FCA finalises guidance on cryptoassets and consults on product intervention measures.
By Stuart Davis and Charlotte Collins
FCA guidance on the regulation of cryptoassets
As previously reported in this blog, the FCA consulted on guidance on cryptoassets in January 2019. This guidance is designed to help market participants understand how to classify different types of cryptoassets, within the existing regulatory framework. Although the guidance is not able to give definitive answers, and every cryptoasset must be assessed against the guidance based on its own particular features, this publication helps to create a much greater degree of clarity as to how the assessment ought to be performed, and which features are determinative for these purposes.
The FCA published its final guidance in PS19/22 on 31 July 2019. The guidance is substantially the same as that consulted on, save that the FCA has sought to reframe its taxonomy of cryptoassets to help market participants better understand which types of token are regulated. The FCA has included a new category of regulated tokens that constitute e-money, “e-money tokens”, rather than including e-money tokens within the utility tokens category. This provides a clearer distinction between regulated security tokens and e-money tokens on the one hand, and unregulated tokens (utility tokens and exchange tokens that do not fall within the above categories) on the other. However, the final guidance as to whether a token will constitute an e-money token has not changed from the draft version. The FCA has also provided further guidance on so-called “stablecoins”, and on when particular types of token might constitute e-money or securities. The FCA confirms that this determination will depend on the design and rights associated with a specific stablecoin and, therefore, requires a case-by-case assessment.
The FCA has also confirmed that a specified investment is not contingent on it being purchased for value and a token can be a security even if nothing is received for it. This means that so-called “air-drops” do not fall outside the scope of the regulatory perimeter if they would otherwise fall in scope.
The FCA highlights in its feedback that, if an authorised firm carries on activities relating to cryptoassets that fall outside the regulatory perimeter, certain parts of the regulatory regime may still apply in respect of those activities. Most notably, the FCA’s Principles for Businesses, and the Senior Managers and Certification Regime (SMCR). The FCA has previously taken enforcement action against regulated firms for breaches of the Principles in relation to unregulated activities, so authorised firms should not assume that such activities are beyond the FCA’s remit. Further, the individual conduct rules under the SMCR apply in respect of both regulated and unregulated activities. Consequently, conduct by individuals within authorised firms in relation to unregulated cryptoassets that falls below expected standards could amount to a breach of the conduct rules.
FCA product intervention measures for derivatives referencing cryptoassets
The FCA also published a Consultation Paper (CP19/22) in July 2019 on restricting the sale to retail clients of investment products that reference cryptoassets. This consultation fulfils the commitment the FCA made in the Cryptoassets Taskforce final report to consult on such measures.
In the consultation, the FCA proposes to ban the sale, marketing, and distribution to all retail consumers of derivatives and exchange traded notes (ETNs) that reference certain types of cryptoassets.
The FCA is proposing to apply the ban to products referencing unregulated, transferable cryptoassets. The intention is to capture products referencing tokens that are:
- Not specified investments or e-money;
- Are capable of being traded on or transferred through any platform or other forum; and
- Are not limited to being transferred to the issuer or a network operator in exchange for a good or service
The ban seeks to capture both exchange tokens and utility tokens, but would not capture security tokens or e-money tokens (to use the taxonomy in the new FCA guidance). In this context, “referencing” cryptoassets should be taken to include derivatives that use an index or benchmark price for tokens within the contract, as well as those using a single price from a cryptoasset trading platform.
The ban would have a broad geographical scope, as it would apply to products sold, distributed, or marketed in or from the UK to UK retail clients. This would include sales to UK retail clients by EEA firms, including situations in which clients seek products via reverse solicitation. This would also prevent UK brokers or platforms marketing and distributing products available in other jurisdictions to UK retail clients. However, retail clients could still seek products from a third country firm via reverse solicitation. Firms should note that this broad geographical scope does not align with the scope of the FCA’s new product intervention measures relating to CFDs more generally, which do not apply to EEA firms if they are approached by the client directly.
The consultation acknowledges that most of the current derivative products in the UK market that reference cryptoassets would be caught by the CFD measures. However, the FCA is concerned that the market for other products could grow, and wishes to intervene at an early stage.
The guidance applies immediately. The FCA states that it expects market participants to take the guidance into consideration when carrying on business in the UK, in conjunction with the existing perimeter guidance in the FCA Handbook.
While the guidance is certainly helpful, it does not address the policy question as to what should, or should not, be regulated, as this is not within the FCA’s jurisdiction. The FCA can only provide guidance on how it believes the current perimeter applies to cryptoassets. HM Treasury is expected to launch a consultation on potential changes to the regulatory perimeter relating to cryptoassets during 2019. This will explore the more fundamental question as to whether there needs to be any change to the law in the UK in response to the growth of cryptoassets. The FCA notes that feedback to its consultation will help inform HM Treasury’s work.
The FCA is accepting feedback on its proposals relating to product intervention measures for derivatives referencing cryptoassets in CP19/22 until 3 October 2019 and will seek to publish a Policy Statement and final rules in early 2020.
A further cryptoasset-related workstream is the UK’s implementation of MLD5, which will bring more industry players within the scope of the UK’s AML requirements. HM Treasury consulted earlier this year on gold-plating the requirements relating to cryptoassets, potentially bringing more firms within scope than required by the EU rules. HM Treasury also announced that the FCA will be the supervisor for the AML regime relating to cryptoassets. The FCA plans to publish a consultation later this year, setting out its proposed approach.
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