UK Financial Watchdog Gives Green Light to E-money Tokens
Seven months of consultations and their evaluation resulted in the much-anticipated guidance for cryptoassets from the Financial Conduct Authority (“FCA”) in the United Kingdom.
On July 31, 2019, the UK financial regulator has issued the Final Guidance on Cryptoassets (“Guidance”), bringing much expected and necessary clarity to the regulation of cryptoassets in the country. Among other things, the Guidance defines the types of cryptoassets falling under the existing regulatory perimeter and provides advice for market participants.
Since the Cryptoassets Taskforce Report of October 2018 was published, we used to divide cryptoassets into the exchange, utility or security tokens. This taxonomy rapidly became conventional wisdom for crypto tokens in the UK, and, due to a lack of official government response in most of the EU countries — the commonly accepted approach. But now, according to a new regulator’s policy, it is correct to point out security, e-money and unregulated tokens (including exchange or utility tokens that do not meet the definition of either security or e-money tokens).
For the first time, the Guidance establishes a brand new category of cryptoassets — e-money tokens. Notably, many industry players proposed to introduce such a category during consultations, which evidently demonstrates that the demand for the e-money based on the DLT technology is huge.
FCA defined e-money tokens as “any token that reaches the definition of e-money. These tokens are subject to the EMRs and firms must ensure they have the correct permissions and follow the relevant rules and regulations. This category formerly sat within the utility tokens category. These tokens fall within regulation.”
In return, the FCA Handbook defines e-money as “electronically (including magnetically) stored monetary value as represented by a claim to on the electronic money issuer which is: (a) issued on receipt of funds for the purpose of making payment transactions… and (b) accepted by a person other than the electronic money issuer.”
According to both definitions, we see that issuance of e-money tokens will require authorisation with the FCA as an Electronic Money Institution (unless the issuer is subject to supervision as a credit institution). However, is everything so straightforward with this?
From our perspective, one important issue remains open and it is, as usual, about definitions. From the above-mentioned definition of e-money, it appears that they should be issued on receipt of funds. “Funds” here should be understood as defined in the Payment Services Regulations 2017, in particular, as banknotes or coins, scriptural money, and electronic money. Still, most of the cryptoassets are considered neither scriptural money nor electronic money, and of course, they are not banknotes or coins (crypto coins are not coins, funny, isn’t it?).
Therefore, if a stablecoin is pegged to fiat currency but issued on receipt of cryptoassets that are not funds, would it fit the definition of e-money? The Guidance does not solve this collision. The FCA keeps this question open, reserving the right to consider whether a particular stablecoin is e-money token on a case-by-case basis.
Nonetheless, if you have already decided to proceed with e-money tokens, the good news for you is that they are expressly excluded from the definition of specified investments under the Regulated Activities Order. So, at least, issuing e-money tokens wouldn’t require from you to comply with FSMA regulations.
However, the point you need to scrutinize is the Electronic Money Regulations 2011 to ensure a business is appropriately authorised, registered, or exempt. You will also need to pay attention to the Payment Service Regulations 2017 and seek authorisation if your e-money token is used to facilitate regulated payment services.
Finally, you also should keep in mind the forthcoming changes caused by the, 15th Anti-Money-Laundering Directive (“5AMLD”). Despite the Brexit, the, 15AMLD will bring the AML/CFT regime for cryptoassets in the UK. We believe it would cover e-money tokens as well. Further guidance from the FCA on this matter is on the way, so stay tuned.
By all means, the FCA Guidance on cryptoassets brought a long-awaited clarity to the market, although many things still have to be proved in a live environment. Since the crypto industry has been moving from the Wild West to a well-shaped level playing field, any business which is going to provide regulated services should be well aware of what the FCA promulgates through its Guidance. Otherwise, the consequences of non-compliance are severe, and that, by the way, was emphasized by the FCA in the very beginning of the Guidance (up to 2 years’ imprisonment in the worst scenario).
As compliance experts, we strongly suggest following the market response to the Guidance, together with further FCA policy statements and regulatory actions, both in the form of newly granted authorisations and enforcements.
Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. This article outlines the personal thoughts of the authors and may not conform to the position of their companies.
Sergio Mokhniev & Kristina Nikipolska
Compliance Experts at Legal Nodes
Need a lawyer in this area?
6 years in AML