Earlier this week, the UK's Cryptoassets Taskforce (consisting of HM Treasury, the FCA and the Bank of England) published its final report, providing an overview of cryptoassets and underlying technology, assessment of the risks and benefits and the path forward for UK regulation. The paper sets out a good summary of the key concepts in distributed ledger technology so is worth a read from that perspective.
Whilst the overarching message is that the three members of the Taskforce continue to support the development of distributed ledger technology, of particular interest to me (and given the questions we get on a fairly regular basis, quite a large number of clients as well) was that the report goes into the current treatment of types of cryptoassets and sets out guidance for the consultations that are coming down the track.
Types of cryptoasset
The Taskforce considers there to be three broad types of cryptoasset: exchange tokens (which are like bitcoin), security tokens (which are ‘specified investments’ for the purposes of the UK's regulatory regime, and may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits), and utility tokens (which can be redeemed for a particular product or service). This is similar to the Swiss FINMA's guidance which I posted about earlier this year, but covers all cryptoassets, rather than just ICO tokens.
There is a table in Chapter 2 of the report, which sets out the current regulatory perimeter. This sets out different uses of cryptoassets and whether they are likely to fall into the UK's regulatory perimeter (noting that some cryptoassets may fall into more than one category). Some examples are set out below.
- Use of cryptoassets as a means of exchange - payment services regulation under the UK's implementation of PSD2 only covers activities involving fiat currency. Some cryptoassets may meet the definition of e-money if they are issued by a central issuer.
- Investment in cryptoassets - direct investment in cryptoassets does not fall within the perimeter unless the cryptoasset is a security token or the investment is made by a regulated investment vehicle.
- Indirect investment through financial instruments that reference cryptoassets - this is within the regulatory perimeter.
- In the ICO context - if a security token, this is within the regulatory perimeter. If the token issued is a utility token, then it won't be.
Chapter 5 of the report sets out a table on the next steps which the members of the Taskforce plan to take. This seemed particularly helpful in relation to knowing when to expect incoming consultations.
- By the end of 2018
- The FCA aims to consult on perimeter guidance on security tokens. This will clarify the current regulatory position in relation to security tokens.
- The FCA also aims to consult on a potential prohibition of the sale to retail consumers of all derivatives referencing exchange tokens (e.g., bitcoin). ESMA has restricted the sale of contracts for difference referencing cryptoassets and the FCA
- Early 2019
- The UK government intends to issue a consultation in early 2019 to explore whether (and how) exchange tokens and related firms (such as exchanges and wallet providers) could be regulated effectively. Note, the report specifically refers to a coordinated international approach being essential. This would be new - Bitcoin exchanges have not, to date, been subject to
- The UK government also plans to issue a consultation in early 2019 to explore ICOs, where tokens are issued that have comparable features to specified investments. Critically, the UK government "stands ready to redefine and expand the perimeter if required."
- The fifth Anti-Money Laundering Directive (MLD5) provisions on cryptoassets will be implemented in 2019 and the UK government intends to go beyond MLD5, and will consult in early 2019 on applying anti-money laundering requirements other persons involved in the crypto business.
- Although tax is outside the Taskforce's remit, there is a note that HM Treasury is working closely with HMRC and that HMRC will further update their guidance on the tax treatment of cryptoassets by early 2019.
There are a number of ongoing matters with no timing included in the paper as well. For example, the PRA is currently assessing the adequacy of prudential regulations, including for capital, which apply to cryptoasset-related exposures of banks, insurers and designated investment firms - we posted about the Dear CEO letter that was issued as part of this work.
The Taskforce has concluded that DLT has the potential to deliver significant benefits in both financial services and other sectors, and all three authorities will continue to support its development. HM Treasury, the FCA and the Bank of England will take action to mitigate the risks that cryptoassets pose to consumers and market integrity; to prevent the use of cryptoassets for illicit activity; to guard against threats to financial stability that could emerge in the future; and to encourage responsible development of legitimate DLT and cryptoasset-related activity in the UK.