Type of FCA recognised Cryptoassets...

Three types of crypto tokens and NFTs... What is an FCA regulated instrument?

An overview.

In this article, we will strive to introduce the key types of Cryptoassets and whether these assets are likely to be regulated or unregulated assets within the UK. As you will see later on, it is important that firms remain aware of multiple regulations. In particular, a cryptoasset may be an FCA regulated instrument, by being: 

  • specified investments under the RAO

  • financial instruments under the Markets in Financial Instruments Directive (MiFID)

  • e-money under the E-Money Regulations (EMRs)

  • within the scope of the Payments Services Regulations (PSRs)

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Type of Crypto Tokens.

Exchange tokens are sometimes known as ‘cryptocurrencies’, ‘crypto-coins’ or ‘payment tokens’, and are typically unregulated instruments.

Exchange Tokens

In the FCA's Guidance Paper (available here), the FCA recognise that these tokens are typically unregulated, predominantly as they do not provide and rights to the token-holders.

Whilst these tokens are largely unregulated, firms need to pay due regard where these tokens are used within a regulated activity. For example, in case of money remittance (payment services), some firms may used crypto exchange tokens for speed and cost-saving. Whilst in such cases, the exchange token remains unregulated, firms will need to apply caution to ensure the relevant 'other' permissions are present and risk warning applied.

Therefore, whilst the 'Exchange tokens' are not themselves regulated, the activity which firms provide (such as investment, payment services, etc) may result in the need to obtain FCA authorisation.

Utility Tokens

Whilst Utility Tokens these tokens typically grant rights to the holders in current or future services, however these services do not resemble traditional investment instruments (such as voting rights, dividends, etc). An example would be FunFair token.

Where the rights resemble e-money or other specified investments, the token may require regulation. Otherwise, it would be outside of FCA regulation.

Utility tokens as those tokens that provide consumers with access to a current or prospective product or service and often grant rights similar to pre-payment vouchers.

The final category used by The FCA is Security Tokens. These tokens are typically within FCA regulation and therefore firms would need to seek certain prior permissions.

Security Tokens

The final category used by The FCA is Security Tokens. These tokens are typically within FCA regulation and therefore firms would need to seek certain prior permissions. These are tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument.

It is important to note that e-money tokens retain their own category to reflect that e-money tokens (which meet the requirements), are subject to the Electronic Money Regulation (EMR) and thus requires further FCA licensing/regitration.

E-money Tokens

Put simply, this could include any crypto-tokens (or coins) that is:

  • electronically stored monetary value that represents a claim on the issuer

  • issued on receipt of funds for the purpose of making payment transactions

  • accepted by a person other than the issuer

  • not excluded by regulation 3 of the EMRs

E-money tokens are tokens that meet the definition of electronic money in the EMRs.

Stablecoins attempt to stabelise their value through a range of mechanism, meaning that some may be regulated instruments.

Stablecoins

Following on from the above, not every ‘stablecoin’ will meet the definition of e-money, or a security token. Those that aim to stabilise their value through collective investment schemes, debt or other securities are likely to be a regulated instrument. 

While these tokens may not meet the definition of e-money, they could fall inside the perimeter in other ways, for example, as security tokens. Depending on structure and arrangement, tokens could meet the definition of units in
a collective investment scheme, debt securities or other types of specified investments. Given the structure of rights attached to such tokens varies greatly, judgements on whether they fall under the scope of regulation can only be made on a case-by-case basis.

Non-fungible Tokens (NFTs)

Guidance surrounding NFTs is scare at present. Neither The FCA nor HMRC has issued a clear guidance on the interpretation of NFTs and where they may sit in the regulatory world. 

That said, following individual assessments, firms should consider whether NFT being issued would resemble any of the above categories and their descriptions (eg, a regulated instrument under the ROA, EMR, etc).

Therefore, generally speaking, NFT would likely to be a utility or exchange token and therefore be unregulated. However, an NFT could possibly provide rights and obligations similar to specified investments which could blur the line between regulated and unregulated tokens.

A Non-Fungible Token (NFT) is a one-of-a-kind digital token that is permanently linked to a piece and is encrypted with the artist's signature. It validates the piece's ownership and authenticity.