Earlier this week, the UK Cryptoassets Taskforce published its Final Report on cryptoassets and distributed ledger technology (DLT). The Taskforce – which includes representatives from HM Treasury, the UK Financial Conduct Authority (FCA) and the Bank of England – was established in March 2018 to analyse and assess the risks and potential benefits of cryptoassets and DLT and “set out the path forward with respect to regulation [of these areas] in the UK”.
In the Report, the Taskforce indicates that there will be a significant amount of “consultation” in the year ahead to determine whether and where regulatory action is needed in the UK crypto space. The Taskforce also emphasizes the UK’s continued commitment to supporting innovation and ensuring that fintech innovators who “play by the rules” can continue to thrive.
You can read the full report here, but, in the meantime, here are a few interesting points I noted:
The Taskforce identifies three categories of crypto token:
- Security tokens
- Utility tokens
- Exchange tokens (effectively, pure cryptocurrency tokens, “such as Bitcoin, Litecoin and equivalents”).
There is nothing particularly new here from a substance perspective, and the Taskforce’s approach is consistent with the industry trend (globally) to distinguish broadly between security and utility tokens.
However, what we are beginning to see now is evidence of some diverging approaches beginning to emerge across Europe in token classification terminology. For example, FINMA in Switzerland has opted to go with an “asset token” versus “utility token” versus “payment token” classification to describe (broadly) the same categories as the Taskforce. The new Maltese Virtual Financial Assets Act (which coincidentally enters into force today) by contrast introduces the concept of “virtual financial asset” offerings and incorporates a detailed “financial instrument test” to determine whether a particular token may fall within that definition.
In the absence of regulatory action at EU level, we are likely to continue to see diverging regulatory approaches emerge in this space across the EU.
Anti-money laundering: Beyond 5AMLD
The Taskforce observes in the Report that the use of cryptoassets for illicit purposes, including money-laundering, has been low to date. However, it notes that there is an “increasing risk” in that context and confirms that the UK government is currently “developing a robust regulatory response” to address these issues. The Taskforce indicates that the UK response to this risk will “go significantly beyond the requirements set out in the EU Fifth Anti-Money Laundering Directive (5AMLD).”
I wrote an article for Bloomberg Law a while back on 5AMLD and its impact for the crypto industry which you can read here. In summary, 5AMLD (which is required to be brought into law across all EU member states by January 20, 2020), will bring fiat-to-crypto exchanges (dubbed by EU legislators as “gatekeepers of virtual currencies”), as well as custodian wallet providers, expressly within the scope of the EU anti-money laundering regime. The Taskforce indicates that the UK government is likely to go beyond this and will “consult” on whether crypto-to-crypto exchanges, as well as non-custodian wallet providers should be brought within the scope of the UK regime. It will also “consult” on whether the UK’s expanded rules should be extended to firms based outside the UK when providing services to UK consumers.
At an FATF meeting earlier this month, FATF recommended bringing “virtual asset service providers (which includes “exchanges between one or more forms of virtual assets”) within the scope of international anti-money laundering requirements. So it would appear that the UK’s proposed approach is likely to be in line with the latest FATF recommendations. By contrast, 5AMLD (which, as mentioned, is limited to fiat-to-crypto exchanges and custodian wallet providers) will likely need to be updated to bring the EU position in line with the latest FATF recommendations (notably, 5AMLD has already been amended once in the form of a 6th Anti-Money Laundering Directive which was adopted by the EU in October).
The Taskforce’s Report indicates that we can expect UK legislation to be enacted in this area in 2019.
Possible prohibition on the sale of derivatives referencing cryptoassets
The Taskforce notes that the UK Government will “consult” on the possible prohibition of the sale to retail consumers of derivatives (including CFDs, futures, options, and transferable securities) referencing certain types of cryptoassets (in particular, exchange tokens like Bitcoin etc). The Taskforce observes that the FCA has already temporarily restricted the sale to retail consumers of CFDs referencing cryptoassets and notes the risks that these type of instruments raise for retail consumers and market integrity. This is in line with the position taken by ESMA on the same topic at EU-level.
New guidance around security tokens
The Report confirms that security tokens already fall with the “regulatory perimeter” in the UK, but concedes that it can be difficult to determine when the applicable rules apply. The Taskforce notes in that context that the FCA will “consult on perimeter guidance by the end of 2018”. The guidance will outline the FCA’s “interpretation of the current regulatory perimeter”.
Possible regulatory framework for ICOs?
The UK Government will issue another consultation in early 2019 to assess the benefits of ICOs (and similar distribution mechanisms for cryptoassets) with a view to determining whether “an extension of the regulatory perimeter” is required. This language is similar to that used by the European Commission back in March 2018 in its Fintech Action Plan in which it committed to continuing to “monitor developments of cryptoassets and ICOs” with a view to assessing “assess[ing] whether regulatory action at EU level is required”.
Possible new regulations for exchange tokens and related firms
The UK Government will issue yet another consultation in 2019 to explore how exchange tokens and related firms such as exchanges and wallet providers can be regulated. The Report notes that an “internationally coordinated approach and action by other jurisdictions” will help to mitigate risks to UK consumers in that regard.
New tax guidance
The Taskforce observes that the tax treatment of cryptoassets is outside the scope of the Report, but notes that revised tax guidance will be issued by HM Revenue and Customs by early 2019.
The need for a coordinated international approach
The Taskforce emphasizes the need for a coordinated, multi-jurisdictional approach to tackling the complex challenges raised by cryptoassets several times in the approach. The Taskforce notes that the UK will continue to engage internationally through a range of fora, including G20, FATF, IOSCO, ESA taskforces, the recently established GFIN, the Financial Stability Board, the Basel Committee on Banking Supervision and Financial Dialogues and Fintech Bridges driven by the HM Treasury.
A similar theme was highlighted by the European Commission in its Fintech Action Plan back in March 2018, in which it emphasized that “cryptoassets are a worldwide phenomenon”.
Equally, this was a common theme raised by several international regulators at Money20/20 in Vegas last week, with one regulator commenting that the “need to work in lockstep with other international regulators” is an “enduring imperative” for all regulators in this space.
Bank accounts are an operational pain point
In a table included at Annex B to the Report, the Taskforce has included “examples of stakeholder views” that were gathered in the context of compiling the report. One pain point raised by stakeholders relates to the difficulty that blockchain and crypto businesses encounter when trying to open bank accounts in the UK.
Feedback from the crypto and blockchain marketplace indicates that this is not an exclusively UK-issue and this has emerged as key pain point for blockchain and crypto businesses (of all sizes and scale) operating across the EU.
Blockchain and crypto businesses, like other businesses, typically need traditional bank accounts in order to operate. While the traditional banks may have some well-founded concerns with respect to certain businesses operating in this industry, there should be a way for the banks to balance these concerns against the need to ensure that they are not closing their doors to the legitimate players in the space - and it should be possible to achieve this through the implementation of reasonable, risk-based KYC measures. Perhaps as legislators across the globe move forward with regulating the blockchain and crypto industry, this will become less of an issue, but in the interim it would certainly be a positive development to see banks adopting a more open and risk-based approach.
And finally, no mention of Brexit…
Curiously, there is no mention of Brexit in the Report. This seems unusual since Brexit is clearly a key concern for blockchain and businesses operating in the UK right now. For example, just last month, the industry saw Coinbase announce plans to open a 100-person office in Dublin, Ireland as part of a “plan B for Brexit”.
Coinbase’s UK CEO Zeeshan Feroz explained to the Guardian newspaper that “as we plan for all eventualities, it’s important that we continue servicing our customers across Europe and Ireland would be our preferred choice there if it comes to it.” Noting that the company has an e-money licence with the FCA, Feroz explained that Coinbase is a “regulated financial service provider… And clearly as a regulated financial institution, if we don’t have access to [EU regulatory] passporting, we have to look for alternatives”.
While not all blockchain and crypto businesses are currently regulated and in need of regulatory passporting across the EU in the same way as Coinbase, it’s clear that the need to seamlessly access the EU market is still going to be a key concern for most of them either way. That being the case, it seems unusual that the topic wasn’t addressed at all in the Report (even under the “stakeholder views” section at Annex B).....
But perhaps it will be covered by the Taskforce in another “consultation”!