UK Finance Watchdog Issues Guidance on Regulation for Bitcoin and Crypto Assets

The U.K. Financial Conduct Authority has finalized its guidance on crypto assets, clarifying which tokens fall under its jurisdiction.

True cryptocurrencies like bitcoin and ether, which the FCA classes "Exchange tokens," are not regulated, though anti-money-laundering rules apply.

Most respondents supported the proposals, said the FCA. Importantly, the guidance provides a definition of security tokens.

In any scenarios in which the tokens are traded, the advisers and brokers handling the tokens, and the financial promotions regime, will need authorization, said the FCA. If a security token is tradeable on the capital market, said the FCA, it will further be considered a transferable security under the European Union's Markets in Financial Instruments Directive, and that regime will apply too.

Given the growing popularity of security token offerings, there could be a blurring of the lines between those and utility tokens, according to Jacqui Hatfield, a partner specializing in crypto at the London office of law firm Orrick.

"The interesting thing is where you have got utility tokens that are dressed up as security tokens just to make sure that they don't fall foul of any promotion type restrictions. So the question is, does that actually change the nature of the token itself when it comes to trading it?".

"We look at the nature of individual tokens and issuances; we don't rely on the labeling, particularly with something like stablecoins, where we find the terminology is not especially helpful, because it could be a security token, it could be an e-money token, or it could be an unregulated token."

The FCA agreed further clarity between types of tokens was required and said it will separate e-money tokens from the utility tokens and security tokens categories.

The FCA refers to cryptocurrencies like bitcoin and ether which have no controlling authority or centralized issuer as exchange tokens and these are outside its parameters of regulation.

Exchange tokens will be caught by the EU's 5th Anti-Money Laundering Directive, which will be transposed into UK law by the end of 2019.