On 31 July 2019, the United Kingdom Financial Conduct Authority (“FCA”) published its final guidance on the types of cryptoassets that fall within the FCA’s current regulatory framework, clarifying the resulting obligations for firms and regulatory protections for consumers (“PS 19/22” or “the Policy Statement”).
The Policy Statement provides market participants welcome pointers as to how the FCA applies the regulatory perimeter to different types of cryptoassets. It remains the case that definitive judgements as to the regulatory classification of specific cryptoassets can only be made by assessing each cryptoasset on a case-by-case basis, taking into account its particular features.
In the Policy Statement, the FCA responds to feedback it received on its perimeter guidance consultation paper on cryptoassets published in January 2019 (“CP 19/3”) and sets out its final guidance. The draft guidance set out in CP 19/3 was itself based on categories of cryptoassets initially defined in the UK Cryptoasset Taskforce Final Report published in October 2018 (see our client alert on this here).
The publication of the Policy Statement has quickly followed the publication of the FCA’s consultation on a proposed retail ban on crypto currency derivatives (see our client alert on this here). The volume of documents published by UK regulatory authorities suggests this has become a high priority.
The Policy Statement – what’s new?
As noted above, CP 19/3 categorised cryptoassets into three types of tokens: (i) exchange tokens; (ii) security tokens; and (iii) utility tokens and set out how these might fall in our outside of the current UK financial regulatory perimeter. The FCA reports that the majority of respondents supported the proposals outlined in CP 19/3. The final guidance published in the Policy Statement is therefore substantively the same as the draft guidance consulted on, save some amendments to improve clarity in a few areas.
In its guidance, the FCA sets out where tokens are likely to be:
- specified investments under the Regulated Activities Order;
- e-money under the E-Money Regulations;
- captured under the Payment Services Regulations; or
- outside of the regulatory perimeter.
The Policy Statement provides greater clarity as to when tokens might be classified as “E-money” and therefore fall within the scope of the regulatory perimeter on that basis. This new category is distinct and therefore separate from the utility tokens and security tokens category.
This provides a clear distinction between: (i) security tokens and e-money tokens, which can be caught by current regulation; and (ii) exchange tokens and utility tokens, which should usually fall outside of the UK regulatory perimeter.
The FCA also uses the Policy Statement as a reminder that it intends to gold plate the UK’s implementation of the Fifth Anti-Money Laundering Directive by extending it to cover initial coin offerings and the transfer of cryptoassets.
Rationale of the FCA’s guidance
In order to protect consumers, the guidance makes clear that firms carrying on certain specified activities in relation to cryptoassets must obtain the appropriate authorisations. This will allow consumers to use services such as the FCA Register to make sure that the firms they are dealing with have the necessary permissions for the regulated activities they are undertaking.
Broadly speaking, the FCA’s guidance will help market participants to understand whether the cryptoassets they use are within the regulatory perimeter.
The Policy Statement sets out the FCA’s guidance on how the current regulatory framework applies to cryptoassets. Although it may not be legally binding, it applies immediately. The FCA states that it is the firm’s responsibility to ensure that it has the correct authorisations for the activities it intends to engage.
As noted above, the FCA has also published its consultation paper on a proposed ban on the sale, marketing and distribution to retail clients of derivatives that reference certain types of cryptoassets. The consultation remains open until 3 October 2019. Should the FCA decide to proceed with the final rules, a final policy statement is expected to be published in Q1 2020.
Finally, Her Majesty’s Treasury is expected to be publish a consultation paper in 2019 exploring legislative change to potentially broaden the FCA’s regulatory remit over cryptoassets.