UK Regulator FCA Clarifies Crypto Guidelines with Updated Consultation Paper

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    The United Kingdom Financial Conduct Authority (FCA) has released a fresh consultation paper on cryptocurrencies to clarify its regulatory scope on the industry called “Guidance on Crypto”. The paper is an 

    Dubbed the consultation paper is an update to similar guidelines published in January earlier this year and Most of the rules from January were simply issued in the new report called Guidance on Cryptoassets – Feedback and Final Guidance to CP 19/3

    The updated paper, influenced by 92 industry players who provided feedback, is not a drastic alteration to the regulatory environment for crypto – but rather categorises the tokens into different sections. 

    “This is the latest in a string of regulatory developments in the crypto markets,” stated Herbert Sim, Head of Business Development from Broctagon Fintech Group

    “The guidance outlines that cryptos have no intrinsic value as they are not guaranteed by an underlying asset. Although not a ban, it’s a move in that direction. This lack of enthusiasm is shared by several countries; the US with its scrutiny of Libra, and India, who are looking to implement a similar ban on cryptocurrencies which are not state-regulated. These movements could end up coming back to bite. The international competition on cryptocurrencies is heating up and there are huge risks in being left behind.”

    He added that the Chinese central bank, for example, sees a market opportunity in crypto and has written an article outlining its benefits.

    “By loosening up on crypto and championing Bitcoin, it appears to see an opportunity to get ahead of the game and take up a leading position in one of the key asset classes of the future.”

    “China’s central bank is even throwing itself into the crypto race by consolidating and creating a new digital currency. This may go on to rival that of Facebook’s stifled Libra, particularly considering Facebook is not permitted in China. Although a certain level of regulatory scrutiny is wise, other countries should consider taking China’s lead and seizing their own opportunities – or risk being left behind.”

    The regulatory treatment of cryptoassets will not change: 

    • Security tokens: this category does not change materially from the Guidance that we consulted on and refers to those tokens that provide rights and obligations akin to specified investments as set out in the RAO, excluding e-money. We have now specifically removed e-money from the definition of a security token, to create a separate category. These remain within the regulatory perimeter.
    • E-money tokens: this category refers to any token that reaches the definition of e-money. These tokens are subject to the EMRs and firms must ensure they have the correct permissions and follow the relevant rules and regulations. This category formerly sat within the utility tokens category. These tokens fall within regulation.
    • Unregulated tokens: this category refers to any token that does not meet the definition of e-money, or provides the same rights as other specified investments under the RAO. This includes tokens referred to as utility tokens and exchange tokens.
      • These tokens can, for example, be issued centrally or be decentralised, give access to a current or prospective good or service in one or multiple networks and ecosystems, or be used as a means of exchange. They can be fully transferable or have restricted transferability. These tokens fall outside the regulatory perimeter.

    The FCA states in the paper:

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

    Aries Wang, CEO, and Co-Founder of Bibox, the AI-enhanced, encrypted digital asset exchange, said:

    “In an ideal scenario, all firms dealing with crypto assets should be enforcing a degree of self-regulation, however, a defined regulatory perimeter for those involved with the issuance, creation or trading of crypto assets will help to keep the industry in line. The FCA is by no means driving regulatory change but as an influential force in the European market, we foresee the typology and guidance being rolled out as an industry standard.”

    “The paper critiques a supposed inherent intention to remove token holder rights in the case of what the FCA categorizes as “exchange tokens”, the umbrella term for cryptocurrencies, crypto coins, and payment tokens. While exchange tokens, including Bitcoin and Ether, fall outside of the remit of the FCA citing concern for consumer protection, little consideration was given to the vast benefits to users who have lost faith in traditional market mechanisms in ensuring market integrity and entirely dismissing the role of 5AMLD (Anti Money Laundering Directive).”

    “Clarification from financial authorities is vital for both protecting consumers and keeping players in check, yet the lack of understanding of DLT is apparent in this still somewhat cloudy and tentative guidance.”

    Charles Phan, Founding Engineer of Interdax, the all-in-one cryptocurrency exchange providing a safe, secure, and more efficient platform to the masses through innovative derivatives contracts, added:

    “Given how the FCA has listened to the industry about which tokens to regulate, actively seeking industry feedback, it is unfortunate they have taken a blanket approach regarding crypto derivatives. Crypto derivatives are a field ripe with innovations benefitting the retail investor and it would be unfortunate for UK firms to be excluded due to events experienced in the regulated financial world.”

    “While the guidance seems sensible and aligned with the approach taken in several other countries, their proposed ban of derivatives built on top of the “exchange tokens” seems excessive, ill-suited and could simply push innovation overseas. These products will continue to thrive in the coming years to potentially become the most valuable niche of the crypto ecosystem, replicating what happened in the traditional markets. If the FCA is too stringent on in-demand crypto assets, it risks further isolating itself from a rapidly growing and highly fruitful market.”

    Filipe Castro, Co-Founder, and CIO at UTRUST, the cryptocurrency payment solution offering instant transactions, buyer protection, and crypto-to-cash settlements, stated:

    “By issuing its final guidance on crypto assets, the UK Financial Conduct Authority has clarified its position on which token categories fall within its jurisdiction.”

    “FCA’s classification considers 3 main types of tokens: Security, E-Money and Unregulated tokens. This a very positive development, representing a balanced and pragmatic approach to the ecosystem with clear guidelines. Furthermore, the consideration of a separate category for e-money payments tokens highlights the growing market demand for this segment, by acknowledging that “certain utility tokens can also be used to facilitate regulated payments, particularly where their volatility has been stabilized.” This is likely to further attract blockchain start-ups to consider the UK as a favorable place to develop their technology and products.”

    Iain Wilson, Advisor to NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, said: 

    “Repositioning the token taxonomy to distinguish security tokens from e-money tokens is positive; regulation for securities should be structured differently from payments. The overall guidance provides a framework for distinguishing between regulated and unregulated tokens, as well as detailing the firm and individual activities that fall within the scope of FCA Authorisation. Whilst some survey respondents continue to look for global regulatory harmonization, we feel that this is unlikely in the foreseeable future.”

    Kicking off in August 2019 the FCA will restrict non-crypto CFDs and then starting in September 2019 for non-crypto CFD-like options. The FCA perspective on how to deal with derivatives with underlying crypto-assets is more or less a total ban but the public consultation ends October 3, 2019.

    The proposed ban on crypto derivatives for retail investors, including options, futures, contracts for difference (CFDs) and exchange-traded notes with underlying (unregulated) cryptoassets like bitcoin, is perhaps the most controversial move by the FCA.