Shearman & Sterling LLP | FinReg | UK Regulator Provides Guidance on Regulatory Perimeter and Crypto-Assets
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  • UK Regulator Provides Guidance on Regulatory Perimeter and Crypto-Assets
    07/31/2019
    The U.K. Financial Conduct Authority has published a Policy Statement and final Guidance on Crypto-assets. The Policy Statement summarizes the feedback received to the FCA's consultation on draft Guidance and sets out the FCA's response to that feedback. The final Guidance is, for the most part, the same as that on which the FCA consulted, except the FCA has made some drafting changes to provide further clarity and has added some guidance on stablecoins and airdrops. In addition, the FCA has revised the taxonomy by making a distinction between: (i) unregulated tokens, which are exchange tokens and utility tokens; and (ii) regulated tokens, which are security and e-money tokens.

    The Guidance is intended to clarify the FCA's expectations for firms carrying on crypto-asset activities within the U.K. by providing insight for market participants on whether certain crypto-assets are within the FCA's regulatory perimeter or are otherwise regulated. The FCA highlights that the Guidance should be used by firms to understand the regulatory status of their crypto-asset activities, but assessing whether a crypto-asset or related activity is within the regulatory perimeter can only be done on a case-by-case basis. Firms should also refer to the FCA's Perimeter Guidance Manual (PERG) in its Handbook, and where firms need further clarification, they should contact the FCA and/or obtain external legal advice.

    The Guidance provides an overview of the U.K. regulatory perimeter and discusses relevant concepts, such as "by way of business." It also refers to the territorial scope of the regulatory perimeter, referring to the detailed guidance in PERG and highlighting that where part of an activity is carried on outside the U.K., a firm may still be carrying on a regulated activity in the U.K. The Guidance clarifies that a firm may require authorization if:
    1. The firm carries on a specified activity by way of business in the U.K. involving a crypto-asset that is a specified investment (security tokens or e-money tokens);
    2. The firm issues e-money tokens;
    3. The firm uses a token to facilitate regulated payment services.

    The Guidance reminds firms that issuers of tokens may not need to be authorized, but that certain other requirements may apply, such as the prospectus and transparency requirements. Market participants are also reminded that the financial promotion prohibition and rules apply to crypto-assets. In particular, financial promotions for regulated and unregulated products and services must be clear, fair and not misleading and firms must make clear in any financial promotion the activities for which they are regulated and should not communicate in any way that their authorization applies to any unregulated crypto-assets.

    The Guidance provides the FCAs current view on how different types of crypto-assets may fall within the regulatory perimeter, using three different categories. These are:
    • Exchange tokens.  These tokens are currently outside of the regulatory perimeter and firms may transfer, buy, sell and operate crypto-asset platforms for these tokens without needing authorization.

    The FCA highlights that HM Treasury's consultation on transposing the EU Fifth Money Laundering Directive into U.K. law proposes a wider scope than the EU Directive and would introduce anti-money laundering obligations for entities involved in crypto-assets, including exchange tokens. 5AMLD is due to be transposed into U.K. law by January 10, 2020. Although the FCA would be the regulator for those AML obligations, it would not change the regulatory perimeter status of the tokens.

    In addition, the FCA notes that some of the FCA rules for regulated firms may apply to those firms' unregulated activities. For example, the conduct rules of the Senior Managers and Certification Regimes, which will apply from December 9, 2019 to firms regulated only by the FCA.
    • Security tokens. These are tokens that provide rights and obligations like those of specified investments, as set out in the U.K.'s Regulated Activities Order, excluding e-money. These tokens may also be financial instruments under the revised Markets in Financial Instruments package, known as MiFID II.
    • E-money tokens. These are tokens that meet the definition of electronic money under the U.K. Electronic Money Regulations 2011. However, if a token can only be spent with its issuer, and is not accepted by a third party other than the issuer, then it is not e-money under the Electronic Money Regulations.

    The Guidance provides examples of investments that would be within the regulatory perimeter and how the rules apply to crypto-assets, case studies of how the Guidance works in practice and an indicative list of market participants that carry on crypto-asset activities and the types of permissions they might need if the activities involve tokens that are within the regulatory perimeter. The list of market participants are issuers of tokens, advisers and financial intermediaries, exchanges and other trading platforms, wallet providers and custodians and payment providers.

    The FCA expects market participants to consider the Guidance on Crypto-Assets when carrying on business in the U.K. The FCA notes that the Guidance will feed into other workstreams, such as its proposal to ban the sale to retail clients of derivatives referencing crypto-assets, the transposition of 5AMLD into U.K. laws and the Treasury's consultation on whether the crypto-asset markets requires further regulation.

    View the Policy Statement and Guidance on Crypto-Assets.

    View details of the FCA's proposed bank of the sale to retail clients of derivatives referencing crypto-assets.

    View details of the FCA's consultation on the Guidance on Crypto-Assets.

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