UK Regulator: Utility Tokens Are Not Subject to Securities Laws

Britain’s financial regulator is seeking to clarify which cryptocurrency activities need to be officially authorized. The regulator is specifically cautioning that it may ban the sale of crypto derivatives such as CFDs later this year. It’s also clarified that cryptocurrencies and utility tokens are not securities.



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FCA Consults on Cryptoassets Guidance

On Jan. 23, the U.K.’s Financial Conduct Authority (FCA) made public its guidlines on crypto assets. Once finalized, the document will set out the scope of activities it regulates in the field. The guidance is meant to help firms understand whether their activities fall under FCA regulation and comes in response to the industry’s request for greater clarity.

Christopher Woolard, executive director of Strategy and Competition at the FCA, commented: “This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should.”

Banning the Sale of Crypto Derivatives

The regulator notes that while crypto assets “have the potential to bring benefits to markets, firms and consumers, there remains considerable risks to markets and consumers.” So later this year the FCA will consult the public on banning the sale of derivatives linked to certain types of crypto assets to retail investors. The U.K. government is also planning to consult on whether to expand the regulatory perimeter to include further crypto asset activities.

Leveraged derivatives based on cryptocurrencies, like Contracts for Differences (CFDs) and futures carry a high risk of loss due to volatility and the impact of fees such as financing costs and spreads, the document explains. They can also be difficult to value due to a lack of transparency in the price formation of the underlying assets, claims the FCA.

Differentiating Utility Tokens From Securities

Another topic discussed in the guidance paper, of specific importance to projects pursuing Initial Coin Offerings (ICOs), is how the regulator determines which instruments fall under its jurisdiction. The current FCA position on this subject, as expressed in the document, is that unlike security tokens, cryptocurrencies and utility tokens do not constitute regulated securities.

The regulator defines security tokens as those that have similar characteristics to traditional instruments like shares, debentures or units in a collective investment scheme. The FCA clarifies: “Security tokens are the type of crypto asset which falls within the regulatory perimeter.”

In contrast, utility tokens are defined as those that provide consumers with access to a current or prospective service or product and often grant rights similar to pre-payment vouchers. “As utility tokens do not typically exhibit features that would make them the same as securities, they won’t be captured in the regulatory regime, unless they meet the definition of e-money,” the document clarifies. This means that ICOs that issue just utility tokens and not security tokens will require no further regulation.

The FCA is asking for comments on the consultation paper by April 5, 2019, meaning that all of its definitions may be subject to change by that time.

Are these clarifications going to help or hinder the British crypto industry? Share your thoughts in the comments section below.

Images courtesy of Shutterstock, FCA.

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