Cryptoassets: FCA publishes Guidance on regulation of cryptoassets
The Financial Conduct Authority (FCA) has recently issued its Final Guidance on Cryptoassets (Guidance PS19/22) to clarify which cryptoassets fall within the UK regulatory perimeter, and in doing so has identified a new category of cryptoasset. This follows a comprehensive consultation period, which we discussed in our previous article Cryptoassets: developments in UK Regulation.
Cryptoassets covered by regulation
The FCA has clarified that it considers two categories of cryptoasset tokens to fall within the regulatory perimeter. These are “Security” tokens and “E-Money” tokens. The Guidance sets out a number of case studies and examples of the tokens that may fall within these categories.
Security tokens provide rights and obligations akin to traditional securities and are similar to specified investments under the Regulated Activities Order (RAO). Such tokens may also be financial instruments within the Markets in Financial Instruments Directive (MiFID II).
On the basis of their consultation, the FCA determined that a new and separate category of E-Money tokens is required. E-Money tokens are tokens that meet the definition of e-money under the E-Money Regulations 2011 (EMRs). This will likely include so-called ‘stablecoins’ which seek to attempt to stabilise their value using different mechanisms, including backing the token with established currencies (USD, GBP etc.).
Market participants involved with Security and/or E-Money tokens need to be aware of the regulatory framework, including the relevant authorisations and registrations required. Should a market participant be found to have failed to comply with the relevant regulations, they may be exposed to the legal consequences set out in the Financial Services and Markets Act 2000 or EMRs, as applicable, which could include a fine and/or imprisonment.
Although the FCA will consider each cryptoasset on a case-by-case basis, and not all assets will neatly fall within a defined category, other categories of tokens remain unregulated. “Exchange” tokens - which include cryptocurrencies such as Bitcoin and Ether - fall outside the regulatory perimeter. Likewise, “Utility” tokens - which typically provide access to a current or prospective service or product - are unregulated.
The Guidance also clarifies to whom regulation may apply. This includes: exchanges and trading platforms; payments providers; custodians/ wallet providers; and intermediaries such as advisers and brokers. It will be important for participants in the Cryptoasset market to take account of the Guidance and consider whether the activities they are carrying out are regulated.
Whilst the FCA Guidance will assist stakeholders in determining whether cryptoassets are regulated or unregulated, the complexity of products and rapid rate of developments mean that this is an area in which the regulatory status of each cryptoasset will have to be carefully and continually considered. For example, certain tokens, known as ‘dual tokens’, can change in structure and use over time; these may initially fall outside the regulatory perimeter but later fall within it during the lifecycle of a token.
It is important to note that the FCA’s Guidance is limited to whether certain cryptoassets fall within the current regulatory perimeter. HM Treasury is consulting on whether legislative changes are required in order to regulate cryptoassets to a greater degree, as currently a considerable proportion of cryptoassets fall outside the scope of current regulation.
The FCA has also stated that it expects the Fifth Anti-Money Laundering Directive, due to be transposed into UK law by 10 January 2020, to introduce AML requirements on certain cryptoasset activities, including in relation to Exchange tokens (which include cryptocurrencies).
The FCA has sought to bring clarity to the current UK regulation of cryptoassets with its Guidance. The Guidance is not binding but firms would be well advised to follow it as demonstrating compliance with their regulatory obligations. The regulatory landscape of this area is one its participants, and potentially their D&O, E&O, cyber liability and crime insurers, should continue to monitor closely.
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