According to the FCA, the guidance is a response to the commitment made by the UK’s Cryptoassets Taskforce in 2018.
In October, the Taskforce released a report that set the polices and regulatory practices to be used in the United Kingdom regarding cryptocurrency assets and distributed ledger technologies.
What’s Inside The FCA Report On Cryptocurrency Security Tokens
In the report, the Taskforce also made several commitments, including providing additional clarity to firms regarding the regulation of cryptocurrency assets and determining whether unregulated crypto activities should be eventually be regulated. It is the first commitment to which the new FCA guidance is a response.
The role of the FCA is to act as a watchdog over financial markets in order to protect consumers from harm, strengthen the integrity of the UK financial system, and ensure that competition works in the interest of consumers. The agency is responsible for regulating the conduct of 58,000 financial services firms and financial markets within the country. It is the prudential regulator for over 18,000 of these firms.
The FCA States The Risk With Security Tokens
Because cryptocurrency assets represent an emerging technology as well as industry in its infancy, there is an elevated level of risk that associated with investing in or trading cryptocurrencies. Because of these risks, the agency says, regulatory clarity must be provided to companies wishing to operate legitimately and compliantly.
The guidance categorizes cryptocurrencies into three main token types, exchange tokens, security tokens and utility tokens.
Exchange tokens are designed to be used as a means of exchange and have no central authority. They are tools for buying and selling goods and services without intermediaries. These tokens fall outside the FCA’s jurisdiction.
Security tokens, sometimes called equity tokens, usually represents shares in the companies that issues them. Security tokens meet the definition of a Specified Investment and fall under the jurisdiction of the FCA.
Utility tokens grant access to products or services but do not grant holders rights. Utility tokens are not Specified Investments, though they could potentially meet the definition of e-money in certain circumstances. Only under such circumstances would a utility token fall under FCA jurisdiction.
According to the new guidelines, security tokens will be regulated by the same rules that govern traditional securities.
Any company wishing to operate using securities tokens would have to obtain permission from the FCA.
The FCA is currently seeking public comment on the guidance April 5.
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