UK Regulator FCA Proposes Crypo Regulation

FCA Consultation Paper for crypto

The UK Financial Conduct Authority (FCA) published a Consultation Paper on crypto regulation this week. In it, the regulator specifies its proposals on how crypto activities will be regulated and supervised by the authority. For this purpose, FCA uses the framework developed by the UK Cryptoassets Taskforce for different types of cryptoassets.

Scope Of FCA Crypto Regulation Proposal

FCA’s Consultation Paper was issued in order to provide regulatory guidance for market participants carrying on crypto activities. According to the paper, the cryptoasset market, and the underlying DLT technology is developing quickly and “participants need to be clear on where they are conducting activities that fall within the scope of the FCA’s regulatory remit and for which they require authorization“.

It may be a criminal offense to carry on regulated activities without the relevant authorizations.

FCA Consultation Paper

In line with the Taskforce, the FCA categorised cryptoassets into three types of tokens;

  • Exchange tokens: these tokens are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They are, usually, a decentralized tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter.
  • Security tokens: these are tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument and are within the perimeter.
  • Utility tokens: these tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by Specified Investments. Although utility tokens are not Specified Investments, they might meet the definition of e-money in certain circumstances, in which case activities in relation to them may be within the regulator’s perimeter.

According to the findings of the Taskforce, 56 projects in the UK that have used ICOs to raise funds. This accounts for less than 5% of projects globally.

Potential Harm To Investors

From the FCA’s point of view, cryptoassets pose a range of substantial risks to consumers. This can include fraudulent activity, as well as the immaturity or failings of the market infrastructure and services.

Leveraged derivatives, like Contracts for Differences (CFDs) referencing cryptoassets carry a high risk of loss due to the volatility of cryptoassets and the impact of product fees such as financing costs and spreads. They can also be difficult to value due to a lack of transparenc in the price formation of the underlying cryptoasset.

Fraudulent activity is likely to exist across the range of cryptoassets. Significant risks may be associated with ICOs, particularly around high failure rates, or fraudulent ICOs. Recent research looked at listed tokens in 2017 with data provided for those ICOs with over $50 million in market capitalization and found that 78% of these listed tokens were scams.

The FCA is asking for comments on the Consultation Paper (CP19/3) by Friday 5 April.