08.01.2019

FCA Provides Clarity On Cryptoassets Regulation

The FCA is publishing Final Guidance which sets out the cryptoasset activities it regulates. This is in response to the FCA’s consultation published earlier this year.

The Guidance will help firms understand whether their cryptoasset activities fall under FCA regulation. This will allow firms to have a better understanding of whether they need to be authorised and what they need to do to ensure they are compliant.

Christopher Woolard, executive director of Strategy and Competition at the FCA, commented:

‘This is a small, complex and evolving market covering a broad range of activities. Today’s guidance will help clarify which cryptoasset activities fall inside our regulatory perimeter.’

The majority of respondents supported the proposals outlined in the consultation. The FCA is therefore publishing the Final Guidance as consulted on with some amendments to provide greater clarity on what is and isn’t regulated. This includes making the important distinction as to which cryptoassets fall inside the regulatory perimeter clearer.

Consumers should be mindful of the absence of certain regulatory protections when considering purchasing unregulated cryptoassets. Unregulated cryptoassets (e.g. Bitcoin, Ether, XRP etc.) are not covered by the Financial Services Compensation Scheme and consumers do not have recourse to the Financial Ombudsman Service.

Consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value.

Source: FCA

James Kaufmann, partner at the law firm Howard Kennedy, said in an email:

“Aspects to the guidance that stand out include:

  • pre-trading a firm does not need a licence to issue security tokens. However, as soon as security tokens are traded, authorisation regimes will apply as they fall under the category of “specified investments.” behaving like shares or debt instruments with have ownership rights. In the event a security token is tradeable on capital markets, the Markets in Financial Instruments Directive (MiFID) regime will apply;
  • confirmation that exchange and utility tokens will continue to fall outside of the FCA’s regulatory perimeter, however in the case of exemptions such as utility tokens used in e-money schemes, regulation will apply. These tokens will fall within the remit of the 5th Anti-Money Laundering Directive, which is being transposed into UK law later this year; and
  • stablecoins may also fall within the definition of e-money.

The FCA will provide further clarity on types of tokens in due course – it will separate e-money tokens from the utility tokens and security tokens category, creating a specific regulated e-money token category and an unregulated category that includes utility tokens. Any legislative process required to widen the regulatory perimeter is usually long-winded and time-consuming, so it is not surprising the FCA has stated in the guidance that other conduct-based regimes and rules such as SM&CR and Principles for Business may apply to firms using unregulated tokens. In short, we are edging towards a scenario where there are indirect catch-all provisions until more FCA regulatory time and resource can be spent on the subject.”

Herbert Sim, head of business development at Broctagon Fintech Group, said in an email: “The guidance outlines that cryptos have no intrinsic value as they are not guaranteed by an underlying asset. Although not a ban, it’s a move in that direction. This lack of enthusiasm is shared by several countries; the US with its scrutiny of Libra, and India, who are looking to implement a similar ban on cryptocurrencies which are not state regulated. These movements could end up coming back to bite. The international competition on cryptocurrencies is heating up and there are huge risks in being left behind.”

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