With this Communication, the FSMA wants to provide clarity, while awaiting a harmonized European approach, about when cryptoassets may be considered to be securities, investment instruments or financial instruments, and whether they may fall within the scope of the prospectus legislation and/or the MiFID conduct of business rules.

In October 2018, the UK Cryptoassets Taskforce issued a report on the UK's policy and regulatory approach to distributed ledger technology and cryptoassets, setting out some of the potential risks and benefits they present, and making various commitments.

The FCA's guidance consultation comes as a response to one of those commitments, namely providing firms with additional clarity about the current 'regulatory perimeter', which "separates regulated and unregulated financial services activities".

As such, the guidance focuses on the FCA's regulatory perimeter.

Specifically, it looks at where cryptoassets would be considered specified investments under the Regulated Activities Order (RAO), financial instruments under MiFID II or captured under the Payment Services Regulations or the E-Money Regulations.

In line with the Taskforce, the guidance categorises cryptoassets into three main types: exchange, security and utility tokens, explaining whether each falls within the FCA's remit and, if so, what this means for market participants.

The FCA warned:

"Assessing whether a cryptoasset is within the perimeter can only be done on a case-by-case basis, with reference to a number of different factors… Ultimately, it is a firm’s responsibility to make sure that it has the correct permissions for the activities it intends to engage in and we encourage market participants to obtain independent advice if they think the position remains unclear."

Exchange tokens

"This means that the transferring, buying and selling of these tokens, including the commercial operation of cryptoasset exchanges for exchange tokens, are activities not currently regulated by the FCA."

So, exchanges or any organisation that facilitate transactions of bitcoins, ether, litecoin or other exchange tokens between participants are not carrying a regulated activity.

Security tokens

For those cryptoasset activities involving cryptoassets that meet the definition of a specified investment as set out in the RAO (and possibly also a financial instrument under MiFID II), an authorisation or exemption will be required.

However, the FCA noted that determining whether a token is a specified investment is not always easy, especially for those that are securities, such as shares, debt instruments warrants, certificates representing certain securities, units in collective investment schemes, rights and interests in investments.

For each of these categories, the regulator gave examples of some factors that may show that a token qualifies as a security.

Utility tokens

As utility tokens do not typically show features that would make them the same as securities, they will not be captured in the regulatory regime, unless they meet the definition of e-money or are "used to facilitate regulated payments services".

The FCA concluded:

"Where a person is engaged in activity by way of business in the UK, that relates to a security token, or to a token that constitutes e-money, or is involved in payment services, they should consider whether those activities require authorisation," the FCA said.

This will determine which permissions are needed from the FCA.

Her Majesty’s Treasury is set to publish a consultation in 2019 that considers the options for bringing further cryptoasset-related activity within the regulatory perimeter.

It will also consult on the transposition of the EU’s Fifth Anti-Money laundering Directive and the broadening of anti-money laundering/counter terrorism financing regulation in relation to cryptoassets.

“Any legislative change will require the FCA to consult on the new activities to be brought into the regulatory perimeter, and the FCA will work with HMT on this”, the guidance states.

The FCA will consult later in the year on banning the sale of derivatives linked to certain types of cryptoassets to retail investors and the government is also planning to consult on whether to expand the regulatory perimeter to include further cryptoassets activities.

The FCA said:

"We are aware of a growing number of UK firms offering so-called cryptocurrencies and cryptocurrency-related assets. As indicated in our Feedback Statement on DLT, cryptocurrencies are not currently regulated by the FCA provided they are not part of other regulated products or services."

However, cryptocurrency derivatives can be financial instruments under MiFID II, although the regulator does not consider cryptocurrencies "to be currencies or commodities for regulatory purposes under MiFID II".

"Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations," the statement said.

Other regulated activities that reference to either cryptocurrencies or tokens issued through an initial coin offering (ICO) are also likely to require FCA authorisation, including cryptocurrency futures, cryptocurrency contracts for difference and cryptocurrency options.

The regulator advised firms that are unsure whether they require authorisation to check its general guidance on the regulatory perimeter in PERG and to seek expert advice.