Today the UK released a cryptocurrency advisory document for investors. The 50-page document is said to provide guidance to investors looking to trade and invest in cryptocurrencies. The paper sets out important implications for firms issuing or creating crypto assets, financial advisers, exchanges and consumers. The FCA is accepting feedback from stakeholders until Friday 5 April 2019 after which the regulator will issue a Policy Statement that outlines the final guidance. The paper came about following comments in September by the influential Treasury Committee who described the market as the “Wild West” and called for more consumer protection.
In response to this, in early 2018, the FCA was made part of the ‘Cryptoasset Taskforce’ to look into the risks and rewards of digital money, after Bank of England governor Mark Carney said cryptocurrencies were failing.
Interestingly, UK crypto exchanges still only account for around 1% of all cryptocurrencies traded globally each day, with a volume of roughly $200m, according to the FCA.
The paper structures crypto assets into three categories:
- Exchange tokens;
- Security tokens;
- Utility tokens
Exchange tokens (like Bitcoin, Litecoin etc.) are not issued or backed by any central authority and can be used directly as a means of exchange. The paper stated that “While exchange tokens can be used as a means of exchange, they are not currently recognised as legal tender in the UK, and they are not considered to be a currency or money.”. At the moment, tokens do not fall within the regulatory perimeter of the FCA.
Security Tokens have attributes that make them same or akin to traditional financial instruments such as equities/stocks/shares, debentures or units in a collective investment scheme. These do fall within the regulatory perimeter of the FCA as their classification meets the definition of “specified investments” per the state’s Regulated Activities Order and/or “Financial Instruments” regulated by the Markets in Financial Instruments Directive II. “Tokens can be considered transferable securities under MiFID as well as Specified Investments under the RAO.”
Utility Tokens give the customers with access to the products or services but do not “exhibit features that would make them similar or the same as securities.” Utility tokens generally fall outside the regulatory authority of the FCA unless they meet the definition of E-money.
The BoE (Bank of England) regulator noted that exchange tokens such as Bitcoin and Ethereum are unlikely to be categorized as E-money because “amongst other things, they are not usually centrally issued on the receipt of funds, nor do they represent a claim against an issuer.” However, stablecoins which are pegged by a fiat currency e.g. USD, GBP could potentially meet the definition of e-money.
Why is this so important?
This means the UK authorities i.e. the Bank of England are taking cryptocurrency trading seriously enough to look into regulation. If this ever happens it means that trading assets like Cardano and EOS could be as common as trading GBP/USD or shares on the London Stock Exchange. Analysts believe this is the key to the future of cryptocurrencies, regulation protects customers from things like fraud and exchange hacks as procedures will be in place to reimburse or compensate customers. There is another side to this coin, crypto was made to be untraceable and decentralised. So this interesting development may be counter-intuitive. One thing is for sure these are interesting times and there is a long journey before cryptocurrencies become common.