Regular readers will be familiar with our previous commentary on cryptoassets and the increasing focus of the UK government and regulators on this area.
On 29 October 2018, a further development took place with the publication of the final report of the Bank of England, FCA and HM Treasury Cryptoassets Taskforce. The report included details of consultations which UK authorities plan to issue over the next few months in order to mitigate the regulatory risks associated with the cryptoasset ecosystem.
Firstly, the FCA has proposed a ban on the sale of derivatives, including CFDs, options, futures and transferable securities, which reference certain types of cryptoassets. This proposal goes further than the current restrictions that ESMA has imposed on the sale of such products to retail customers. For example, the current ESMA requirement is that the leverage in CFD contracts referencing cryptoassets must not exceed 2:1. The FCA hopes that its proposal will address some of the concerns which have arisen around consumer protection and market integrity given the volatility and illiquidity of these products.
Secondly, a consultation mapping out the FCA’s interpretation of the current regulatory perimeter with respect to cryptoassets will be published before the end of 2018. At present, security tokens (issued through Initial Coin Offerings (ICOs)) fall within the UK regulatory framework but ICOs do not. The FCA expressed concern in the report that the “novel nature” of some cryptoassets and the presence of new market participants may mean that the current regulatory position is not being correctly understood. In particular, market practitioners expect the FCA to clarify its approach with respect to ICOs and the differentiation between utility and security tokens.
Thirdly, the Treasury will issue a consultation in early 2019 exploring whether there are examples of cryptoassets which have comparable features to specified investments but are structured in such a way that they avoid regulation. The report states that such products should be regulated in order to protect investors, eliminate fraudulent activity and ensure market integrity and notes that the government “stands ready” to redefine the regulatory perimeter as required.
Fourthly, aware of the “increasing” risk of cryptoassets being used to facilitate money laundering and financial crime, the government will consult on going “significantly beyond” the protections contemplated in the Fifth Money Laundering Directive ((EU) 2018/843). It plans to extend the reach of the implementing legislation to include exchange services between different cryptoassets, cryptoasset ATMs and non-custodian cryptoasset wallet providers. The government will also consider whether firms based outside the UK should comply with these regulations when providing services to UK consumers in order to prevent illicit actors in the UK dealing with firms based abroad and therefore bypassing UK regulation.
Fifthly, the government expects to issue a consultation in early 2019 to further explore whether and how exchanges listing tokens and related wallet providers could be regulated. The report explicitly acknowledges that exchange tokens are unlike other financial service products and present “new challenges” to traditional forms of financial regulation. The government, FCA and BoE are particularly aware of the need for regulatory initiatives in this space to be globally aligned, in order to ensure global coherence and prevent regulatory arbitrage in a sector which is not confined to national boundaries and that involves highly mobile actors. Accordingly the Treasury has stated its intention to engage internationally on these efforts through the organisations like the G20, the European Securities and Markets Authority and the Financial Action Task Force.
In news which also nods to the higher level of regulatory oversight we are seeing in this space, DLA Piper has joined Global Digital Finance’s (GDF) cryptoassets sector circle on 31 October 2018 as a Founding Member. This follows the release of the industry led Code of Conduct and Taxonomy for Cryptographic Assets. The Founding Members will support GDF in developing its global strategy and growing a community membership of firms who wish to adhere to the Code of Conduct. For further information please refer to the associated press release.
and then 