Following a consultation published in January, the FCA received 92 responses seeking clarification of the policy intentions, and this guidance looks to address these concerns.

The guidance does not vary too greatly from the initial consultation, but it does provide greater clarity on some areas, including when certain type of cryptoassets would fall under the regulator's remit.

Different categories

The FCA guidance separated tokens into three categories:

• Security tokens: the January consultation set out that security tokens fall within the FCA's regulatory perimeter, meaning that if a firm was carrying out activities akin to specified investments as defined in the Regulated Activities Order (RAO) it would need to obtain the relevant permissions. As a result of the consultation, the guidance removed e-money from the definition of a security token and created a separate category to make the classification of tokens clearer.
• E-money tokens: the consultation had stated that, in some instances, utility tokens would meet the criteria of e-money and while utility tokens are not regulated by the FCA, e-money is. The regulator has now further clarified this and created a separate e-money category. The guidance also notes that certain stablecoins may meet the definition of e-money. It acknowledges that as stablecoins vary in structure and arrangement they cannot have one uniform classification. If a stablecoin is an electronically stored monetary value that: is issued on receipt of fiat currency for the purpose of payment; is accepted by other users; and is not excluded by regulation 3 of the E-Money Regulations, it will fall within the e-money token category.
• Unregulated tokens: the guidance noted that a number of cryptoassets have been used to facilitate regulated payments, such as international money remittance. Firms using cryptoassets in that way will continue to be regulated as normal and would have to obtain the correct permissions and follow the relevant rules and regulations. However, the tokens themselves remain outside the FCA's perimeter. This is also the case with cryptocurrencies, which are defined as exchange tokens. The FCA noted that the courts and the legislature need to address this matter and therefore it is outside the scope of this guidance. It does, however, acknowledge that the Treasury is working on an approach to unregulated cryptoassets and the regulatory perimeter could therefore change at some stage.

Other considerations

While not expanding the FCA's perimeter, it is worth noting that the Government has assigned the FCA to be the supervisor for the fifth Anti-Money Laundering Directive (5AMLD).

The 5AMLD will introduce an anti-money laundering regime for cryptoassets, and will bring within its remit virtual currency exchange platforms and wallet providers. This will therefore allay some consumer protection and market integrity fears that had arisen through exposing the identity of users and the source of the funds.

The guidance also comments on proposals to ban crypto-derivatives for retail investors (ie, derivatives with an underlying cryptoasset).

Last month, the FCA set out plans to prohibit the sale, marketing and distribution of crypto-derivatives to retail consumers and has put this out for consultation with a deadline for comments of 3 October.

The consultation states that cryptocurrencies could not be valued as easily as other more traditional assets and their price fluctuation was more akin to gambling than technological or economic development and therefore should not be made available to retail investors.

What happens now?

The next steps will be interesting.

Communications from public authorities have intensified in recent months with the view to some significant changes on the horizon.

The prospects of new crypto regulation from the Treasury could see a change to the regulatory perimeter and bring more cryptoassets within the regulated space.

The FCA may still remain cautious in its approach to cryptoassets, but this guidance is an important starting point to the coming discussions on what it has called a "small, complex, and evolving market covering a broad range of activities".

In October 2018, the UK Cryptoassets Taskforce issued a report on the UK's policy and regulatory approach to distributed ledger technology and cryptoassets, setting out some of the potential risks and benefits they present, and making various commitments.

The FCA's guidance consultation comes as a response to one of those commitments, namely providing firms with additional clarity about the current 'regulatory perimeter', which "separates regulated and unregulated financial services activities".

As such, the guidance focuses on the FCA's regulatory perimeter.

Specifically, it looks at where cryptoassets would be considered specified investments under the Regulated Activities Order (RAO), financial instruments under MiFID II or captured under the Payment Services Regulations or the E-Money Regulations.

In line with the Taskforce, the guidance categorises cryptoassets into three main types: exchange, security and utility tokens, explaining whether each falls within the FCA's remit and, if so, what this means for market participants.

The FCA warned:

"Assessing whether a cryptoasset is within the perimeter can only be done on a case-by-case basis, with reference to a number of different factors… Ultimately, it is a firm’s responsibility to make sure that it has the correct permissions for the activities it intends to engage in and we encourage market participants to obtain independent advice if they think the position remains unclear."

Exchange tokens

"This means that the transferring, buying and selling of these tokens, including the commercial operation of cryptoasset exchanges for exchange tokens, are activities not currently regulated by the FCA."

So, exchanges or any organisation that facilitate transactions of bitcoins, ether, litecoin or other exchange tokens between participants are not carrying a regulated activity.

Security tokens

For those cryptoasset activities involving cryptoassets that meet the definition of a specified investment as set out in the RAO (and possibly also a financial instrument under MiFID II), an authorisation or exemption will be required.

However, the FCA noted that determining whether a token is a specified investment is not always easy, especially for those that are securities, such as shares, debt instruments warrants, certificates representing certain securities, units in collective investment schemes, rights and interests in investments.

For each of these categories, the regulator gave examples of some factors that may show that a token qualifies as a security.

Utility tokens

As utility tokens do not typically show features that would make them the same as securities, they will not be captured in the regulatory regime, unless they meet the definition of e-money or are "used to facilitate regulated payments services".

The FCA concluded:

"Where a person is engaged in activity by way of business in the UK, that relates to a security token, or to a token that constitutes e-money, or is involved in payment services, they should consider whether those activities require authorisation," the FCA said.

This will determine which permissions are needed from the FCA.

Her Majesty’s Treasury is set to publish a consultation in 2019 that considers the options for bringing further cryptoasset-related activity within the regulatory perimeter.

It will also consult on the transposition of the EU’s Fifth Anti-Money laundering Directive and the broadening of anti-money laundering/counter terrorism financing regulation in relation to cryptoassets.

“Any legislative change will require the FCA to consult on the new activities to be brought into the regulatory perimeter, and the FCA will work with HMT on this”, the guidance states.

The FCA will consult later in the year on banning the sale of derivatives linked to certain types of cryptoassets to retail investors and the government is also planning to consult on whether to expand the regulatory perimeter to include further cryptoassets activities.