The UK Financial Conduct Authority (‘FCA’) has recently issued Guidance relating to cryptoassets attempting to make clear which tokens fall within the UK’s jurisdiction. The proposed consultation paper, upon which this Final Guidance is based on, was proposed in January. The FCA is said to have received feedback from 92 respondents coming from numerous banks, trade associations, consultancies, fintechs, amongst other firms and individuals. The FCA has stated that most respondents answering to the Consultation Paper have agreed with many of the proposals set out.
The Guidance’s main aim is to classify the types of cryptoassets which fall under already existing categories. Bitcoin and Ether, classed by the FCA as ‘exchange tokens’ are not expressly regulated even though anti-money-laundering rules may still apply.
Under this Guidance one is made aware of which tokens are regulated by the FCA under the Financial Services and Markets Act (‘FSMA’) or in accordance to the E-Money Regulations (‘EMRs’). The FCA, through its Guidance, aims to regulate two wide-ranging types of tokens. Firstly, the FCA aims to regulate tokens which are financial instruments, these being security tokens. These tokens exclude E-money, which if issued by a credit or financial institution are to be regulated in accordance to the scope of EMRs.
Security tokens that act similarly to shares, derivatives or debt instruments fall within the remit of investment services. This allows for security tokens to be regulated by the FCA. The Guidance distinguishes between security tokens with utility tokens. While security tokens are regulated by the FCA, utility tokens fall outside the FCAs capacity. The concept of utility tokens may only be regulated if such tokens meet the definition of electronic money. This would thus fall within the definition of E-money. This particularly applies to stable-coins, whereby if the definition of e-money is met, these would be subject to regulation by the FCA.
Through its Guidance, the FCA has classified exchange and utility tokens as being unregulated. Through the response gathered from the consultation document, it was recorded that respondents almost unanimously agreed that exchange tokens fall outside the regulatory scope and that firms would not need existing regulatory permissions. The FCA now also considers e-money tokens as being regulated, even though in the past it may have been considered as a utility token.
Through it’s Guidance the FCA has attempted to lessen any legal uncertainty whilst strengthening consumer protection, market integrity while promoting competition. The Guidance aids market participants to better understand their responsibilities when offering cyrptoasset services. However, one would have expected the guidance to go further, especially when it comes to exchange tokens and utility tokens, and more specifically when it comes to future intentions of the FCA on the regulation of such tokens, their exchange and other services connected to them. Furthermore, the FCA did not create any test or guidance to help stakeholders distinguish between security, e-money and unregulated tokens, as some other jurisdictions have done over the past months.
The full version of the Guidance document can be found here.