A NEED FOR REGULATION
2018 was a year of international scrutiny for digital currencies. As regulators around the globe wake up to the potential dangers posed by new technology (now falling under the umbrella term of “cryptoassets”), pressure has been mounting on the UK government and the Financial Conduct Authority (“FCA”) to impose some form of regulation on the industry. The FCA has made further progress in relation to the regulation of cryptocurrencies such as bitcoin, in an attempt to tackle the growing market. On 7 March 2019 the FCA published the results of its research into consumer attitudes too and awareness of crypto-assets. The FCA’s findings are summarised below.
Attitudes and behaviours
On the basis of the reports, the FCA drew out three main conclusions about crypto-asset consumers’ attitudes and behaviours in this field. The FCA believes that:
- many consumers see crypto-assets as a fast-track to easy wealth;
- many consumers may not fully understand what they are purchasing; and
- there are signs that crypto-assets are accompanied by risky behaviours.
The FCA reports that consumers purchasing crypto-assets are often looking for ways to ‘get rich quick’.
Level of awareness and scale of the consumer market
Separately, the research carried out by Kantar TNS showed that only a small minority of UK consumers have bought crypto-assets and that many consumers do not understand what crypto-assets are. The FCA estimates that only 3% of those surveyed had ever bought crypto-assets, and that 73% of UK consumers don’t know what a ‘cryptocurrency’ is, or are unable to define it.
Level of potential harm
Based on the results of research outlined above, and taking into consideration the findings on the level of awareness and uptake of cryptoassets among consumer generally in the UK, the FCA has concluded that the evidence about the potential harm of crypto-assets to consumers may be overstated.
HOW THE FCA DEFINES CRYPTOASSETS
The FCA has created the following framework by categorising cryptoassets based on their intrinsic structure, as well as their designed use:
- Exchange tokens: Cryptoassets, such as Bitcoin, Litecoin and equivalents, are often referred to as ‘cryptocurrencies’, ‘cryptocoins’ or ‘payment tokens’ and are usually decentralised and use a distributed ledger technology (“DLT”) platform. Such decentralised platforms enable value transfer among participants without the need for an intermediary or central bank and therefore the network can operate on a ‘peer-to-peer’ basis. Exchange tokens do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment. These tokens are likely to fall outside the FCA’s regulatory perimeter.
- Security tokens: These are tokens that amount to a ‘Specified Investment’ under the Regulated Activities Order (“RAO”). These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instruments under the EU’s Markets in Financial Instruments Directive II (“MiFID II”). These tokens are likely to be inside the FCA’s regulatory perimeter.
- Utility tokens: These are tokens which can be redeemed for access to a specific product or service that is typically provided using a DLT platform. These tokens are likely to fall outside the FCA’s regulatory perimeter.
THE CONSULTATION PAPER AND LOOKING AHEAD
The FCA has published a consultation paper (CP19/3) earlier this year (available here) on cryptoassets. The consultation paper builds on the above categorisations and sets out details on where different types of cryptoassets might fall in the regulatory perimeter.
The FCA is currently accepting responses to the consultation paper which closes on 5 April 2019 and the FCA intends to publish final guidance by summer 2019. It is hoped that the final guidance, to be released after the consultation has ended, will allow firms to have a greater understanding as to whether the cryptoassets they are dealing with, fall within the regulatory remit or not.
To view the FCA’s resources on cryptoassets, please click here. For more information on or any guidance or advice on cryptocurrencies or cryptoassets, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.