Latest FCA Guidance From the U.K. an “Indirect Catch-All” of Provisions

The U.K.’s Financial Conduct Authority (FCA) released its final guidance on crypto assets regulation on July 31, 2019, a move welcomed by industry participants who believe that clarification on which crypto asset activities fall under FCA’s jurisdiction will help boost interest and activity in the sector. 

“Lack of regulatory certainty in this sector has often been cited by major institutions as a reluctance to invest, and it is likely that this guidance will be one step closer towards greater interest and activity in the area,” James Kaufmann, a partner at law firm Howard Kennedy, wrote in a statement sent to Bitcoin Magazine. “With over 92 respondents to the consultation paper, there is evidently an extremely broad range of interest in this subject.” 

In January 2019, the FCA released a consultation paper on crypto asset regulation for public comment. 

The final guidance was produced with input and feedback from across the financial services sector and beyond, including banks, trade associations, consultancies, fintechs, token issuers, crypto asset exchanges and academia.

Highlights of the Guidance

In the final guidance, the FCA gives a definition for “security tokens,” which, because they behave like shares or debt instruments and have ownership rights, fall under the category of “specified investments” and within the FCA’s regulatory remit. 

The regulator also defines “exchange tokens,” which are assets like bitcoin and ether. 

“These are not issued or backed by any central authority and are intended and designed to be used as a means of exchange … These tokens are usually outside the perimeter,” the FCA said. Exchange tokens are, however, subjected to anti-money laundering (AML) rules. 

Utility tokens, which grant holders access to a product or service but no rights, might meet the definition of e-money in some circumstances (as could other tokens), and in this case, activities involving them may be regulated, the FCA said. 

Iqbal V. Gandham, chair of CryptoUK, a self-regulatory trade association for the crypto industry and a respondent to the consultation paper, said he was content with the final guidance, noting that it “provides welcome additional clarification to the FCA’s taxonomy of crypto assets and how the existing regulatory perimeter applies to crypto assets.”

In a statement sent to Bitcoin Magazine, Gandham said, “Britain’s crypto asset sector is a key part of the U.K. fintech industry but needs regulatory certainty to reach its full potential.”

Regulatory uncertainties have hampered the growth of the sector in many ways, including hindering crypto companies’ access to banking services, CryptoUK had told Bitcoin Magazine in previous communication.

Pressure to Regulate 

According to Oliver Tonkin, general counsel of BCB Group, a London-based crypto brokerage firm, the final guidance on crypto assets changed relatively little from the draft guidance issued earlier in the year. 

The main change, though, comes in the commentary on stablecoins. 

“In its draft guidance, the FCA was interested in views on whether stablecoins could potentially fall within the regulatory perimeter, either as security tokens or, potentially, e-money,” Tonkin told Bitcoin Magazine. “The FCA guidance makes it clear that, in evaluating whether a stablecoin falls within scope, the structure of any stablecoin will need to be carefully considered. Only where this structure gives a stablecoin features which allow it to fall within the existing statutory definition of e-money will a stablecoin be regarded as such.”

Stablecoins and Libra

Stablecoins have been all the rage over the past year, with a total of 57 stablecoin projects present as of February 2019, according to The State of Stablecoins report by Blockchain. 

Facebook’s Libra digital currency initiative has been undeniably the most controversial of these. 

Set to launch as early as 2020, Libra aims to be a stablecoin fully backed by a reserve of real assets that would allow the platform’s billions of users to make transactions online. 

The project has sparked considerable skepticism among regulators and financial analysts. In Europe, the announcement was met with opposition, with calls for tighter regulation of the company and antitrust measures. Officials have raised concerns over consumer data integrity/privacy, anti-money laundering (AML) and terrorism financing. 

According to Kaufmann, Facebook’s possible entrance into the crypto space is pushing policymakers around the world to move quicker with crypto regulation. 

“It is likely that Facebook’s announcement to launch its Libra digital coin has added pressure to financial regulators at an international level to clarify their thinking on this subject,” Kaufmann said.

Uncertainties Remain

Though the guidance does give some clarity on which crypto assets the FCA regulates and how it plans to do so, there are still many gray areas.

“There are a number of areas, in particular the issue of custody of crypto assets in the same wallet (some of which may be regulated and others not), where the law may have to change to allow the construction of a more bespoke regulatory infrastructure for this market,” Tokin said. “The guidance makes it clear that the FCA is limited by the wording of existing legislation in its room for maneuver in bringing crypto assets more widely into the regulatory perimeter.” 

For Kaufmann, the FCA is using “indirect catch-all provisions” until more time and resources can be spent on crypto asset regulation. 

“Any legislative process required to widen the regulatory perimeter is usually long winded and time consuming, so it is not surprising that the FCA has stated in the guidance that other conduct-based regimes and rules such as Senior Managers and Certification Regime (SMCR) and Principles for Business (PRIN) may apply to firms using unregulated tokens,” Kaufmann said.

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