Today, January 23rd 2019, the UK Financial Conduct Authority (FCA) published a consultation paper titled “Guidance on Cryptoassets”. In the 50-page document, the financial regulator offered “guidance for crypto assets in order to provide regulatory clarity for market participants carrying on activities in this space.” The paper carries important implications for firms issuing or creating crypto assets, financial advisers, exchanges and consumers. The FCA is accepting feedback from stakeholders until Friday 5 April 2019 after which the regulator will issue a Policy Statement that outlines the final guidance.
The paper recognized that “crypto assets can take many forms and be structured in different ways”, but categorized crypto assets into three broad types of tokens:
(i) exchange tokens;
(ii) security tokens;
(iii) utility tokens.
Assessing which token will fall under which category would be done on a “case-by-case basis.” The regulator warned that the token categories are not mutually exclusive and a token issued as a utility token, might during the course of its lifecycle be considered as an exchange token.
Exchange tokens (like Bitcoin, Litecoin etc.) are not issued or backed by any central authority and can be used directly as a means of exchange. The paper noted that “While exchange tokens can be used as a means of exchange, they are not currently recognized as legal tender in the UK, and they are not considered to be a currency or money.” Currently, exchange tokens do not fall within the regulatory perimeter of the FCA.
Security Tokens have characteristics that make them same or akin to traditional financial instruments such as shares, debentures or units in a collective investment scheme. They fall within the regulatory perimeter of the FCA as their classification meets the definition of “specified investments” per the state’s Regulated Activities Order and/or “Financial Instruments” regulated by the Markets in Financial Instruments Directive II. “Tokens can be considered transferable securities under MiFID as well as Specified Investments under the RAO.”
Utility Tokens provide the consumers with access to the products or services but do not “exhibit features that would make them the same as securities.” Utility tokes generally fall outside the regulatory authority of the FCA unless they meet the definition of e-money.
The regulator noted that exchange tokens such as Bitcoin and Ether are unlikely to be categorized as E-money because “amongst other things, they are not usually centrally issued on the receipt of funds, nor do they represent a claim against an issuer.” However, stablecoins which are pegged by a fiat currency e.g. USD, GBP could potentially meet the definition of e-money.