UK: The UK Financial Conduct Authority Issues Final Guidance On Cryptoassets

Last Updated: 15 August 2019
Article by Simon Firth

On 31 July 2019 the UK Financial Conduct Authority (FCA) issued its final guidance on cryptoassets (the Guidance) following its consultation on draft guidance earlier in the year. Here we summarise and assess the key components of the Guidance.

The Guidance and the UK Regulatory Regime

The Guidance is relevant to a range of businesses including:

  • issuers and creators of cryptoassets;
  • firms marketing cyrptoasset products and services, and buying and selling cryptoassets;
  • firms holding and storing cryptoassets;
  • investment managers; and
  • investment exchanges and trading facilities.

The Guidance is designed to enable market participants to understand whether certain cryptoassets are within the regulatory perimeter or fall outside regulation, and consequently to determine whether they need to be authorised by the FCA and what rules or regulations apply to their business. An activity relating to cryptoassets which does fall within the regulatory perimeter (as discussed below) will usually require the firm performing that activity from the UK by way of a business to be regulated by the FCA (and in some cases by the Prudential Regulatory Authority (PRA) under the UK Financial Services and Markets Act 2001 (FiSMA). Conducting regulated activities without authorisation is a criminal offence unless an exemption applies.

A separate FCA authorisation and registration regime applies to firms which issue e-money and undertake payment services,It should be noted, however, that issuing e-money a regulated activity for credit institutions (i.e. banks and building societies), credit unions and municipal banks, which means they will be authorised by the FCA to issue e-money under the FiSMA regime.

Terminology

Cryptoassets can take many forms and be structured in different ways. The FCA recognises three broad categories of cryptoassets: e-money, security and unregulated tokens, and appreciates that they may move between categories during their lifecycle.

In the Guidance the FCA uses "tokens" to denote different forms of cryptoassets, and "cryptoasset" as a broad term that captures the different types of tokens, being a neutral term that does not denote a direct comparison with fiat currency.

Unregulated tokens

Unregulated tokens are those tokens that do not provide rights or obligations akin to specified investments (like shares, debt securities and e-money). Any token that is not a security token, or an e-money token is an unregulated token.

Utility tokens

Utility tokens provide consumers with access to a current or prospective service or product and often grant rights similar to pre-payment vouchers. In some instances, they might have similarities with, or be the same as, rewards-based crowdfunding. Much like exchange tokens, utility tokens can usually be traded on the secondary markets and be used for speculative investment purposes. This does not in itself mean these tokens constitute specified investments if they do not have the characteristics of relevant specified investments.

As utility tokens do not exhibit features that would make them the same as security tokens, they are not be captured in the FCA's regulatory regime.

Exchange tokens

Exchange tokens such as Bitcoin are used in a way similar to traditional fiat currency. However, while exchange tokens can be used as a means of exchange, they are not currently recognised as legal tender in the UK, and they are not considered to be a currency or money. Exchange tokens currently fall outside the UK regulatory perimeter. Therefore the transferring, buying and selling of exchange tokens, including the commercial operation of cryptoasset exchanges for exchange tokens, are activities not currently regulated by the FCA.

Firms should however note that the European Union (EU) Fifth Anti-Money Laundering Directive (5AMLD) will be transposed into UK law by 10 January 2020 to introduce anti-money requirements to certain cryptoasset activities, including:

  • exchange services between one cryptoasset and another, or services allowing value transactions within one cryptoasset exchange or peer-to-peer exchange service provider;
  • cryptoasset automated teller machines;
  • transfer of cryptoassets;
  • issuance of new cryptoassets, for example through initial coin offerings (ICOs); and
  • the publication of open-source software (which includes, but is not limited to, non-custodian wallet software and other types of cryptoasset related software).

Security tokens

Security tokens are those tokens that provide rights and obligations akin to specified investments as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) excluding e-money. These tokens may also be financial instruments under the EU Markets in Financial Instruments Directive (MiFID II). For example, security tokens have characteristics which mean they are the same as or akin to traditional instruments like shares, debentures or units in a collective investment scheme (i.e. most funds).

Where a person is engaged in activity by way of business in the UK that relates to a security token, or to a token that constitutes e-money, or is involved in payment services, they should consider whether those activities require FCA authorisation or registration. The RAO specifies the relevant activities and investments for this purpose. The most relevant specified investments for tokens are shares, debt instruments, warrants, certificates representing certain securities and units in collective investments schemes (i.e. most funds).

Working out whether a particular token, for example, is a specified investment will depend on a number of factors, including:

  • the contractual rights and obligations the token holder has by virtue of holding or owning that cryptoasset;
  • any contractual entitlement to profit-share (like dividends), revenues or other payment or benefit of any kind;
  • any contractual entitlement to ownership in, or control of, the token issuer or other relevant person (like voting rights);
  • the language used in relevant documentation, like token whitepapers, that suggests the tokens are intended to function as an investment, although it should be noted that the substance of the token (and not the label used) will determine whether an instrument is a specified investment;
  • whether the token is transferable and tradeable on cryptoasset exchanges or any other type of exchange or market; and
  • whether there is a direct flow of payment from the issuer or other relevant party to token holders, which may be an indicator that the token is a security.

Firms should also be aware that financial promotions relating to specified assets are regulated unless certain exemptions apply.

E-money tokens

E-money tokens are those that meet the definition of e-money under the UK Electronic Money Regulations 2011 (the EMRs). Firms issuing e-money must ensure they are appropriately FCA authorised or registered.

E-money issuance is regulated under the EMRs and is a regulated activity under the RAO when carried on by credit institutions, credit unions and municipal banks. E-money is electronically stored monetary value as represented by a claim on the electronic money issuer which 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 by the EMRs.

E-money must enable users to make payment transactions with third parties, so must be accepted by more parties than just the issuer. E-money includes fiat balances in various types of online wallets or prepaid cards.

Electronic storage of monetary value includes the possibility of using distributed ledger technology (DLT) and cryptographically secured tokens to represent fiat funds, e.g. GBP or EUR. Cryptoassets that establish a new sort of unit of account rather than representing fiat funds are unlikely to amount to e-money unless the value of the unit is pegged to a fiat currency, but even then it will still depend on the facts of each case.

Stablecoins

Attempts might be made to stabilise the volatility of cryptoassets, where the resulting token is commonly referred to as a "stablecoin". Stablecoins are a type of token, and depending on what they are backed with, how they are arranged and how they are structured, will fall in different categories of the FCA's taxonomy. For instance, a stablecoin could be considered a unit in a collective investment scheme, a debt security, e-money or another type of specified investment. It might also fall outside of the FCA's remit. Ultimately, this can only be determined on a case-by-case basis.

Need for a prospectus

If a token is a transferable security and will either be offered to the public in the UK or admitted to trading on a regulated market, an issuer will need to publish a prospectus for the tokens unless an exemption applies. For example, there is an exemption for offers made entirely in the UK for less than €8 million in any 12-month period. In the case of cross-border offers, there are currently different exemption thresholds in different EU Member States, and the position of such public offers will need to be carefully considered.

An issuer undertaking a non-exempt public offer of securities will need to have the prospectus reviewed and approved by the FCA. If a prospectus is required, the specific disclosure requirements will depend on the type of security (e.g. equity shares, corporate bonds). The obligations, such as those relating to the provision of historical financial information, are no different for a token issuer to an issuer of traditional securities.

Using cryptoassets to facilitate payment services

Tokens can be used to facilitate regulated payment services such as international money remittance. The UK Payment Services Regulations 2017 (PSRs) specify regulated payment services which include services relating to the operation of payment accounts (e.g. cash deposits and withdrawals from current accounts), execution of payment transactions, card issuing, merchant acquiring, and money remittance.

The PSRs also include a list of activities that do not constitute a payment service in the UK, like payment transactions executed wholly in cash and directly between the payer and the payee without any intermediary intervention.

The regulated payment service is the payment service provided to specific clients (for example clients at each side of a money remittance services) and not the dealings among payment service providers to deliver the end payment arising from that service. Where a payment service is being provided, the payment service provider (PSP) remains responsible for that service until the payee or payee's PSP receives the funds, even if it uses cryptoassets as a vehicle for the provision of that service.

Services relating to cryptoassets themselves, such as the operation of a cryptoasset account or transmission of cryptoassets are not within the scope of the PSRs (unless the cryptoasset in question meets the definition of e-money) because they only regulate activities with regards to funds which are defined as "banknotes and coins, scriptural money and electronic money". However, a payment service that relates to funds will be in scope, even if cryptoassets are used to facilitate the service.

Q&A

The Guidance includes useful Q&A section supplementing the Guidance.

Assessment

The FCA Guidance provides useful clarity on cryptoasset regulation as the cryptoasset market develops and regulators focus on this fast-growing business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions