Cryptoassets are a superset of cryptocurrencies. The most widely known cryptocurrency is Bitcoin. Altcoins and crypto tokens are subset categories of cryptocurrency. Litecoin, Bitcoin Cash and Dogecoin are common examples of altcoins. Crypto tokens are special cryptoasset tokens that reside on their own blockchains and represent an asset or utility .
Bitcoin and altcoins are virtual currencies that have dedicated blockchains and are primarily used as a medium for digital payments. Crypto tokens, however, operate on top of a blockchain that acts as a medium for creation and execution of decentralised apps and smart contracts and are used to facilitate transactions. In the following subsections, we briefly introduce virtual currency products (including Bitcoin and Ether), utility tokens, security tokens and stablecoins
Based on the feedback the FCA had received on its original taxonomy, cryptoassets are divided into three categories:
Security tokens: these cryptoassets provide rights and obligations similar to specified investments as set out in the Regulated Activities Order (RAO), including those that are financial instruments under MiFID II, and excluding e-money. Firms carrying on regulated activities involving cryptoassets that satisfy the security token definition will need to ensure that they are appropriately authorised or exempted by the FCA, and comply with the relevant securities regulations in the UK.
E-money tokens: these are cryptoassets that satisfy the definition of e-money, that is: (i) they are an electronically stored monetary value representing a claim on the issuer; (ii) they are issued on receipt of funds to make payment transactions; (iii) they are accepted by a person other than the issuer; and (iv) they are not excluded by regulation 3 of the Electronic Money Regulations (EMRs). These tokens are subject to the EMRs, and firms carrying on business in such tokens should ensure that they have the right permissions and follow the relevant rules and regulations.
Unregulated tokens: usually referred to as utility or exchange tokens, these tokens do not either (i) satisfy the definition of e-money, or (ii) provide the same rights as specified investments under the RAO. These tokens fall outside the regulatory perimeter.
Scope of cryptoasset activities
The Treasury has published the Statutory Instrument(link is external) which covers the activities specified in the EU’s 5th Money Laundering Directive (5MLD) and a wider range of activities as recommended by the Financial Action Task Force (FATF).
Cryptoasset businesses carrying on the activities listed below must comply with the MLRs from 10 January 2020.
|Cryptoasset activity||As described in the Statutory Instrument|
|Cryptoasset exchange provider (including Cryptoasset Automated Teller Machine (ATM), Peer to Peer Providers, Issuing new cryptoassets, e.g Initial Coin Offering (ICO) or Initial Exchange Offerings).||a firm or sole practitioner who by way of business provides one or more of the following services, including where the firm or sole practitioner does so as creator or issuer of any of the cryptoassets involved, when providing such services.|
(a) exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets,
(b) exchanging, or arranging or making arrangements with a view to the exchange of, one cryptoasset for another, or
(c) operating a machine which utilises automated processes to exchange cryptoassets for money or money for cryptoassets.
|Custodian Wallet Providers||a firm or sole practitioner who by way of business provides services to safeguard, or to safeguard and administer cryptoassets on behalf of its customers, or private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets, when providing such services.|
Compliance with MLRs
From 10 January 2020, UK cryptoasset businesses must comply with the MLRs.
Please contact us if you are thinking of dealing with cryptoassets as a business and we will guide you towards an appropriate licence relevant for your planned activity.