The question of what is or might be in the Financial Conduct Authority perimeter – i.e. covered by FCA regulation – isn’t always straightforward and can cause even a seasoned expert to think long and hard.
It’s a new field, and the law is still emerging. Certainly in the UK, there are very few court cases determining whether or not something falls into the FCA’s regime.
So far crypto assets have not been brought into the Regulated Activities Order, which is the legal basis given by parliament for the FCA to regulate a particular activity. Still, judging from the September 2018 Treasury Select Committee report, it seems likely that more crypto activities will be brought within the FCA’s perimeter in the next year or two.
In the meantime here are three examples which are already causing crypto entrepreneurs and lawyers to scratch their heads.
The difference between security and utility tokens
On the face of it this is straightforward. If an Initial Coin Offering (ICO) token is like a transferable security then it is in the FCA perimeter.
Indications that something is a security token might be as follows:
- Potential to receive distributions of profits/revenues (i.e. dividend-like)?
- Potential to receive fixed payments (i.e. interest-like)?
- Potential to receive a distribution from residual assets on a winding up?
- Does it give any entitlements akin to shareholder voting rights in the business?
Utility tokens, on the other hand, are outside the perimeter. But they’re also less straightforward – partly because they’re less intuitive and familiar.
On the one hand, if a token has none of the above characteristics it’s likely to be a utility token. A more positive indicator that something is a utility token might be that it enables access to some practical function or application. The FCA keep mentioning, as an example of a utility token, future access to a theme park that hasn’t yet been built.
In terms of fundraising, you could ask is a token donation-based (utility) or given in expectation of a return (security)? Or could it change over time, initially issued to raise funds for a project (security) but eventually having a utility purpose? These nuances are not yet captured in the perimeter rules and need case-by-case examination.
Do my activities count as e-money?
This is another tricky question concerning the FCA perimeter. If people are issuing or using crypto assets as a store of value then they may be (inadvertently or consciously) issuing e-money as a regulated activity.
In particular, if someone separate from the issuer is standing in the middle between two other parties and saying ‘I am the issuer of this e-money and I will stand good for the claim’ then they are very likely to be issuing e-money as defined.
So, let’s say a consumer wants to use crypto tokens to buy something from a merchant. If the merchant comes back and says ‘I accepted your token and I want to claim the value of that’ – and if there is a separate person in the chain who is happy to make good that claim – then that is an e-money transaction and within the regulated perimeter.
This differs from standard Bitcoin transactions where the Bitcoin is just a medium of exchange, not a store of value, and there is no central ‘issuer’ stating that they will ensure value for any claims.
What about payment services?
One area that is already widely talked about is the fact that blockchain technology can be used to speed up money remittance, e.g. using Bitcoin to move money rapidly cross-border. Some emerging fintech businesses in the UK are already using crypto assets in this way to support their money remittance services or execute payment transactions. Both activities require a regulatory licence because they fall within the FCA perimeter.
