On 18 January 2022, HM Treasury set out its response to its July 2020 consultation seeking to bring certain cryptoassets into the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). The consultation set out a proposed definition for qualifying cryptoassets, to be brought into the scope of the FPO as a controlled investment. The definition proposed in the consultation set out several criteria for a qualifying cryptoasset, including that it was fungible, transferable, not electronic money, and not a currency issued by a central bank or public authority.
In chapter 4 of the response HM Treasury covers, in light of the responses received to the earlier consultation, how the government intends to define qualifying cryptoassets for the purposes of the FPO, such that they fall within scope of the regime, and how the relevant controlled activities and exemptions will be amended to apply to qualifying cryptoassets.
Definition of qualifying cryptoasset
The scope of ‘qualifying cryptoasset’ in the response is any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. HM Treasury intends to exclude from this other controlled investments, electronic money under the Electronic Money Regulations 2011, and central bank money. The final drafting for the definition is still under development. Any eventual legislation is intended to be accompanied by any necessary FCA rules or guidance appropriate for the regime.
The government intends to include a ‘transferability exclusion’ within the definition of qualifying cryptoasset and this will exclude tokens such as travel passes, lunch passes, and supermarket loyalty schemes that are cryptographically secure from the regime. The government’s view is that the inclusion of this additional limb in the definition will clarify the types of transferable tokens that are in scope.
The government has decided to retain fungibility in the definition of qualifying cryptoassets, leaving non-fungible tokens out of scope, for a number of reasons.
The government notes that ‘hybrid token’ is not a regulatory classification under the FPO and the question of how the FPO regime applies to such tokens will be determined by the classification made at the time the promotion is made. In any case, the government expects that promotions in relation to these tokens would be within scope as either relating to a qualifying cryptoasset or as another controlled investment.
The government is removing the reference to distributed ledger technology from the definition of qualifying cryptoassets. The government’s thinking is that this will future-proof the definition for innovations in the underlying technology that cryptoassets utilise. This technology agnostic definition is in line with the definition proposed by the government in its consultation on the regulatory treatment of stablecoins.
Following the consultation, the government continues to judge that there is not a case for adding any new controlled activities to the FPO.
The consultation proposed to amend several FPO controlled activities to apply to qualifying cryptoassets. These activities were: dealing in securities and contractually based investments; arranging deals in investments; managing investments; advising on investments; and agreeing to carry on specified kinds of activity. It is the
government’s view that these controlled activities provide substantial coverage of the activities conducted by cryptoasset businesses. The government is seeking only to amend activities where strictly relevant to cryptoasset businesses, in order to avoid unnecessary and disproportionate amendments to the regulatory perimeter.
The government believes that, in various instances, DeFi may be in scope. Whether certain cryptoasset lending activities or decentralised finance platforms are within scope of the regime ultimately depends on the activities being carried out and promoted.
Exemption to the FPO
The government has decided not to add a new exemption into the FPO that carves out from the regime any promotions that simply state that a vendor is willing to accept or offer qualifying cryptoassets in exchange for goods and services. The government’s assessment is that such statements would not constitute an inducement to enter into investment activity, and would therefore be out of scope of the regime in any case.
The government intends to put in place a suitable transitional period (approximately six months) from both the finalisation and publication of the proposed FPO regime and the complementary FCA rules