The Financial Conduct Authority (“FCA”) has published a consultation paper (“Guidance”) providing guidance on the regulation of cryptoasset activities.
The Guidance implements the first step of the action plan detailed in last year’s report by the Cryptoasset Taskforce (“Taskforce”). This group, which brings together representatives from HM Treasury, the Bank of England and the FCA, is keeping a watching brief on the cryptoasset market. Our blog post on the Taskforce’s initial report is available here.
The FCA seeks responses to the Guidance from interested parties by 5 April 2019 and aims to publish final guidance by summer 2019.
Guidance on FCA Regulation
The FCA repeats the warnings of the Taskforce concerning the volatility and risky nature of cryptoasset products. The Guidance comments on the potential for consumers to experience large and unexpected losses. It also warns of a heightened risk of fraud and scams in connection with the cyrptoasset marketplace. One aim of the FCA’s intervention in this area then, is to help potential investors understand the protection available to them in this small but growing market.
The FCA categorises cryptoassets into three types of ‘tokens’: exchange tokens, utility tokens and security tokens.
Exchange tokens (such as Bitcoin) and utility tokens (which are broadly analogous to pre-payment vouchers) generally are not regulated. However, the report makes clear that these tokens could be caught be the regulatory regime depending on their particular characteristics. They may also come under the definition of ‘e-money’ (in which case, further regulation will apply). Firms need to take a case-by-case approach when considering whether their products are regulated.
The Guidance makes clear that the FCA does regulate security tokens. These tokens meet the definition of a ‘specified investment’ under the FCA regime as they often amount to shares or debt instruments. Therefore, firms carrying out activities in relation to these types of cryptoassets must be authorised by the FCA. If not, they risk criminal prosecution.
As our recent blog explored, the rules on financial promotions are a keen focus for FCA enforcement action. The regulator has used this Guidance as a further opportunity to press home this point. Firms participating in regulated activities involving cryptoassets must avoid poor advertising practices. Firms must warn customers of the risks involved, not overstate the benefits, and be clear which of their products are regulated and which are not.
The Guidance is just the first in a series of actions, which the FCA and other Taskforce authorities will undertake this year in relation to cryptoassets. The FCA regulatory remit could widen further following these upcoming consultations. Legislative change could be on the horizon as the authorities seek more clarity and control.