FCA sets regulatory roadmap for crypto

The Financial Conduct Authority’s (FCA) guidance on crypto assets released this week is being hailed as an important step in bringing greater clarity and confidence to the sector.  

The consultation paper is timely because of demand from firms to be able to create investment products that include cryptocurrencies, and technology will transform the market’s infrastructure following regulatory clarity after the consultation period, says Ed Gouldstone, head of product management for Linedata’s asset management business.

“It is open for consultation, obviously, and I think the suggestion is if you look at the guidance, the future framework of regulation is likely to follow that,” he says. “This type of guidance is there that says if it looks like this, [crypto] can be treated similar to existing securities regulation.”

The guidance from the FCA categorises crypto assets along the lines of exchange tokens, security tokens and utility tokens. It describes security tokens as meeting the definition of a specified investment. 

According to Claire Harrop, senior associate at law firm Freshfields Bruckhaus Deringer, security tokens may well be a financial instrument for the purposes of the second Markets in Financial Instruments Directive.

“You need to look at the classification of your crypto asset,” she says. “Then you need to look at what you are doing with it. If it is a specified investment under the UK regime, then you need to look at whether you need to be authorised to do what you are doing with it.”

For crypto asset firms, the new guidance does not change the rules – if they were breaching regulations before, they would still be doing so after its release. “But they might be clearer about whether they are doing so,” says Harrop.

You need to look at the classification of your crypto asset. Then you need to look at what you are doing with it

Claire Harrop, Freshfields Bruckhaus Deringer

In the consultation paper, the FCA mentions a significant reduction in capital raised through initial coin offerings (ICOs) in 2018, compared with 2017. It notes the global ICO funding was $165 million in November 2018, compared with more than $823 million in November 2017.    

Charles Hayter, chief executive officer of CryptoCompare, says people realised they were, in some cases, not being rational in their decision-making processes.

“That is where we have seen the reduction,” he says. “We have also seen [it] through our data; we recalled the feeds from various publications in the space. And we have seen that the number of articles has come down. But, as a percentage of that, the number of articles specifically about ICOs has reduced as well.” 

According to Linedata’s Gouldstone, reduced ICO activity in 2018 is a response to the asset class being seen as too risky. He says a lot of those initial ICOs were subscribed to by individuals and were not really used as an institutional investment, and the FCA appears to be keen to enforce its remit to protect individuals.

“Maybe having [a] regulatory framework around it can reintroduce interest in that it now becomes a slightly safer, better governed route and that could be interesting,” says Gouldstone.  

Last month it was reported that the FCA was investigating 18 firms in relation to crypto transactions. The FCA’s consultation ends on April 5. 

This article first featured on sister website waterstechnology.com