The Virtual Currency Regulation Review:
Crypto assets and the UK regulatory framework
20 December 2018
Global regulators have taken a range of approaches to responding to virtual currencies.
Currently, some but not all types of crypto assets fall within scope of financial services regulation in the UK. In general, the structure and substantive characteristics of a virtual currency, token or other type of crypto asset will determine whether or not it falls within the UK regulatory perimeter, and if so, which regulatory framework or frameworks will apply. This requires a case-by-case analysis, as illustrated by the UK Financial Conduct Authority’s (FCA) consumer warning on initial coin offerings (ICOs) issued in September 2017:
"Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.
Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.
Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law."
This is likely set to change, as the House of Commons Treasury Committee issued a report in September 2018 which concluded that that regulation of the "Wild West" crypto-asset market is needed and that, at a minimum, the regulatory response should address consumer protection and anti-money laundering (AML) risks (a summary of the report is available here). This may also involve creation of a new class of regulated financial instruments or development of other new regulations that are specifically designed to capture certain types of crypto assets. For example, the FCA has indicated that it intends to consult on whether the regulatory perimeter requires extension to capture crypto assets that currently fall outside the UK regulatory perimeter but have comparable features to regulated financial instruments.
However, in the meantime, it is necessary to analyse the substantive features of a given virtual currency, token or other crypto asset against the existing UK regulatory perimeter in order to determine whether and, if so, how it is regulated. When carrying out this analysis, it is helpful to ask the following questions:
- Might virtual currencies be transferable securities or other types of regulated financial instruments or investments?
- Might arrangements relating to the issuance of virtual currencies involve the creation of a collective investment scheme?
- Might virtual currencies give rise to deposit-taking, the issuance of electronic money or the provision of payment services?
- Might the issuance of virtual currencies or the operation of an exchange for virtual currencies be regulated as crowdfunding?
The UK chapter of the Virtual Currency Regulation Review considers these questions in the context of different types of virtual currencies and provides a broad overview of the current UK regulatory framework for crypto assets.
PDF Chapter reproduced with permission from Law Business Research Ltd.