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FCA Issues Final Guidance on Cryptoassets2nd August 2019 Corporate
Earlier this year, the FCA issues a consultation paper on how cryptoassets should be regulated. On 31 July it released its final guidance on the issue.
Broadly the results of the consultation agreed with the FCA’s initial assessment of the regulatory status of cryptoassets, but importantly has made some drafting changes to make it easier to determine what regulatory category a cryptoasset will fall into and as a result whether or not it is subject to FCA regulation.
In its consultation paper, the FCA divided cryptoassets into “exchange tokens„, “utility tokens„ and “security tokens„. While the position with respect to “security tokens„ was clear in the consultation paper, it could be difficult in practice to determine whether a token was an exchange token or a utility token. In particular, the definition of exchange token suggested that they should “not be issued or backed by any central authority„. This created issues as many new tokens are issued by a central issuer, but satisfy all of the other criteria for treatment as an exchange token.
The FCA has now re-categorised cryptoassets as “security tokens„, “e-money tokens„ or “unregulated tokens„.
Security tokens, much the same as before, are those tokens that provide rights and obligations akin to specified investments as set out in the Regulated Activities Order, excluding e-money. These tokens are within the FCA’s regulatory perimeter.
E-money tokens, which is a new category of token capturing any token that reaches the definition of “e-money„ in the E-money Regulations 2011. Like any other e-money, these tokens are subject to the E-money Regulations and firms must ensure they have the correct permissions and follow the relevant rules and regulations. These tokens fall within the FCA’s regulatory ambit.
Unregulated tokens, are to any token that does not fall within the definition of security token or e-money token. These fall outside the FCA’s perimeter, and the definition captures broadly those tokens categorised as “exchange tokens„ or “utility tokens„ in the consultation paper.
The updated categories are much clearer and should assist cryptoasset issuers, exchanges and investors in determining the correct treatment of their tokens. However, issuers should always take advice on the regulatory status of their assets, as ultimately it’s the particular structure of their tokens and the rights of token holders which will determine the question. John Young in our London office regularly advises cryptoasset issuers on these issues and others.
Please note this is not legal advice.