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PS19/22 Guidance on Cryptoassets

FCA Final Rules: Which Cryptoassets Activities are Regulated?

5th August 2019

The Regulatory Perimeter: Cryptoassets

The FCA has now published feedback and final guidance entitled PS19/22: Guidance on Cryptoassets. This follows on from their January Consultation CP19/3 and the Cryptoassets Taskforce’s final report that was published last year. In addition to the Final Rules & Guidance, the regulator has also published a Q&A which supplements their guidance.

The FCA noted that the majority of respondents to the consultation supported the proposals outlined in CP19/3 and therefore the final guidance has being published as consulted upon, with additional clarifications on what is and what is not regulated, particularly with regard to cryptoassets that fall inside the regulatory perimeter.

Click here to view PS19/22: Guidance on Cryptoassets.

PS19/22: Guidance on Cryptoassets

Published on 31 July 2019, the FCA’s Finalised Guidance sets out the cryptoassets activities that are regulated and will therefore help firms to better understand whether their activities fall under FCA regulation.

As a result Firms will have a greater understanding of if they need to be authorised and what they need to do to ensure they are, and remain, compliant with the regulator’s rules.

Which cryptoassets activities are regulated?

In order to fall within the FCA’s regulatory perimeter for cryptoassets activities, a person must be carrying out a ‘specified activity’ in relation to a ‘specified investment’. The FCA Guidance helps to clarify whether different types of cryptoassets shall constitute a ‘specified investment’ and therefore fall within the regulations.

In discussing the various types of cryptoassets, the FCA refers to the following unregulated ‘tokens’ i.e. assets that are not recognised as legal tender:

• Exchange tokens: these type of tokens typically do not grant the holder any rights associated with specified investments and are decentralised where there is no central issuer obliged to honour any contractual rights. Examples of exchange tokens include Bitcoin, Ether, and XRP, which the FCA inform fall outside of the regulatory perimeter.
• Utility tokens: these tokens provide consumers with access to a current or prospective service or product, similar to a pre-payment voucher, and which fall outside the regulatory perimeter.

However, the following types of tokens may fall within the regulatory perimeter:

• Security tokens: These are tokens that provide rights and obligations akin to specified investments other than e-money (e.g. shares). The FCA considers that whether these fall within the regulatory perimeter will depends on the function of the token (irrespective of the labelling of a token in a whitepaper).
• Electronic-money or E-money tokens: The FCA informs that e-money tokens, which meet the definition of e-money under the Electronic Money Regulations 2011 (EMRs) will fall within the regulatory perimeter.
• Stablecoins: These are described as tokens stabilised through being backed by fiat currency, cryptoassets, other tangible assets, algorithms, or a combination of these and may fall within or remain outside the regulatory perimeter subject to their structure and the stabilisation method used.

The FCA’s Guidance has been welcomed by the industry since it provides long awaited clarity for market participants and helps both new and established companies to understand the regulatory treatment of cryptoassets and their own firm’s regulatory obligations when carrying out activities in respect of so-called crypto-assets.

When issuing their Guidance, the FCA have also reminded consumers to be mindful when considering to invest in unregulated cryptoassets, such as exchange tokens (Bitcoin, Ether, XRP etc) since they will not be covered by the Financial Services Compensation Scheme and consumers will not have recourse to the Financial Ombudsman Service.

The FCA also advises that Consumers should be cautious when investing in such cryptoassets and ensure they understand and can bear the risks involved with assets that have an intrinsic value.

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