The UK Financial Conduct Authority (the “FCA”) published a Policy Statement in response to the feedback it received on its ‘Guidance on Cryptoassets’, previously in consultation.
The final version of the Guidance on Cryptoassets (the “Final Guidance”) aims to provide market participants and stakeholders with a clearer picture of which cryptoassets fall within the FCA’s jurisdictional remit and consequently their classification. Moreover, the Final Guidance attempts to reduce legal uncertainty, whilst simultaneously enhancing consumer protection, market integrity and protection of competition.
The Final Guidance outlines the obligations to be adhered to by market participants, such as firms requiring authorisations to offer cryptoasset related services, whether issuing, marketing, buying, selling or holding cryptoassets.
Initial Cryptoassets Taxonomy and Industry Feedback
The classification of cryptoassets has changed following feedback the FCA received from the industry. Previously, cryptoassets were divided into three categories by the FCA:
- Exchange tokens: defined as tokens not issued by a central authority, intended as a means of exchange and often known as cryptocurrencies.
- Utility tokens: defined as tokens granting their holders access to a current or prospective product or service, which do not however grant the same rights as those of specified investments. Throughout its consultation, the FCA considered the option that utility tokens may also encompass e-money, in which case the E-Money Regulations (“EMRs”) would apply.
- Security tokens: These tokens provide rights and obligations similar to specified investments in the UK’s Regulated Activities Order (“RAO) and thus falling within the regulatory perimeter of the FCA.
Further to the classification of the various types of cryptoassets, the Guidance organized such cryptoassets into two groups: regulated and unregulated tokens.
The FCA classified Exchange and Utility tokens as unregulated tokens, thus falling outside the regulatory perimeter of the FCA, a fact which garnered nearly unitary consensus amongst stakeholders in the UK.
Throughout the consultation period, the FCA proposed that Exchange tokens may be used to facilitate regulated payments. Most stakeholders agreed, noting however that the cryptoassets’ volatility may impact their effectiveness in facilitating payments.
Prior to the issuance of the Final Guidance, regulated tokens included solely Security Tokens.
Security tokens have been defined by the FCA as assets similar to traditional instruments such as shares, debentures or units in a collective investment scheme.
Throughout the consultation process the FCA considered e-money tokens as regulated, even if primarily they were considered to fall within the parameters of a utility token by the FCA. Stakeholders commented that grouping e-money with utility tokens was not ideal seeing as how the two diverge in their use.
Following the feedback received, the FCA amended its prior classification with the purpose of eliminating any remaining confusion regarding regulated and non-regulated cryptoassets. Moreover, the FCA took into consideration feedback by stakeholders regarding the material differences between Exchange and Utility tokens.
The Final Guidance outlines three main categories of cryptoassets, introducing e-money tokens and grouping utility and exchange tokens together as one category:
- E-money tokens: These tokens were introduced as a separate category and are defined in accordance to the definition of e-money, that is: issued on receipt of funds for the purpose of making payment transactions, accepted by a person other than the electronic money issuer and not excluded as being e-money by the same EMR;
- Security tokens: As aforementioned, security tokens are those providing rights and obligations similar to specified investments to their holders, excluding e-money;
- Unregulated tokens: In its final classification, the FCA grouped Exchange and Utility tokens into one class of tokens, defining them as tokens that do not provide rights or obligations similar to specified investments. In essence, any token which is not an E-money Token or a Security token is to be deemed an unregulated token.
Firms seeking to offer services in relation to cryptoassets, may need authorisation by the FCA if they carry out regulated activities by way of business in the UK and, or if such businesses are involved in certain specified kinds of investments. Moreover, if activities are excluded in full under the RAO, authorization may likely be required.
Credit institutions, credit unions or municipal banks issuing e-money tokens remain regulated. Other firms issuing e-money must follow the EMRs, and must be appropriately authorised, registered or exempt from requiring such registration.
Issuers of tokens may themselves not need to be authorised, however there may still be certain requirements; such as issuing a prospectus or a whitepaper, depending on the nature of the token.
Similar to the approach adopted in Malta, the FCA provided that where there is doubt as to whether an unregulated token may fall within the category of a security token or whether an activity requires authorisation, the assessment needs to be carried out on a case-by-case basis.
Looking Forward & Similarity with Malta’s Crypto Laws
Drawing parallels with the Maltese Virtual Financial Assets (“VFA”) framework, that is the framework regulating cryptoassets in Malta, the FCA’s inclusion of electronic money as a separate category is very much akin to Malta’s classification of cryptoassets, namely, that adopted under Financial Instrument Test.
Moreover, what the UK is classifying as Security Tokens could fall within the class of Financial Instruments under Maltese law. On this point the MFSA has recently issued a consultation note on the regulation of security token offerings.
On the other hand, the FCA adopted a different approach to Exchange tokens and Utility tokens, in their grouping as unregulated tokens. This is a major difference to what the Maltese legislator has done. Under Maltese law, apart from e-money and financial instruments, there are two more distributed ledger technology asset classes or as referred to under UK law cryptoassets, specifically virtual tokens and virtual financial assets. In Malta’s case the whole VFA regime was set-up on the regulation of certain type of cryptoassets, namely those which classify as virtual financial assets.
In conclusion, market participants are expected to take the Final Guidance into consideration when carrying out business in the UK. Moreover, Her Majesty’s Treasure is to determine whether further regulation is required particularly in relation to unregulated cryptoassets. The FCA is now also seeking to determine whether it should ban the sale of derivatives linked to certain types of unregulated cryptoassets to retail clients.
Article written by Dr Terence Cassar, Dr Bernice Saliba and Legal Trainee Ms Camille Pellicano.
For more information on Cybersecurity, DLTs, Blockchain and Cryptocurrencies please contact Dr Ian Gauci on firstname.lastname@example.org, Dr Terence Cassar on email@example.com and Dr Bernice Saliba on firstname.lastname@example.org
Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.