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Is the FCA's new guidance the first step towards workable cryptocurrency regulation or just a holding pattern for now?

On Wednesday the UK's Financial Conduct Authority (FCA) finally issued its guidance setting out exactly which crypto tokens fall under its jurisdiction.

Although the guidance (based largely on the FCA's consultation paper CP19 issued in January this year) still didn't provide the formal regulatory framework many market participants demand, it does specify which types of crypto assets fall into which of the FCA's existing categories. It also explains that while cryptocurrencies like bitcoin and ether still won't regulated, they must adhere to the UK's anti-money-laundering legislation.

Perhaps more importantly the guidance also confirmed that once issued, security tokens will be viewed as assets (like shares) requiring ownership rights which in turn makes them a 'special investment' and means they now fall into the purview of the FCA. 

Conversely utility tokens won't fall into the FCA's remit as they don't attract the same types rights as regulated financial instruments. That is unless they meet the definition of electronic money and, therefore, fall into the new 'e-money tokens' category.  It was also interesting to note certain stable coins could well fall into the e-money category because if they do, they too would become the FCA's responsibility. 

The guidance goes on to say that in the same way as a company issuing shares doesn't need a licence, a company can launch a security token without a license. However, once those tokens are traded the FCA will need to authorise all of the advisers or brokers involved in that trading. In addition, if a security token goes on to be traded on the capital market it will also need to adhere to the European Union’s Markets in Financial Instruments Directive (MiFID). 

In summary in their accompanying statement the FCA said:

"Market participants should use the Guidance as the first step in understanding how they should treat certain crypto assets, however definitive judgements can only be made on a case-by-case basis.”

As lawyers who specialise in cryptocurrency - and most specifically in resolving disputes relating to the trading of cryptocurrencies - it is the expectation of having to work to this "case-by-case basis" that concerns us.  

We know from experience that the people behind crypto are more than capable of making utility tokens look like security tokens or vice versa to avoid or ensure FCA approval. Similarly, who is ultimately going to sit and work out which stable coins will fall into the new e-money category, which will be deemed as security tokens and which will be allowed to continue as unregulated tokens?

Nick Cook, director of innovation at the FCA recognises that threat but offers no more assurance than they will "always look at the underlying characteristics".  And, despite the widespread media coverage the FCA's new guidance has enjoyed, it was interesting to note the FCA were quick to add further clarity was required. They said e-money tokens needed to be better separated from the utility tokens and security tokens categories to "create a specific regulated e-money token category and an unregulated category that includes utility tokens."

Most worryingly of all though the FCA ended by saying that "if the UK wants to bring more crypto assets into the regularity net, the law has to be changed and that is in the Treasury's gift" which leads us to question just how much this guidance actually adds from a legal perspective. 

If you would like to discuss a case involving the trading of any cryptocurrency or would like to discuss how this guidance may affect cryptocurrency you own or are planning to invest in, please call us today on 020 7792 5649 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it..

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MLA 2017 18 Shortlisted 2