FCA Guidance on Cryptoassets

Introduction

The Financial Conduct Authority (“FCA”) have released a consultation paper, Guidance on Cryptoassets. The paper can be found here.

The purpose of the paper is to give guidance to the many different organisations, business and individuals operating in the cryptoasset sector. Jurisdictions outside of the United Kingdom (UK), such as the United States of America, Gibraltar and Switzerland have issued guidance or legislation which gives certainty of the perimeters cryptoassets can operate in.

This has been a struggle for businesses and individuals in the UK as they are unsure how to proceed and expand in their crypto-ventures due to the lack of clarity.

A parliamentary report was released in September 2018 which gave detail of how the industry was operating, what the issues were and what needed to be done.

A conclusion of that report was that cryptoassets were to be brought into the scope of the FCA so they can start to be regulated. Additionally, they said “cryptocurrencies” should be called “cryptoassets”. Since this, all reports or papers released by official organisations refer to them as cryptoassets. This includes Her Majesty’s Revenue and Customers in their recent tax guidance, found here.

The Paper

The guidance applies to cryptoasset issuers, marketers, buyers/sellers, custody, financial advisers, professional advisers, investment managers, exchanges and consumers. The guidance is relevant to everyone involved in the industry.

Categories of Cryptoasset

Much like other jurisdictions, the FCA has defined the three main types of cryptoasset and given guidance as to each type.

Exchange tokens

Not issued or backed by a single authority, they are used as a medium of exchange and they closely resemble traditional currency; examples of Exchange tokens are Bitcoin. These are not expected to be regulated.

Security tokens

These are tokens that will meet the definition of a Specified Investment as defined by regulation and will have qualities of a share or debt instrument. These tokens fall within the scope of the FCA and finance regulation.

Utility tokens

These tokens issued by a single authority and controlled by that authority. They will typically grant the bearer a right to exchange the tokens for a product or service. These tokens will not have characteristics of a Security token. Depending on the certain characteristics of the token, they may constitute as e-money, and therefore regulated.

There are certain characteristics that determine what the cryptoasset is defined as, if you are unsure, you should seek independent legal advice.

In summary, if the cryptoasset is defined as a Specific Investment or e-money, if you deal with these cryptoassets in a particular way, such as issue them, you need to be authorised by the FCA.

What does this mean and what effect will it have on the industry?

The issuers of the tokens will need to evaluate if they can launch their tokens by way of Security Token Offering (“STO”) or Initial Coin Offering (“ICO”) and if they need to be authorised by the FCA; they may also need to ensure they are compliant with additional finance rules. Additionally, an issuer with tokens already in circulation should evaluate the nature of their tokens to determine if they come under the scope of the FCA.

Businesses such as brokers, exchanges and custody agents that have been dealing with cryptoassets will need to evaluate all of the tokens they are currently dealing with. They may take the view that they stop dealing in a substantial number of tokens if they believe that they fall under the regulation. Alternatively, they may apply to the FCA to be authorised to deal with those tokens.

This will have a knock-on-affect to the token issuers as their token may be removed from being traded on exchanges or held by custody agents. Additionally, individuals who have their tokens on exchanges or brokers may find them demanding they release the tokens, as they are not authorised to deal with them.

We expect businesses dealing with a variety of tokens to require that the token issuers supply a letter from a reputable law firm, confirming or denying that the token falls within the regulation.

Summary

The guidance is needed by the industry so those operating in it are able to make an informed decision of investments in their business moving forward, in turn, allowing the cryptoasset industry in the UK to mature and evolve.

The guidance will force issuers of cryptoassets to take a look at their token to determine if they need a licence from the FCA or if they can continue without it.

Some exchanges and custodians of tokens will now need to be authorised and to comply with additional rules, although many have applied for licenses already in anticipation. Other exchanges and businesses will simply refuse to deal in Security tokens and Utility, e-money tokens.

If you are an individual or business dealing with cryptoassets and would benefit from expert advice here in the UK or internationally, please contact Thomas Hulme at Mackrell Turner Garrett.

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Thomas Hulme
Thomas joined Mackrell Turner Garrett as a Trainee Solicitor in September 2017, having previously run his own security business, specialising in protecting the IT infrastructure of SMEs and large enterprises. This commercial background gives him a unique insight into what it takes to establish and run a company. Before undertaking a position within the firm, Thomas completed a Graduate Diploma in Law and an LPC, but he now has plans to also undertake a Masters LPC with Business, alongside his training with the firm.