To regulate or not to regulate? That was the question: UK FCA provides its Final Guidance on regulation of crypto-assets

By Jim Bulling and Rebecca Gill

The UK Financial Conduct Authority (FCA) has released its Feedback and Final Guidance (Guidance) on crypto-assets, specifying when certain types of crypto-assets fall under existing categories. The Guidance is in response to the FCA’s consultation paper from January 2019 on crypto-assets. As we have previously blogged, the consultation paper looked at whether crypto-assets could be considered ‘specified investments’ under the Regulated Activities Order (RAO) and other instruments, and therefore should be regulated.

While the Guidance does not differ significantly from the consultation paper, it clarifies that security tokens and e-money tokens will be regulated, with all other tokens remaining unregulated, for the following reasons:

• Security tokens: given that these tokens provide rights and obligations akin to specified investments under the RAO, they will be regulated.
• E-money tokens: this new category is for tokens that meet the definition of e-money under the UK’s Electronic Money Regulations and will be regulated accordingly. These tokens include some forms of stablecoins.
• Exchange tokens: these tokens have been determined to fall outside the FCA’s regulatory perimeter, notwithstanding some respondents expressing concerns over consumer harm.
• Utility tokens: as with exchange tokens, utility tokens will remain to be unregulated.

Certain activities that use unregulated tokens may nevertheless be regulated, for example when they are used to facilitate regulated payments. Further, the Fifth Money Laundering Directive will bring in an AML regime for exchange tokens.

Whilst the Guidance is a policy statement, market participants should use it as a basis for understanding how certain crypto-assets will be treated by the FCA. The FCA’s views in the Guidance may not be binding, but may be a persuasive factor in determining litigious outcomes and a participant’s compliance with the law.

Now is the time for market participants to start reviewing their business activities which involve crypto-assets and consider whether those activities will be subject to regulation which may require authorisations or registration.