The UK Financial Conduct Authority (FCA) has been in consultation with organisations involved with Cryptocurrencies and following their statement in 2018 that they would offer further guidance, have now issued a press release confirming how they will be regulating different types of Digital Assets.
The FCA have divided Digital Assets into four categories, broadly in line with the guidance that they gave in their consultation paper CP19 in January 2019, as to the way tokens will be regulated going forward giving the industry much needed clarity. However, to assured all Digital Assets will need to comply with FCA money laundering regulations, which is to be welcomed:
· Exchange tokens — will be treated as being “unregulated” and therefore FCA will not be under the remit of the FCA e.g. Bitcoin ought to be an Exchange token but there is some doubt if Ethereum is one too?
· Security tokens — are classified as “specified investments” and will be under the FCA’s domain, which means that any organisations dealing in security tokens will need to be regulated.
· Stablecoins — for those tokens backed by “Fiat” these are to be treated as e-money and fall within the FCA’s to be regulated. This is consistent with current regulations as one does not need to be authorised to trade bank deposits i.e. if you offer a service where by you manage someone’s “cash” by moving it between say $,€, Yen CHF, £ etc, but all held with in a multi-currency deposit account, you do not need to be authorised by the FCA!
· Utility tokens — these in “most circumstances” will NOT be regulated and therefore not the responsibility of the FCA.
Many tokens, especially during the ICO mania of 2017/18, claimed to have issued utility tokens may find that the FCA now classifies them as security tokens, which could prove a regulatory challenge for the firms that issued them and their advisors!
“A firm can issue security tokens without needing a regulatory license, in the same way that issuing shares does not require a license. But in any scenarios in which the tokens are traded, the advisers and brokers handling the tokens, and the financial promotions regime, will need authorization”, said the FCA. It then went on and said, “If a security token is tradeable on the capital market, said the FCA, it will further be considered a transferable security under the European Union’s Markets in Financial Instruments Directive (MiFID), and that regime will apply too”.
It is worth noting that if an asset is not regulated and falls outside the scope of the FCA’s regulation then investors will not be covered by the Financial Services Compensation scheme or be able to take any complain they have about such an investment to the Financial Ombudsman!
The FCA guidance is a positive step forward for the Digital Asset industry as it would appear that there is without doubt interest in the digitisation of many asset classes enabling markets to operate more efficiently. This guidance gives compliance staff in banks, brokers, asset managers and professional advisors greater clarity to position themselves and accordingly as they increasingly become more engaged with Digital Assets.
For more #DigitalBytes each week email:Jonny.Fry@TeamBlockchain.net