BetterNews #9: FCA’s Final Guidance on Cryptoassets

On July 31, 2019, the UK Financial Conduct Authority (FCA) has published the final Guidance on Cryptoassets in its Policy Statement PS19/22 (Guidance). The Guidance includes a revised regulatory assessment of the cryptoassets and requirements applicable to wallet providers, exchanges and trading platforms. FCA Guidance is not legally binding but compliance with the Guidance may provide a safe harbor for market participants.

The Cryptoassets webpage containing the lists of regulated security and e-money tokens, unregulated utility and exchange tokens also was updated by the FCA, as well as its current open consultation on potentially prohibiting the retail sale of derivatives and exchange-traded notes referencing certain types of unregulated cryptoassets.

Classification of cryptoassets

The classification of cryptoassets has changed following feedback the FCA received from the industry. The FCA established two categories of tokens:

Unregulated tokens falling outside the regulatory perimeter, which include

• exchange tokens, which do not grant the holder any rights, are decentralized with no central issuer with respective obligations, and
• utility tokens, which are tokens providing consumers with access to an existing or prospective product or service, similar to a pre-payment voucher;

Regulated tokens being under the regulatory perimeter, including

• security tokens, and
• electronic money (“e-money”) tokens.

In respect of exchange tokens, the FCA reminds about compliance with Fifth Anti Money Laundering Directive (“5AMLD”) and proposed extension UK AML regulations towards the exchange services between cryptoassets, cryptoasset ATMs, etc.

Security tokens

The Guidance states that security tokens are those providing rights and obligations similar to specified investments to their holders, excluding e-money. According to the Guidance legal nature of the token depends on the substance of the token rather than the labeling of a token in a whitepaper. The FCA provides examples of rights provided by a security token including ownership rights, debt owed by the issuer, etc.

E-money tokens

The Guidance sets out that e-money tokens are defined following the definition of e-money under the Electronic Money Regulations 2011 (“EMRs”). The Guidance also mentions “stablecoins”, described as tokens stabilized through being backed by fiat, the basket of cryptoassets, other types of assets, or algorithms. According to the Guidance “stablecoins” may or may not be “e-money” or “security tokens”, but could be derivatives, units in a collective investment scheme, debt securities or some other type of specified investment.

Regulated activities

Irrespective of the type of token being issued, the market participants should consider whether their tokens are being used to facilitate payment services. In such a case, the appropriate authorization under the Payment Services Regulations 2017 will be required (unless an exemption applies).

The Guidance contains an overview of market participants and activities they typically carry out being recognized as a regulated activity, these include issuers of tokens (including through ICOs), advisers and other intermediaries (provision of advice to consumers and helping to facilitate the purchase of tokens), exchanges and trading platforms (facilitating transactions between market participants), etc.

It also should be noted, that according to the Guidance if an entity is inviting customers to engage in investment activity, such as encouraging customers to purchase a certain type of security token, such communications may fall under the financial promotion regime.

Conclusion

The market participants are expected to consider Guidance when carrying out business in the UK. Additionally, Her Majesty’s Treasury will initiate whether the discussion regarding whether further regulation is required particularly concerning unregulated cryptoassets. The FCA expects an increase in the number and accuracy of authorization submissions from the entities involved in regulated cryptoasset activities.