UK’s Regulatory Watchdog Issues Clarity On Cryptoasset Definitions

The UK is the latest country to issue clarity on crypto regulation.

The Financial Conduct Authority (FCA), the country’s financial watchdog, released a policy statement yesterday in response to a consultation paper published in January this year. The paper prompted a response from 92 major financial entities, including crypto exchanges, banks, and trade associations. The regulator says that most responses were in support of the original proposals.

Even as it provided clarity on the status of tokens, however, the FCA also warned consumers about the dangers of cryptocurrency markets. “A combination of market immaturity, volatility, and a lack of credible information or oversight raises concerns about market integrity, manipulation and insider dealing within cryptoasset markets,” the regulator stated in a press release.

Clarity on Cryptoasset Definitions

The FCA report has important definitions that clarify the status of tokens.

It divides tokens issued by cryptoassets into three broad categories: exchange tokens, utility tokens, and security tokens. Exchange tokens are decentralized cryptoassets used as means of exchange without a single governing authority to bring action against, in cases of fraud or scams. Utility tokens are tokens used to access a service or product and do not provide special rights of returns to holders. Finally, security tokens provide returns to investors and resemble securities and stocks in their structure. The regulations say that when they are issued, these tokens behave like shares or debt instruments. Thus, they fall under a special category of specific investments. The government agency also defined another category of tokens called e-money tokens, which are tokens that meet the definition of electronic money and are issued by a central authority.

The FCA states that cryptocurrencies such as Ethereum and Bitcoin will be considered as exchange tokens and are not subject to regulation. But they will have to adhere to AML regulations. All utility tokens will be outside the control of the FCA. However, some utility tokens may fall under the category of e-money under special circumstances. The agency did not elaborate on specific circumstances that might cause utility tokens to be classified as e-money. Some stablecoins, or cryptocurrencies that aim to keep a stable value with respect to a basket of goods or fiat currencies, may also fall into the category of e-money. This means that they will fall under the FCA’s control.

Cryptocurrency businesses and associations welcomed the FCA’s move.

“Today’s announcement provides welcome additional clarification to the FCA’s taxonomy of cryptoassests and how the existing regulatory perimeter applies to cryptoassets,” stated Iqbal V. Gandham, chair of CryptoUK – a self-regulatory body.

A Turnaround from Earlier Position

The report is a turnaround from the FCA’s position this year. At the time, it had proposed a ban on many crypto investments to protect retail investors. Back then, the FCA claimed that ETNs and crypto-based derivatives were too risky for retail investors since assessing risk was almost impossible.

The UK has already stated that it plans to make all crypto-related businesses AML-compliant by January 2020 as part of its new new economic crime plan. The plan will ensure that the UK laws meet the best international standards, which will provide a comprehensive response for use of crypto globally. The FCA will be the main supervisory body. It will be in charge of creating a stringent AML regime for all crypto businesses. A UK official said that this plan would ensure better coordination between various sectors of government to help fight the problem of dirty money.