FCA’s Guidance on Cryptoassets – welcome clarity

9 April 2019

Cryptoassets have attracted significant and growing attention from consumers, markets, governments and regulators globally”, stated the FCA earlier this year in launching its consultation on its Guidance on Cryptoassests.  Jill Lorimer has previously commented on the Cryptoassests guidance.

The aim of the Guidance is to “provide regulatory clarity for market participants carrying on activities in this space” and it appears to do just that.

Context - why the FCA is focusing on cryptoassets

The Guidance refers to the conclusions of the UK Crypto Asset Taskforce which published a report that set out the UK’s policy and regulatory approach to cryptoassets and Distributed Ledger Technology (‘DLT’). The FCA recalls how this report assessed the risks and potential benefits of cryptoassets, identified potential harms, set out a plan for regulation in the UK and detailed the different activities that should be assessed. It confirms that though the number of firms carrying out cryptoasset activities in the UK remains small, mainstream financial services firms are entering the market, and a small derivatives market is beginning to develop. It underlined that “there is growing evidence at a global level of increasing harm”.

The Guidance goes on to explain key concepts related to cryptoassets and sets out where cryptoasset activities can be subject to FCA regulation.

The Guidance

The Guidance as drafted is clear and easily understandable in respect of the types of cryptoassets, the regulatory perimeters, and the responsibilities of firms. The increased certainty provided by the Guidance will help to legitimise firms dealing in cryptoassets and increase their use by informed and confident consumers. 

The clarity provided by the Guidance, in keeping with the commitment of the Cryptoassets Taskforce, as to where cryptoasset activities fall in relation to the regulatory perimeter is welcome.

This is particularly valuable given that it may be a criminal offence to carry on regulated activities without the relevant authorisations. See our related blog on the FCA’s inquiry into “Crypto-Cowboys” FCA sharpens focus on crypto cowboys.

A pragmatic approach?

As we monitor developments in this area, it will be interesting to see whether, as per the proposed HMT consultation on potentially expanding the FCA’s regulatory perimeter to bring in further types of cryptoasset – the UK is taking a different regulatory route than that recommended by the European Securities and Markets Authority (ESMA). ESMA, in its publication ‘Advice: Initial Coin offerings and Crypto-Assets’ of 9 January 2019, expressed concern at the possibility that some Member States might consider creating more complicated regimes to encompass those cryptoassets that do not currently fall under their regulatory remit.

The fear expressed by ESMA was that such an approach would be ‘risking legitimising crypto-assets and encouraging wider adoption.’ They further advise to focus the regime for cryptoassets not currently captured on ‘warning buyers about the risks of those crypto-assets, instead of a more elaborate regime that could legitimise crypto-assets and bring them into a similar regulatory remit as the one for crypto-assets that are financial instruments.’ We raise this point not by way of criticism but solely to observe that the approach of the Taskforce and HMT indicates a willingness to depart, if appropriate, from the ESMA advice. This to us appears to be a pragmatic and reasoned approach which recognises the important of legitimising this new and exciting facet of business in the UK.

What next?

The consultation has now closed and the FCA will review the responses before publishing a policy statement in summer 2019.  The FCA confirms that the final Guidance will help market participants to understand whether the cryptoassets they use are within the regulatory perimeter and help them better understand whether they need to be authorised and what rules or regulations apply to their business.   

We are also expecting the Government to issue a consultation on the Fifth Money Laundering Directive and how it applies to “virtual currencies” in the coming months. See our related blog: Beyond #Brexit: new anti-money laundering regime agreed.

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