The Financial Conduct Authority (FCA) has published its Final Guidance setting out which cryptoassets and related activities it regulates and which tokens it will be responsible for. This follows the release of a draft statement and a consultation period which closed earlier this year.
The Guidance is intended to help businesses identify whether or not the cryptoassets they use fall under FCA regulation. It aims to alert them to pertinent issues as well as helping them understand whether they need to be authorised and what rules or regulations apply to their activities and what they need to do to ensure compliance. The FCA has nevertheless recognised that it can be a difficult exercise to identify with a cryptoasset is regulated or not and has stated that it should be done on a case-by-case basis.
In line with the earlier reports of the Cryptoasset Taskforce, the FCA has categorised cryptoassets into three types of tokens, namely security tokens, utility tokens and exchange tokens, although it has stressed that these categories of tokens are not intended to be mutually exclusive or exhaustive. The Guidance has clarified which tokens will be regulated as they will likely be ‘specified investments’ under the Regulated Activities Order, financial instruments under MiFID II, e-money under the E-Money Regulations and/or payment services under the Payment Services Regulations.
Security tokens, which, very broadly speaking, are a blockchain verified ‘share’ of an underlying asset, are categorised as ‘specified investments’ and will be regulated. Utility tokens, which are usually purchased within a blockchain ecosystem in exchange for access to a product or service, will generally fall outside the regulation unless they meet the required definition of electronic money or payment service. Exchange tokens are perhaps the most well-known tokens as these cover the cryptocurrencies, including Bitcoin and Ethereum amongst others. Again, these are generally not regulated by the FCA unless they meet the required definition of electronic money or payment service. It should be noted that being outside the regulation in this context does not mean that there is no applicable regulation at all as there remains a need to comply with anti-money laundering regulations.
The FCA has stated that the protection of consumers and market integrity are a key part of its objectives and so it also used the publication of the Guidance as an opportunity to warn consumers of the risks of investing in cryptoassets. It generally advised consumers to be cautious and be sure that they “understand and can bear the risks involved”. It went on to particularly highlight the risks of unregulated cryptoassets. It considered that consumers were often unaware that the lack of regulation meant that holders of such cryptoassets had more risk as certain protections, such as the Financial Services Compensation Scheme and recourse to the Financial Ombudsman Service, would not be available to them.
The FCA has acknowledged that this is a constantly evolving sector and so while the additional clarity that comes from this Guidance should be welcomed, it may not last for long. Businesses operating in the cryptoasset market will continue to need to keep a close eye on regulatory developments and in particular the progress and subsequent outcome of the HM Treasury consultation on whether further regulation is required.