What are cryptoassets? Regulated/unregulated activities

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What are cryptoassets?

Similar to e-money, defining cryptoassets is a difficult task. In this case however, the difficulty stems from the concept being entirely novel and perhaps not so well understood.

The most comprehensive definition that helps in differentiating cryptoassets from other forms of financial instruments is that of Prof. Dr. Houben, R., Snyers, A. in Cryptoassets – Key developments, regulatory concerns and responses, a study conducted for the European Parliament.

According to this definition, a cryptoasset:

  1. is recorded on some form of a digital distributed ledger secured with cryptography,
  2. is neither issued nor guaranteed by a central bank or public authority, and
  3. can be used as a means of exchange and/or for investment purposes and/or to access a good or service.

The term ‘cryptoassets’ encompasses cryptocurrency, tokens, coins and all various asset types associated with the crypto industry. The European Banking Authority has defined cryptoassets as a type of private asset, the inherent value of which depends upon cryptography and distributed ledger technology.

UK cryptoassets taxonomy

The UK differentiates between regulated cryptoasset activities and unregulated ones.

As per the FCA Policy Statement 19/22, regulated cryptoassets taxonomy is as follows:

Security Tokens

Security tokens are cryptoassets that provide rights and obligations similar to specified investments set forward in the Regulated Activities Order (RAO), with the exclusion of e-money. It is however not always easy to identify whether tokens fall within the specified investments category, in particular when they act similar to shares or debt instruments. To make matters easier, the following factors are of assistance:

  • contractual rights and obligations stemming from the ownership of the token
  • contractual entitlement in the lines of dividends, revenues or any other benefit such as voting rights
  • language used in token “white papers” delineating how tokens will function and what instrument they represent
  • the transferability and tradability of the tokens on cryptoasset exchanges
  • the presence of direct flow of payments from issuer to token holders indicates that the token is a security. In case this flow is a contractual entitlement, there is a strong indication of the token being a security.

These tokens can also be financial instruments under the recast Markets in Financial Instruments Directive (MiFID II). They can, therefore, have features similar to traditional financial instruments such as shares, debentures or units in a collective investment scheme.

E-money Tokens

E-money tokens are cryptoassets that meet the definition of e-money. Read our article explaining what is e-money.

Exchange tokens

Exchange tokens (e.g. Bitcoin, Ethereum, etc.) do not have the backing of any central authorities. In essence they are decentralised tokens that often go by the name of “cryptocurrencies”. Exchange tokens only serve as a means of exchange.

Utility tokens

Utility tokens provide consumers with access to either a current or future service/product that can be a cryptocurrency. They are tokens that fund the development of the cryptocurrency during the Initial Coin Offering (ICO).

When authorisation from the FCA is required?

If a firm carries out regulated cryptoasset activities (activities relating to e-money and security tokens), it has to obtain a relevant permit from the FCA. For example, if a company raises money from offerings of security tokens, they may be subject to UK prospectus requirements as well as the financial promotion regime.

As per FCA Policy Statement 19/22, unregulated crypto assets consist of tokens that do not meet the definition of e-money, and that do not provide rights and obligations akin to security tokens. The unregulated cryptoassets taxonomy is as follows:

When no authorisation from the FCA is required?

Financial services relating to utility and exchange tokens do not require authorisation from the FCA. For example, you do not need to be authorised to operate a trading platform if your trading platform allows trading only utility and exchange tokens.

Although unregulated cryptoasset activities do not require an authorisation, they are subject to certain Regulations and FCA Rules if provided by a regulated firm. For example, the Principles for Business and the individual conduct rules under the Senior Managers and Certification Regime (SMCR), can in certain instances apply to these activities.

In any case, FCA-authorised firms, must not falsely present their authorisation as extending to unregulated cryptoasset activities.

When a registation with the FCA is required

One of the novelties of the 5th Anti-Money Laundering Directive (5AMLD) is its application to cryptoasset activities, which was implemented in the UK with by the Money Laundering and Terrorist Financing (Amendment)
Regulations 2019.
Certain activities (e.g., crypto-to-crypto exchange) require a specific AML/CTF registration regardless of the type of a cryptoasset involved in the activity.

You should not that registration is different from authorisation and it does not entail that a firm is a regulated entity.

How can PSP Lab help you?

If you are interested in knowing more about cryptocurrencies and cryptoassets or are thinking of starting a new venture in this field, do not hesitate to contact PSP Lab. Our expertise covers Fintech consulting, business development, and software development. Moreover, having a dedicated cryptoasset advisor at PSP Lab means we will be able to answer all your questions.

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