On January 23, 2019, the UK Financial Conduct Authority (“FCA”) issued its widely anticipated “Guidance on Cryptoassets” consultation paper CP19/3 (the “Consultation”). The Consultation followed the UK Cryptoassets Task Force’s publication last October, which set out the UK’s policy and regulatory approach to cryptoassets and distributed ledger technology and called for the FCA to issue guidance on its regulatory perimeter. The purpose of the Consultation is to provide guidance on the proposed rules that the FCA intends to implement in relation to cryptoassets and to provide market participants with the opportunity to provide initial feedback.

Amongst other things, the Consultation provided some helpful clarification as to where cryptoassets would fall within the FCA’s regulatory perimeter.

Which cryptoassets are within the FCA’s regulatory perimeter?

The FCA’s guidance clarifies whether different types of cryptoassets would fall within the FCA’s regulatory scope and, in particular, outlines whether cryptoassets are likely to fall within one or more of the following categories:

This is relevant because if a cryptoasset falls within one of the above categories, it could mean that the relevant firm carrying out certain activities in relation to cryptoassets is engaging in a regulated activity. Firms that carry on regulated activities in the UK are required to obtain authorisation from the FCA in order to do so.

In addition, the FCA has highlighted that, while issuers of tokens may not need to be authorised themselves, other regulatory requirements may apply (e.g., under the UK financial promotion regime and/or the Prospectus Directive (2003/71/EC)).

In this respect, the FCA has stated the following in its Consultation:

  • “security tokens” (which the FCA defines to be a token which has the specific features of a typical security such as a share, debenture or unit in a collective investment scheme) are likely to fall within the definition of a “specified investment” and therefore fall within the FCA’s regulatory scope; and
  • on the other hand, “exchange tokens” (such as Bitcoin, Ether or Litecoin) and “utility tokens” (which grant holders access to a current or prospective product or service but do not grant holders rights to profit or ownership) would be unlikely to constitute a “specified investment”.

The FCA also stated in its Consultation that, while exchange tokens and utility tokens would probably not amount to a “specified investment”, they may still be brought into the FCA’s regulatory perimeter under the PSRs or EMRs depending on the specific features of the tokens.

The FCA ultimately reminded firms that due to the complexity of many tokens, firms should consider a number of factors to determine if the relevant token is a specified investment. Ultimately, this can only be assessed on a case by case basis and legal advice should be sought.

Impact on Firms

The Consultation provides some welcome clarity as to when cryptoassets may fall within or outside the FCA’s regulatory scope.

Firms that carry on cryptoasset business which is within the regulatory scope of the FCA will need to seek authorisation to carry on the relevant regulated activities. In addition, where a cryptoasset is a transferable security and will be either offered to the public in the UK or admitted to trading on a regulated market, the issuer would need to publish a prospectus approved by the FCA, unless an exemption applies.

Next Steps

The Consultation will remain open until April 5, 2019, with the FCA aiming to provide final guidance in summer 2019. HM Treasury is also expected to publish a consultation paper in early 2019 on exploring legislative change to potentially broaden the FCA’s regulatory remit to bring further types of cryptoassets within its regulatory scope.

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Photo of Amar Unadkat Amar Unadkat

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients…

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients on issues relating to the Alternative Investment Fund Managers Directive (“AIFMD”), the second Markets in Financial Instruments Directive (“MiFID II”), as well as the latest ESG developments. Amar also focusses on UK regulatory compliance matters, including the FCA’s change of control regime, the appointed representative regime and the Senior Managers & Certification Regime.

Amar’s clients include private equity firms, investment managers and advisers, firms in the FinTech space, wealth management businesses, banks and sovereign wealth funds.

Photo of John Verwey John Verwey

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients…

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients that range from small start-up fund managers to established global fund advisers and managers.

A particular area of focus for John is Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II).  This includes advising on pre-marketing and marketing strategies for fund managers, advising on the Level One and Lever Two requirements under AIFMD and implementing UK rules and legislation, and advising on the organizational and conduct of business requirements under MiFID II.