UK Financial Watchdog Launches Crypto Asset Regulatory Consultation

The market watchdog has issued a preliminary guidance, explaining which virtual coins come under regulatory oversight.

The UK Financial Conduct Authority (FCA) launched on Wednesday a public consultation intended to provide clarity on the issue of cryptocurrency regulation. The agency is seeking the opinion of various crypto stakeholders, among them exchanges and wallet providers, regarding a 50-page preliminary guidance. In this document, the FCA explains which types of digital assets and related business are subject to regulatory oversight.

The FCA divides cryptocurrencies into three categories: exchange, security, and utility tokens. The definitions follow a report by the UK Crypto Assets Task Force - a body consisting of the FCA, the Bank of England (BoE), and Her Majesty’s Treasury (HMT).

According to the guidance, exchange tokens are decentralized assets used as means of exchange, and they do not fall within the FCA’s scope. Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) are examples of coins from that category because no central authorities issue them, the regulator says. If a platform offers trading services for exchange tokens only, the company does not need authorization. However, the UK will complete this year the implementation of the European Union’s Fifth Anti-Money Laundering Directive (5AMLD), which enforce obligatory anti-money laundering (AML) rules for crypto-to-fiat exchanges, the FCA reminds.

Also, exchange tokens do not fall under the definition of e-money, but some transactions that involve them may constitute regulated activity, for example, money remittance and cash placement.

Security tokens come under the FCA’s remit because these assets have similar characteristics to traditional financial instruments like shares, units in collective investment schemes, and debentures, the regulator notes. Exchanges, trading platforms, payment services, custody and wallet providers, advisers, brokers, and other intermediaries need authorization if offer security tokens.

“We consider a security to refer broadly to an instrument (i.e., a record, whether written or not) which indicates an ownership position in an entity, a creditor relationship with an entity, or other rights to ownership or profit,” the regulator says in its guidance.

The last category consists of tokens that give users access to blockchain-based products but do not lead to ownership rights. Utility tokens are the same as prepayment vouchers, which are assets outside of the FCA’s remit. However, if utility tokens meet the e-money definition, they come under oversight.

E-money is an electronically stored monetary value with a central issuer accepted by a person other than the issuer, and “issued on receipt of funds for the purpose of making payment transactions,” the FCA explains in the guidance. Stablecoins pegged to fiat currencies like the British pound, the US dollar, or the euro are e-money.

“Miners and transactions processers engaging with decentralized tokens are unlikely to be carrying out regulated activities,” the FCA says.

The consultation is open until April 5, 2019, and stakeholders can say why they agree or disagree with the definitions in the preliminary guidance. The FCA also plans to conduct a consumer survey in the second quarter, and based on the results of both initiatives, the regulator will publish its final guidance with binding decisions in the second half of the year.

The consultation comes in at a significant time for the UK crypto industry as HMT prepares to publish its own consultation on whether and how to have the agency’s legal powers expanded so that more crypto asset come under FCA supervision.

In December, the Financial Action Task Force (FATF) called on the UK to expand its crypto market oversight.

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