FCA Publishes Final Guidance on Cryptoasset Regulation in the UK

Neil Dennis

UK markets regulator the Financial Conduct Authority (FCA) published its final guidance on the cryptoasset activities it regulates, following a consultation paper from April.

Document number PS19/22, titled Guidance on Cryptoassets: Feedback and Final Guidance to CP19/3 (April's paper), the FCA summarised the feedback it received to the consultation and its responses and final guidance.

This final guidance does not dramatically alter the existing regulatory framework, but does dictate which types of digital asset fall under which category and what the regulatory response should be.

Consultation Paper

In its April document, the FCA identified three distinct categories of digital token:

  • Exchange tokens: not issued by a central authority but meant to be used as a means of exchange for buying and selling goods and services without the need for traditional intermediaries
  • Utility tokens: grant holders access to a current or prospective product or service. They are not specified investments but might meet the definition of e-money in some circumstances
  • Security tokens: provide rights and obligations akin to specified investments, such as a share or debt instrument

In the new document, the regulator said that while exchange tokens fell outside its perimeter, utility tokens may involve some activities that might need regulating, while security tokens fall fully within the FCA's regulatory perimeter.

The FCA delineated a further category in the new guidance, and separated e-money tokens from utility and security tokens. E-money is "electronically-stored monetary value" that includes fiat balances in online wallets or prepaid cards and falls within the FCA's regulatory remit.

It elaborated:

Any token that is not a security token, or an e-money token is unregulated. However, market participants should note certain activities that use tokens may nevertheless be regulated, for example, when used to facilitate regulated payments.

Criminal and Consumer Rules Always Apply

It added that rules on anti-money laundering and other criminal activities, as well as consumer protection safeguards must always be observed. It said:

We also want to help consumers better understand the cryptoasset market and the resulting implications for the protections they have, depending on the product.

The FCA received 92 responses to CP19/3 from players within the financial services industry and beyond, including banks, trade associations, fintech firms, crypto exchanges and token issuers, as well from outside the corporate world from academia and private individuals.

Security Tokens

As expected, the bulk of the regulatory framework surrounding cryptoassets focuses on security tokens. The FCA said it was possible to issue such tokens without a securities trading license, but any subsequent transactions involving the tokens would need authorization.

Furthermore, if a security token is tradeable on capital markets, it would also be considered a transferable security under the EU's Markets in Financial Instruments Directive (MiFID) and it would also be regulated under these rules also.

While utility tokens would generally be considered outside of the FCA's remit, it said that certain activities involving these assets, such as securitization - the packaging of assets into tradeable securities - would be.