On 23 January 2019, the FCA published Consultation Paper 19/3 (CP19/3) concerning guidance on cryptoassets. Within the UK Cryptoasset Taskforce’s report of October 2018, the Taskforce set out a commitment to provide extra clarity to firms about where current cryptoasset activities are regulated. The FCA is consequently consulting in CP19/3 on guidance to fulfil that commitment.
CP19/3 targets firms trading, exchanging, holding and creating crypto assets such as coins or tokens, and individual investors.
The guidance focuses on where cryptoassets interact with the FCA’s perimeter. In particular, it looks at where cryptoassets would be considered ‘Specified Investments’ under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), ‘Financial Instruments’ such as ‘Transferable Securities’ under the Markets in Financial Instruments Directive II (MiFID II), or captured under the Payment Services Regulations (PSRs) or the E-Money Regulations (EMRs). It also covers where cryptoassets would not be considered ‘Specified Investments’ under the RAO.
In chapter 2 of CP19/3, the FCA sets out the wider context of the consultation, explaining the key concepts related to cryptoassets and the cryptoassets market. The perimeter guidance is set out in chapter 3.
Within the chapter 3 guidance, the FCA uses the framework developed by the Cryptoasset Taskforce for different types of cryptoassets, explaining whether they are within the FCA’s regulatory remit, and if so, what this means for market participants. A Q&A section is provided setting out the common questions that the FCA is asked with regards regulation and specific cryptoassets. The key cryptoassets addressed within CP19/3 are:
- exchange tokens;
- security tokens; and
- utility tokens.
With regards Brexit, if a Withdrawal Agreement is ratified an implementation period is intended to operate from 29 March 2019 until at least the end of December 2020. During this time, EU law will still apply in the UK. Obligations derived from EU law will continue to apply and firms must continue with implementation plans for EU legislation that is still to come into effect before the end of December 2020. The FCA notes that while important for all firms, including those carrying on cryptoasset activities, upcoming legislation such as the transposition of the Fifth Anti-Money Laundering Directive (5AMLD) is relevant – especially for firms using exchange tokens.
The impact of CP19/3 is that currently unregulated crypto-related businesses will need to seek authorization under such regimes as MiFID II, while some of those that will remain unregulated after the review, such as crypto exchanges, will still have to comply with 5AMLD once transposed into UK law. Later this year the FCA will consult on banning the sale of derivatives linked to certain types of cryptoassets to retail investors. The Government is planning to consult on whether to expand the regulatory perimeter to include further cryptoasset activities.
The deadline for responses to the CP19/3 is 5 April 2019.
A client briefing note on CP19/3 will be published shortly.