepted by a third party or parties as money or for the settlement of payment transactions.

Electronic storage of money includes using cryptographically secure tokens to represent fiat funds such as GBP or USD.


What does the regulatory framework mean and who does it affect?

The consequence of the FCA guidance is that anyone engaged in a business activity in the UK that relates to a security token or an e-money token or is involved in payment services involving cryptocurrencies should consider whether their activities require authorisation. In addition to the FCA’s regulatory framework there are a number of regulatory obligations that might apply, notably the AML (Anti-Money Laundering) KYC (Know Your Client) and CTF (Counter Terrorist Financing) regulations as well as securities related regulations such as the Prospectus Directive and Market Abuse Regulations.


The regulatory framework applies to any market participant carrying out a regulated activity involving tokens, including:


Issuers of regulated tokens

  • Prospectus Regulations

  • Market Abuse Regulations

  • Disclosure Guidance and Transparency Rules

  • AML/KYC/CTF procedures


Token exchanges and trading platforms

  • permission for operating a Multilateral or Organised Trading Facility

  • dealing in investments as principal or agent

  • arranging deals in investments and other provisions regarding investments


Payment providers custodians/wallet providers

  • E-Money Regulations 2011

  • Payment Services Regulations 2017


Advisers, brokers and other intermediaries

  • regulations for advising on investments

  • range of provisions relating to dealing in and arranging investments


Wallet providers and custodians

  • regulations for managing, safeguarding and administering investments


Additionally, the FCA has highlighted that even if an FCA authorised firm carries out an unregulated activity that does not itself require a permission (e.g. in relation to an unregulated cryptoasset) it is possible that the FCA’s general rules of conduct may still apply to the firm and to relevant individuals within it, so care should be taken even when dealing with an asset that is unregulated.


The penalties for carrying out a regulated activity without the correct FCA authorisation can incur unlimited fines or up to 2 years’ imprisonment.


Conclusion

This is a summary, not a comprehensive review, of the FCA Guidance and is intended for general guidance only. It should not be relied upon as definitive and, as always, expert advice should be obtained on a specific situation.


Tim Carswell



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