The Financial Conduct Authority (FCA) of UK has published “Guidance on Cryptoassets” consultation paper on January 23, 2019. In this 50-page long financial document, the authority has offered the guidelines to clarify the regulatory provisions prevailing in the cryptoassets space. The document has important implications for a variety of stakeholders including crypto exchanges, financial advisors, and customers. To further improve the regulations, the FCA has invited feedback from the stakeholders which can be submitted until April 5, 2019; following which the regularity authority will finally come up with a policy statement outlining the contours of the cryptoassets regulations.
Categorization of Cryptoassets
The report fully recognized that cryptoassets can take one or another form but still for the classification purpose, it has divided the cryptoassets into three broad categories of tokens- exchange tokens, security tokens, and utility tokens. To determine the category of the token, FCA will adopt a case-by-case approach and has clarified that the categories of tokens are not mutually exclusive and one token pertaining to one category at one point in time can be considered as another kind of token during the later point in its life cycle.
Exchange tokens, the very first kind of tokens, are the tokens which can be used directly for the exchange purposes. These tokens are not backed or issued by the central authority, and the paper noted that although exchange tokens are valid for exchange purposes, these are not a legal tender in the UK and hence, cannot be considered to be legitimate money or currency. The exchange tokens, as of now, do not fall under the regulatory purview of the FCA.
The characteristics of security tokens put them at par with other financial instruments like shares and debentures. The security tokens come under the purview of the FCA as they meet the definition of the specified investments as per the regulatory activities provisions of the agency. The security tokens can be safely considered as transferable securities, and they also meet the criteria of being considered as a specified investment under the RAO. Utility tokens, the third and last category, can be used to access the products or services, but they cannot be considered to be the same as the securities. The FCA has no control over the utility tokens until and unless these tokens meet the criteria of being considered as e-money.
Other important observations from the regulator noted that the exchange category of tokens consisting of coins like Bitcoin and Ethereum cannot be categorized as e-money because the central agency does not issue these and they do not represent any claim against the issuer. Stablecoins, on the other hand, could fall under the category of e-money as their value is pegged to fiat currency.