In January this year, the Financial Conduct Authority (FCA) issued a consultation paper setting out its proposals for guidance on cryptoassets; in particular it looks at where cryptoassets would be considered ‘specified investments’ under the Regulated Activities Order (RAO). In July, ‘Final Guidance on Cryptoassets’ was published to guide businesses in understanding whether their cryptoasset activities fall under FCA regulation.
The final guidance
The key takeaway from this is the fact that the FCA has reframed its classification of cryptoassets and split them into (1) regulated tokens and (2) unregulated tokens.
The guidance refers to two types of regulated tokens:
- security tokens; and
- E-money tokens.
Security tokens are the most akin to existing ‘specified investments’ as set out in the RAO (excluding e-money). Examples of more common specified investments in today’s market are shares or debt instruments. Because security tokens give the holders similar rights, such as economic rights to company profits, they are regulated.
E-money tokens are tokens which meet the definition of e-money pursuant to the E-Money Regulations 2011. Broadly speaking, e-money is electronically stored monetary value represented by a claim on the electronic money issuer which is:
- issued on receipt of funds for the purpose of making payment transactions
- accepted by a person other than the electronic money issuer
- not excluded by regulation 3 of the E-Money Regulations 2011.
E-money tokens also fall under the regulatory remit of the FCA.
Unregulated tokens are those tokens that do not provide rights or obligations akin to specified investments (like shares, debt securities and e-money). Exchange tokens, utility tokens and, in some circumstances, stablecoins, sit within this category but the key is to note that if it is not a security token or an e-money token, it is an unregulated token.
Exchange tokens (those used as a medium of exchange such as Bitcoin or Litecoin) and utility tokens (these tokens simply provide users with a product and/or service such as the ERC20 Ethereum standard or Filecoin) were highlighted in the previous guidance.
This final guidance refers specifically to the increasingly popular stablecoins which are designed to try to stabilise the volatile nature of other cryptoassets such as exchange tokens. These tokens are typically backed by an underlying asset, such as fiat currency, or assets such as gold. The well-known, but often criticised Tether is one of the largest stablecoins in existence. The proposed Libra currency (backed by Facebook) also has plans to be backed by reserves of differing assets.
These stablecoins are included within the loose heading of unregulated tokens, but the final guidance does highlight an important point that these must be reviewed on a case by case basis as sometimes a stablecoin could fall within the regulated sphere. For example:
- A stablecoin could be considered a unit in a collective investment scheme, a debt security, e-money or another type of specified investment, in which case it would be regulated.
- If, in an attempt to stabilise the pricing volatility, this gives rise to rights or obligations that are akin to a specified investment as security tokens or e-money tokens do, they could be regulated.
It is worth highlighting that, while these are termed unregulated, there are potentially regulated activities surrounding these tokens, such as certain payment services.
What does this mean?
The guidance does helpfully clarify the FCA’s approach to regulating cryptoassets, most of which will be welcome to market participants. However, it is always hard for regulators to keep up with an evolving technology and ensure the UK continues to be an attractive hub for distributed ledger technology (DLT) businesses.
The FCA has not yet extended its reach to regulate digital asset trading platforms/exchanges which facilitate much of the market trading of cryptoassets and cryptocurrencies globally.
It is worth noting the references to the Fifth Anti-Money Laundering (AML) Directive in the guidance. This directive, which will be transposed into law by 10 January 2020, will have important ramifications for the sector, and AML is a very hot topic. Most DLT businesses have been preparing for the implementation of this directive already, and we will keep you up to date with this as it progresses..
If you have any queries concerning the regulation of cryptoassets, or cryptoassets in general, please contact the team:
Harry Bengough [email protected] 01242 246411
Nicola McNeely [email protected] 01989 561429