22 August 2019
The FCA has finalised its perimeter guidance in relation to cryptoassets (Guidance), which sets out its approach to analysing whether particular cryptoassets are regulated. While its guidance is not binding on courts, firms that comply with it will be treated as having complied with the relevant rule or requirement.
The FCA consulted stakeholders on draft perimeter guidance in January 2019.
The Guidance forms part of the actions being taken by HM Treasury, the FCA and the Bank of England to further develop and implement the UK's policy and regulatory approach to cryptoassets and Distributed Ledger Technology (DLT) as set out in the final report of the Cryptoassets Taskforce (Taskforce) in October 2018.
HM Treasury is due to consult in 2019 on potentially expanding the FCA's regulatory perimeter.
The FCA has also recently consulted on a potential ban on the sale of products referencing some unregulated cryptoassets to retail consumers.
The regulatory perimeter refers to the boundary that distinguishes regulated and unregulated financial services. Unless an exemption applies, firms that carry on regulated activities by way of business in the UK in connection with cryptoassets must ensure that they have the correct permissions from the FCA; conducting regulated activities without authorisation is a criminal offence and may give rise to financial penalties.
The FCA uses the term "tokens" to refer to different types of cryptoassets and it originally adopted the three-fold categorisation used by the Taskforce: (a) exchange tokens; (b) utility tokens; and (c) security tokens.
The FCA has now revised the terminology it uses to reflect feedback it has received from industry and will now categorise tokens as follows:
We provide below some further commentary on those tokens subject to regulation ie security tokens and e-money tokens.
Determining whether a token is a specified investment is not always straightforward. The full list of specified investments is found in Part III of the RAO and the FCA has provided detailed guidance in Chapter 2.6 of its Perimeter Guidance manual.
The Guidance contains a non-exhaustive list of factors to take into account including:
From the FCA's market observations, the following are the likely to be the most relevant: (a) shares; (b) debt instruments; (c) warrants; (d) certificates representing certain securities; (e) units in collective investment schemes; and (f) rights and interests in investments.
The Guidance illustrates each of the above with case studies, which firms should familiarise themselves with. For example, whether a token might amount to a share will depend on the rights which are conferred to the token holder. Tokens which give holders similar rights to shares, such as voting rights or access to a dividend or the distribution of capital upon liquidation are likely to be security tokens.
Firms also need to be aware that instruments that derive their value from referencing a token, like derivative instruments, are likely to within the regulatory perimeter.
In addition, firms should consider whether a token may also be a financial instrument under MiFID II, which requires them to take account of relevant EU materials such as the European Commission's Q&A on MiFID II and material from the European Securities and Markets Authority.
For a token to be an e-money token, it must meet the definition of e-money under the EMRs. E-money is electronically stored monetary value as represented by a claim on the electronic money issuer which is:
The Guidance notes that within the FCA's regulatory sandbox – which allows businesses to test their innovative propositions in the market with real consumers – it has seen many firms which have facilitated DLT-based e-money to provide more efficient, automated and transparent services, including for international payments.
A stablecoin is a cryptocurrency that is pegged to another stable asset such as gold or a fiat currency like the USD and typically with a 1:1 backing. It is intended to maintain a consistent value with the fiat currency or other asset and is therefore in theory backed by the fiat currency/asset. Any token that is pegged to a currency, like USD or GBP, or to another asset, and is used for the payment of goods or services on a network might constitute e-money (provided that it also meets all of the elements of the definition of e-money above).
If you would like to discuss any of the above points, please get in touch.