On January 23rd, the UK's Financial Conduct Authority (FCA) published a consultation paper titled "Guidance on Crypto Assets." This document categorizes various types of digital tokens into three distinct groups and explores how they might be regulated under the FCA’s existing rules—for example, as specified investments, financial instruments, or electronic money.
The regulator emphasized the need for clarity, noting that crypto assets pose certain risks to consumers and investors. Providing clear guidelines helps businesses operating in this space understand what falls under regulatory oversight and what does not.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, stated:
“This is a small but growing market, and we want both industry and consumers to be clear what is regulated and what is not. This is vital for consumers to understand the level of protection they’ll benefit from and to ensure the market functions properly.”
Three Categories of Crypto Assets
The FCA’s proposed framework classifies crypto assets into three primary types, each with its own regulatory implications.
Exchange Tokens
Tokens like Bitcoin and Litecoin, referred to as "exchange tokens," are not considered specified investments. They are not recognized as legal tender in the UK and exhibit high volatility compared to traditional currencies or commodities. As a result, buying and selling these tokens generally fall outside the FCA’s regulatory scope.
Security Tokens
These tokens are categorized as specified investments because they meet the definition of regulated activities under the UK’s Financial Services and Markets Act 2000. The FCA also indicated that, under the Markets in Financial Instruments Directive II (MiFID II), these products would be treated as financial instruments.
Firms that wish to issue, sell, or trade security tokens must apply for authorization from the FCA. This includes businesses that operate trading platforms or infrastructure for security tokens.
Utility Tokens
While some utility tokens might qualify as electronic money in certain situations, they are typically not regulated by the FCA. Since these tokens generally do not exhibit the same characteristics as securities, they are not captured under existing regulatory regimes unless they meet the specific definition of electronic money.
The Case of Stablecoins
Stablecoins, which are often pegged to traditional currencies like the US dollar or British pound, may qualify as electronic money depending on their structure. This includes those backed by specific assets (which could include specified investments), a basket of crypto assets, or those that use algorithms to control token supply.
Regulatory Expectations for Businesses
Firms dealing with security tokens must comply with all the rules that apply to traditional securities. This includes securing the proper permissions from the FCA for activities such as advising, dealing, or arranging deals in investments.
The FCA clarified:
“Businesses that want to create infrastructure for the sale, purchase, or transfer of security tokens—often referred to as exchanges or trading platforms—must ensure they have permission to carry out such activities.”
Consultation and Industry Feedback
The FCA has opened a 10-week consultation period, ending on April 5th, during which it invites feedback from the public and industry stakeholders.
Steve Davies, a blockchain leader at PwC, commented via email on the FCA’s consultation:
“While the guidance addresses some risks associated with crypto assets, it also highlights several positive aspects. However, questions remain—such as whether unregulated crypto assets should be brought under the FCA’s scope for enhanced consumer protection, and whether the existing regulatory framework is suited to the unique nature and risks of these products.”
Frequently Asked Questions
What are the three types of crypto assets defined by the FCA?
The FCA classifies crypto assets into exchange tokens (e.g., Bitcoin), security tokens, and utility tokens. Each category has different regulatory implications regarding investor protection and oversight.
Are Bitcoin and other similar cryptocurrencies regulated in the UK?
Currently, exchange tokens like Bitcoin are not considered specified investments and are not directly regulated by the FCA. However, businesses offering services around these tokens may still be subject to anti-money laundering rules.
How are security tokens treated under the new guidance?
Security tokens are treated as specified investments and are subject to the same regulations as traditional financial instruments. Firms dealing in these tokens must be authorized by the FCA.
What about utility tokens?
Utility tokens typically fall outside the FCA’s regulatory perimeter unless they qualify as electronic money. Most do not require authorization under current rules.
Do stablecoins require regulatory approval?
It depends. If a stablecoin meets the definition of electronic money, it may be regulated under e-money rules. Firms should assess their structure and review the latest regulatory guidelines to ensure compliance.
How can businesses participate in the FCA’s consultation?
Interested parties can submit feedback via the FCA’s website before the deadline on April 5th. The regulator will review all responses before issuing final guidance.
This guidance marks a significant step in clarifying the regulatory treatment of digital assets in the UK. Industry participants are encouraged to stay informed and engage with policymakers during the consultation period. For those looking to deepen their understanding of compliance requirements, explore more regulatory strategies tailored to crypto businesses.