The UK Financial Conduct Authority issued final guidance regarding how different types of cryptoassets likely fall within its regulatory perimeter and warning that persons conducting regulated activities typically must be authorized, unless exempt.
The FCA initially proposed its guidance in January 2019. (Click here for background in the article “UK Financial Conduct Authority Proposes Guidance to Help Classify Cryptoassets; Says Cryptocurrencies and Utility Tokens Generally Outside Regulatory Perimeter” in the January 27, 2019 edition of Bridging the Week.) The FCA’s final guidance was issued after it received input from over 65 respondents.
Generally, the FCA concluded that cryptoassets that do not provide rights or obligations typically associated with shares, debt instruments or electronic money are not within its regulatory reach. These digital assets typically include what the FCA terms “exchange tokens” or virtual currency in many jurisdictions (e.g., tokens used as a means of exchange but which are not recognized as legal tender). However, certain activities involving exchange tokens will soon be subject to anti-money laundering requirements in the UK.
The FCA said that stablecoins – which it regards as a different type of cryptoasset than an exchange token – are likely to be either regulated or unregulated depending on what rights or obligations a holder may have associated with ownership of such tokens. Generally, there are four types of stablecoins: fiat currency-backed; crypto-collateral-backed; asset-backed; and algorithmically stabilized. According to the FCA, depending on their structure, stablecoins backed by financial assets, physical assets or other cryptoassets might be regulated, if a token holder has any rights to the underlying assets or to payment or profits derived from the underlying asset. Otherwise, the stablecoin is likely unregulated, although soon, certain activities involving such tokens may also be subject to AML obligations in the UK.
Finally, the FCA said that cryptoassets akin to shares or debt instruments (i.e., security tokens) are likely within its regulatory perimeter, while digital tokens that are effectively “electronically stored monetary value” are likely subject to the UK’s e-money regime. Persons issuing their own security tokens are likely subject to prospectus, disclosure and other requirements, while other market participants transacting in security tokens and cryptoassets subject to e-money rules on behalf of others are likely subject to other requirements.
FCA provided many specific examples of characteristics of different cryptoassets and how they might be categorized in its guidance. The FCA also identified various potential market participants (e.g., wallet providers and custodians) and discussed how their activities involving different types of cryptoassets might bring them within the UK conduct regulator's oversight.
In other legal and regulatory developments involving cryptoassets:
- SEC Commissioner Urges Nonexclusive Safe Harbor for Issuers of Digital Assets: In a speech in Singapore, Securities and Exchange Commissioner Hester Peirce cautioned against international regulators adopting a single framework for cryptoasset regulation. She said that “[j]ust as states take different approaches and learn from one another in the U.S., crypto regulation affords international regulators the opportunity to learn from one another.” Although Ms. Pierce acknowledged that having different regulatory schemes “can create regulatory friction,” she claimed that different approaches also encourage “regulatory competition” which she considers healthy.
- Bank Fails to Have Lawsuit Dismissed Claiming It Improperly Reclassified Crypto Purchases as Cash Advances Without Adequate Disclosure: A federal court in New York declined to dismiss a putative class action lawsuit against Chase Bank USA, N.A. that claimed when the bank changed its policy of treating acquisitions of virtual currencies as being “purchases” to “cash advances” on its credit cards beginning in January 2018, it breached its contract with relevant customers. At the time of its change in policy, Chase also began to charge customers higher interest rates on balances and cash advance fees. The court held that it was a reasonable interpretation that the term “cash advances” solely applied to advances pertaining to real money, in which case plaintiffs’ claim was legitimate; Chase had argued that “cash advances” should be more broadly construed to apply to anything that acts as a medium of exchange. Nonetheless, the court dismissed a separate claim by plaintiffs that, under law, they were entitled to advance notice of a change in the terms of their contract when Chase began first construing their virtual currency purchases as “cash advances.” The court held that Chase, by solely varying its interpretation, did not change a term of a contract. (Click here for background regarding the initial lawsuit against Chase in the article "Bank Agues Cryptocurrencies Just Like Money to Justify Charging Cash Advance Fees" in the November 11, 2018 edition of Bridging the Week.)
My View: The FCA’s final guidance on which cryptoassets fit within its regulatory perimeter provides a succinct exposition of the different types of cryptoassets, and provides useful insight into how they might or might not fit within the regulator’s remit. In many cases, the FCA provides alternative examples of characteristics of a cryptoasset that are critical to such a determination in the form of “case studies” and concludes with a clear statement of the FCA’s legal conclusion (e.g., a token is likely regulated or unregulated).
To date, in the United States, the Securities and Exchange Commission has taken a different route in explaining its thinking regarding cryptoassets that might constitute securities and be within its regulatory remit and market participants whose activities handling such cryptosecurities might implicate regulatory requirements. The SEC has generally offered high level advice, e.g., in the form of a so-called "Report of Investigation," or a "Framework" for investment contract analysis. However, other than in two no action letters and multiple enforcement actions, the SEC has not provided insight into its thinking as applied to specific factual circumstances. It would be helpful for the SEC to issue a document like the FCA's final guidance that not only provides its high level thinking, but its views as applied to various specific factual circumstances.
(Click here for background regarding the SEC staff’s views in the article “SEC Staff Outlines Characteristics of Cryptoassets That Could Cause Them to Be Regarded as Securities” in the April 7, 2019 edition of Bridging the Week.)