UK FCA spells out when cryptoassets fall within the scope of regulation

Regulators around the world have grappled with how cryptoassets fit within their rules. The Financial Conduct Authority has now set out its final stance on the different types of cryptoasset and how they are regulated in the UK. Notably, “stablecoins” are not seen as a separate category and so may be regulated or unregulated depending on their structural features.

Drawing the line – final perimeter guidance

In January 2019, the FCA proposed draft guidance which was intended to clarify its view on which types of cryptoasset fall inside and outside the UK regulatory perimeter.

The regulatory perimeter is the line between financial services activities which are regulated and those which are not. Ultimately it is for Parliament and the courts to draw the line, but FCA perimeter guidance can help firms understand whether they need to seek FCA authorisation.

The FCA has now issued a policy statement which finalises its guidance as it relates to cryptoassets.

Reframing cryptoassets – changes to the FCA’s taxonomy

Previously, and in line with the October 2018 Cryptoasset Taskforce report, the FCA divided the cryptoasset market into security tokens, exchange tokens and utility tokens.

The FCA has reframed these categories as:

• Security tokens (regulated): largely unchanged from the draft guidance, this covers tokens which qualify as investments like shares, bonds or units in a fund
• E-money tokens (regulated): cryptoassets that meet the definition of e-money (see our previous blog) are regulated
• Unregulated tokens: any cryptoasset that is not a security token or an e-money token is unregulated e.g. exchange tokens (aka cryptocurrencies) like Bitcoin and Litecoin or utility tokens which allow access to a service or network.

In other words, buying and selling unregulated tokens does not require FCA authorisation. However, dealing in derivatives which use cryptoassets is a regulated activity (even if the underlying cryptoassets are unregulated). And new rules may from January 2020 impose AML checks to other cryptoasset activities.

The FCA also notes that it is possible for tokens which facilitate payment services (such as money remittance) to be regulated. This depends on whether regulated payments are being provided rather than the type of cryptoasset being used.

How stablecoins fit into the regulatory framework

The FCA has updated its guidance to clarify its position on stablecoins. The term “stablecoins” generally refers to cryptoassets that have a mechanism for stabilising their value, often by being backed by fiat currency or assets. In a speech in July the FCA described Libra – the proposed digital currency intended to facilitate retail payments within the Facebook ecosystem – as a stablecoin. 

The FCA has decided not to treat stablecoins as a separate category of cryptoasset. Instead the FCA will fit them into its existing framework on a case by case basis. In other words, depending on how it is structured, a stablecoin could be any of a security token, e-money token or unregulated.

International perspective

Feedback to its draft guidance encouraged the FCA to find a harmonised international approach to cryptoassets. The treatment of cryptoassets currently depends on the approach of the local law and regulators. For example, the US SEC takes a relatively broad view on what qualifies as a security token and France has set up a way for utility tokens to receive a regulatory seal of approval.

In response, the FCA notes the difficulties with taking a global approach because of the inherent structural differences between jurisdictions’ securities markets and legal frameworks, but it proposes to encourage consistency in regulation, for example via the Global Financial Innovation Network.

What happens next?

The FCA hopes that its guidance will inform other supervisory work on cryptoassets, including its engagement with cryptoasset firms. It also indicates that it is monitoring cryptocustody and settlement which are not covered by the perimeter guidance.

According to the FCA, the Treasury will consult on whether further regulation is required in the cryptoasset market. Changing the regulatory perimeter would need new legislation.

Finally, as the supervisor for the new AML regime for cryptoassets, the FCA will consult on its proposed approach later this year.