During the summer, the UK Financial Conduct Authority (FCA) published a final guidance on which activities involving cryptoassets fall within its current financial services regulatory framework.
This is the first time that the UK regulator has provided clear advice as to how cryptoassets fit into its regulatory regime. The guidance confirms that any firm in the UK issuing, buying, selling or advising on regulated cryptoassets without prior authorisation from the FCA may be committing a criminal offence.
Central to the guidance is the nature of the cryptoasset and the rights or obligations it grants to the holder. The guidance confirms that ‘exchange tokens’ such as bitcoin and ether, and their exchanges fall outside of the FCA’s regulatory remit, although the guidance stresses that, given their volatility, investors should proceed with caution.
Similarly, ‘utility tokens,’ which provide holders with access to a service or product in a similar way to a pre-payment token, will also remain unregulated by the FCA. This approach is consistent with other European regulators, but not with the US where the existence of a secondary market for utility tokens means they automatically fall within the US regulatory regime.
In contrast, a token which gives the holder a right to ownership, or control of the issuer, or a share in its profits are likely to fall within the perimeter of FCA regulation. Such ‘security tokens’ typically grant rights similar to those of a conventional security, such as a share or debt instrument. If the issuer of such security tokens, or any third party, provides investment advice or carries out any other ‘regulated activity’ in relation to such security tokens (such as, for example, brokering transactions), they are likely to require prior FCA authorisation. All such parties will also be subject to the rules in relation to communication of investments under the UK financial promotions regime. Finally, the guidance adds that any firm issuing security tokens to the public may also be caught by the UK Prospectus Regime.
The second regulated category identified by the guidance is any cryptoasset which falls within the definition of e-money. To qualify as e-money, the token must, amongst other things, enable users to make payment transactions with parties other than the issuer, and this can include balances in online wallets and prepaid cards. Any token which is e-money is subject to the E-money Regulations 2011 and issuers require authorisation or registration with the FCA. The FCA notes that cryptoassets which peg their value to a flat currency, a ‘stablecoin’, can potentially fall within the definition of e-money.
The overall message from the FCA is the need to analyse each token on a case-by-case basis. The guidance notes the variety of forms cryptoassets can take and the existence of hybrids, noting that a token which will fall at some stage within a regulated category will be regulated even when it does not display such characteristics. In an ever-evolving market, firms and advisers alike should exercise caution before dealing in any way with cryptoassets without checking if FCA authorisation is required or financial services laws and regulations apply.
A copy of the guidance can be found here.