UK's Cryptoassets Task Force Delivers Latest Report – Consultations Pending But No Bans Yet

Introduction 

On October 30, the UK’s Cryptoassets Taskforce consisting of the Bank of England, the Financial Conduct Authority and HM Treasury published its final report on the UK regulation of cryptoassets (the “Report”). 

The Report sets out the Taskforce’s view on the existing UK regulatory perimeter in respect of cryptoassets; an overview of the risks and benefits posed by cryptoassets; and a discussion of the benefits of distributed ledger technology (“DLT”). 

Headline Items 

The FCA will issue consultation papers later this year proposing: 

1. banning the sale to retail consumers of all derivatives referencing exchange tokens¹; and 
2. regulatory guidance in respect of the UK regulatory perimeter applicable to security tokens². 

HM Treasury will issue consultation papers early next year in respect of: 

1. extending the regulatory perimeter with regard to activities related to ICOs³, and the regulation of exchange tokens; and 
2. “gold plating” the EU 5th Money Laundering Directive (“5MLD”) to capture additional types of crypto businesses when 5MLD is implemented. 

The Report is supportive of the application of DLT within the UK financial services sector, noting it could have significant benefits and that currently there appear to be no significant UK regulatory barriers prohibiting the expansion of the application of DLT. 

However, the Report is explicit that the FCA will not authorise or approve the listing of a transferable security or a fund that references exchange tokens (for example, an exchange traded fund) unless it has confidence in the integrity of the underlying market relating to the relevant exchange token(s). 

Pending Consultations 

Derivatives referencing exchange tokens 

The FCA will consult on a prohibition of the sale to retail consumers of all derivatives referencing exchange tokens such as Bitcoin, including contracts for differences (“CFDs”), futures, options and other transferable securities. 

Security tokens 

The Report confirms that security tokens fall within the current UK regulatory perimeter. However, it recognises that the nature of some cryptoassets and the presence of new market participants may mean the regulatory perimeter is not being correctly understood by market participants. 

Consequently, the FCA will consult on perimeter guidance by the end of 2018. This guidance will set out the FCA’s interpretation of the current regulatory perimeter with respect to security tokens. 

ICOs 

The Report concludes that activities related to cryptoassets structured to have comparable features to an existing regulated investment should be regulated in order to protect investors, eliminate fraudulent activity and ensure market integrity. 

As such, HM Treasury will issue a consultation in early 2019 to explore further whether there are examples of such cryptoassets in the UK market and, if so, whether an extension of the regulatory perimeter is required. 

Exchange tokens 

HM Treasury will issue a consultation in early 2019 to further explore whether and how exchange tokens and related firms such as exchanges and wallet providers could be regulated. 

Comment 

The Report contains no proposals to regulate utility tokens⁴. This contrasts with the recent House of Commons Treasury Committee report on crypto-assets⁵ which called on the UK government to regulate all cryptoasset activity (including ICOs) and cryptoasset exchanges. 

“Gold Plating” of 5MLD 

Although the Taskforce concludes that, while the use of cryptoassets for illicit activity remains low, in its view this risk is increasing, as is the use of cryptoassets for money laundering. Therefore, HM Treasury will consult in early 2019 on bringing the following within the scope of 5MLD: 

• exchange services between different cryptoassets, to prevent anonymous ‘layering’ of funds to mask their origin 
• platforms that facilitate peer-to-peer exchange of cryptoassets, which could enable anonymous transfers of funds between individuals 
• cryptoasset ATMs, which could be used anonymously to purchase cryptoassets 
• non-custodian wallet providers that function similarly to custodian wallet providers, which may otherwise facilitate the anonymous storage and transfer of cryptoassets 
• whether to require firms based outside the UK to comply with 5MLD when providing services to UK consumers, in order to prevent illicit actors in the UK from dealing with firms based abroad and therefore bypassing 5MLD. 

The practical consequence here is that these businesses will be subject to the AML/KYC regulations in 5MLD. 

Comment 

HM Treasury’s proposal to implement specific requirements and guidance relating to AML and KYC obligations in relation to cryptoassets should bring certainty as to the steps market participants need to take and drive up current best practice. 

Footnotes

_{1) An “exchange token” here means a cryptoasset often referred to as a cryptocurrency such as Bitcoin, Litecoin and equivalents. Exchange tokens utilise a DLT platform and are not issued or backed by a central bank or other central body. They do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment.
2) A “security token” here means a cryptoasset that falls within the definition of an existing regulated investment in the UK, typically providing rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
3) An “ICO” here means an initial coin offering relating to an exchange token.
4) A “utility token” here means a cryptoasset that can be redeemed for access to a specific product or service that is typically provided using a DLT platform.
5) See our recent OnPoint here for more commentary.}