With an expanding cryptoasset team and new guidance issued on 31 July 2019, businesses offering tokenized schemes will be subject to greater regulatory scrutiny over the upcoming months.
The FCA published its final guidance on cryptoassets including clarification of its remit in accordance with its areas of focus for its 2019/2020 Business Plan. With over 92 respondents to the consultation paper, there is evidently an extremely broad range of interest in this subject. Lack of regulatory certainty in this sector has often been cited by major institutions as a reluctance to invest, and it is likely that this guidance will be one step closer towards greater interest and activity in the area.
Aspects to the guidance that stand out include:
- pre-trading a firm does not need a licence to issue security tokens. However, as soon as security tokens are traded, authorisation regimes will apply as they fall under the category of “specified investments.” behaving like shares or debt instruments with have ownership rights. In the event a security token is tradeable on capital markets, the Markets in Financial Instruments Directive (MiFID) regime will apply;
- confirmation that exchange and utility tokens will continue to fall outside of the FCA’s regulatory perimeter, however in the case of exemptions such as utility tokens used in e-money schemes, regulation will apply. These tokens will fall within the remit of the 5th Anti-Money Laundering Directive, which is being transposed into UK law later this year; and
- stablecoins may also fall within the definition of e-money.
The FCA will provide further clarity on types of tokens in due course – it will separate e-money tokens from the utility tokens and security tokens category, creating a specific regulated e-money token category and an unregulated category that includes utility tokens. Any legislative process required to widen the regulatory perimeter is usually long-winded and time-consuming, so it is not surprising the FCA has stated in the guidance that other conduct-based regimes and rules such as SM&CR and Principles for Business may apply to firms using unregulated tokens. In short, we are edging towards a scenario where there are indirect catch-all provisions until more FCA regulatory time and resource can be spent on the subject.
This guidance is set against the background of other cryptoasset related announcements earlier in the year with the FCA gearing towards a likely ban on the sale of cryptocurrency derivatives and exchange-traded notes to retail investors (an overall retail ban is highly likely to ensue) and a hiring surge at FCA HQ (two positions in a new team dedicated to digital assets within the Financial Crime department).
Moreover, it is likely that Facebook’s announcement to launch its Libra digital coin has added pressure to financial regulators at an international level to clarify their thinking on this subject. The UK’s policy will continue to be informed by other international regulatory bodies – it will be important to follow their developments in order to stay on top of policy formation and regulatory risk in this area.