In the UK, the FCA has recently issued a consultation paper on its proposed Guidance on crypto-assets which is open to stakeholders to provide their feedback by April 2019. The objective of the Guidance is to determine the regulatory perimeter within which existing UK laws or implemented EU Directives (such as the MiFID, MAR or Prospectus Directive) will apply to crypto-assets based on the standard categorization of exchange, security and utility tokens.
The Guidance indicates when crypto-assets may be considered “specified investments” under local UK law or “financial instruments” under MiFID II or e-money under Payment Services and Electronic Money Regulations.
The key points of this Guidance can be summarized as follows:
1. Exchange Tokens:
exchange tokens (i.e crypto-currencies such as Bitcoin) remain outside the perimeter of the regulation. This means that the transferring, buying and selling of these tokens, including the commercial operation of crypto-asset exchanges for exchange tokens, are activities not currently regulated by the FCA. But by the end of 2019 the 5th AML EU Directive will be implemented also in the UK and therefore AML obligations will apply to such activities.
2. Security Tokens:
the definition of “security tokens” is to include tokens that meet the definition of a “Specified Investment” under UK law, and possibly also a “Financial Instrument” under MiFID II. For example, these tokens have characteristics which mean they are the same as or akin to traditional instruments like shares, debentures or units in a collective investment scheme.
The FCA does also some useful practical evaluations and reports interesting case studies from their Sandbox experience. For instance:
(a) tokens are equivalent to shares if negotiable on capital markets, but listing on a market is not necessary. It is sufficient that they are transferable. This is the standard MiFID definition. However even if a token is not strictly speaking a financial instrument under MiFID – because it may have restrictions to its transferability – it still may be considered like a “Specified Investment” under UK Law.
(b) if voting rights are attached to a token, they must be directed towards the control of the company. For example, a token that provides its holder with the simple right to vote on future ICOs the firm will invest in, would likely not be considered a security as the voting rights don’t confer control-like decisions on the future of the company.
(c) a token representing a Warrant – a right to subscribe in the future – will be considered a security when it grants the right to subscribe to tokens which, when issued, are themselves considered like securities.
(d) a token conferring rights to tokenized securities is itself likely a security.
(e) a token issued to collect capital from investors – which is then pooled, invested and then yields token holders either interests or a profit participation – is likely either considered as a debenture or a participation in an investment scheme and therefore a security.
3. Utility Tokens:
more importantly, the FCA brings much needed clarity on the most controversial of tokens types, that of utility tokens. The FCA seems to take a residual approach to identify utility tokens. Basically – if the token is neither a security nor e-money – then it may well be a utility token and thereby will fall out of the perimeter. Much like exchange tokens, utility tokens can be traded on the secondary markets and be used also for speculative investment purposes. This fact alone does not necessarily mean these tokens are securities.
Payment Services Regulations apply only to funds which are defined as “banknotes and coins, scriptural money and e-money”, therefore not to crypto-assets.
The standard e-money definition derived from the E-Money Directive applies here to crypto-assets, in the sense that they are to be considered as e-money only if:
- electronically stored;
- with monetary value;
- representing a claim on the issuer;
- issued on receipt of funds;
- issued for the purpose of making payment transactions;
- accepted by persons other than the issuer.
Moreover the PSRs cover each side of the remittance, but do not cover the use of crypto-assets as the vehicle for remittance. Say a remittance service receives fiat from payer to be sent to payee in another currency.
Consequently it converts fiat into a crypto-asset for the purpose of facilitating the transfer internally and finally delivers the sum to payee in another fiat currency. No party had any exposure to crypto-assets here. This is also out of the perimeter.
The Guidelines are a long awaited step in the right direction by the FCA. Particularly when bringing more clarity on the issue of utility tokens or definitely putting exchange tokens outside the perimeter.
On comparative legal issues though, the German expert colleague Nina Siedler – fellow Board Member and Chairman of the Think Block Tank – points towards the differences in token categories between the FCA and the German supervisory authority BaFin.
While the trisection of token categories is the same, the three categories vary in detail. The FCA defines exchange tokens as tokens “not issued or backed by any central authority and […] intended and designed to be used as a means of exchange.”
In contrast, the element of having a decentralised issuer seems of no relevance to BaFin, which classifies this category of tokens as “payment tokens” and defining these as “units of account” which are a “financial instrument” according to German national law (while FCA considers those tokens to be outside their perimeter and expressly stating that they are not units of account). Further deviations arise according to national law for the security token category. This highlights once again the need for an EU wide harmonised token categorisation to create a functional European single market for tokens.