May 26, 2020

To Regulate Or Not To Regulate? That Was The Question: UK FCA Provides Its Final Guidance On Regulation Of Crypto-Assets

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.

Co-Authored by Rebecca Gill

Copyright 2020 K & L Gates


About this Author

Jim Bulling, KL Gates, financial services lawyer, funds management attorney

Mr. Bulling's practise focuses on banking and financial services and he acts for a range of entities in the financial services and funds management industry. His clients include Australian and international investment managers, banks, trustees of superannuation funds, wholesale and retail investment trusts, funds management companies and financial planning groups.

His main areas of focus include banking and financial product disclosure issues, financial services compliance issues, financial product distribution issues and superannuation and...