UK Financial Watchdog Plans Oversight of Security Tokens

The U.K.’s Financial Conduct Authority (FCA) has set out proposed guidance for how crypto assets should be regulated in the country.

In a consultation paper published Wednesday, the watchdog assigns the various crypto tokens into three categories and suggests whether these can be accommodated under existing rules overseen by the FCA – for example, as specified investments, financial instruments or e-money.

Explaining the reasons for guidelines, the agency said that crypto assets carry risks for consumers and investors, and clarification of what is regulated and what is not would help firms wishing to operate compliant businesses based around crypto assets.

In a statement, Christopher Woolard, the FCA’s executive director of strategy and competition, said:

“This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should.”

According to the draft paper, “exchange tokens,” such as bitcoin and litecoin, are not specified investments as they are currently not recognized as legal tender in the U.K. and are volatile compared to other investment avenues such as fiat currencies and commodities. Therefore, the buying and selling of these tokens do not fall under the FCA’s remit, the paper states.

On the other hand, “security tokens” are classed as specified investments, since their definition meets the one set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order. “These products are also capable of being financial instruments under MiFID II [Markets in Financial Instruments Directive II],” the FCA states.

While “utility tokens” may meet the criteria of e-money in certain circumstances, these would not generally be regulated by the FCA. “As utility tokens do not typically exhibit features that would make them the same as securities, they won’t be captured in the regulatory regime, unless they meet the definition of e-money,” the watchdog says.

Stablecoins, tokens pegged to a fiat currency like USD or GBPs, might meet the definition of e-money if “backed by certain assets (which may include Specified Investments), a basket of cryptoassets, or potentially through algorithms that maintain the supply of the token.”

For security tokens, all the rules covering traditional securities will apply to them, too. Accordingly, firms wanting to deal in securities tokens would have to apply for permission from the FCA.

The FCA says: “A firm wanting to create infrastructure for the buying, selling and transferring of security tokens (commonly known as exchanges or trading platforms) must ensure it has the appropriate permissions for the activities it wants to carry out.”

The regulator is now seeking public comment on the guidance – which follows a 2018 pledge for further clarification on crypto assets from the UK Cryptoassets Taskforce – by April 5.

In an email to CoinDesk, Steve Davies, PwC’s blockchain lead, commented on the FCA paper, saying that, while it raises the potential risks associated with crypto assets, “there are also a lot of positives.”

However, he continued:

“Some questions remain unanswered, including whether certain unregulated cryptoassets should be brought under the FCA’s jurisdiction to further protect consumers, and whether the existing regulatory framework is appropriate given the unique features and risks associated with these products.”

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