UK Takes Steps Towards Legal Clarity for Cryptos—Does Not See Utility Token As Securities

UK Takes Steps Towards Legal Clarity for Cryptos—Does Not See Utility Token As Securities

The United Kingdom’s Financial Conduct Authority (FCA) released a ‘consultation paper’ on Jan. 23rd as part of its next step on working with crypto assets. It sets out details on where different types of crypto assets might fall in the regulatory perimeter.

This consultation paper allows the public to give feedback on the proposed measures that the FCA is taking in regards to classifying and regulating cryptocurrencies. The consultation phase will close on Apr. 5th.

The FCA has explained the reason behind this paper, highlighting the need for regulatory clarity in the crypto asset market due to the quickly developing blockchain technology which underlies it.

“We are consulting on Guidance for crypto assets to provide regulatory clarity for market participants carrying on activities in this space. The crypto asset market, and the underlying DLT technology, is developing quickly and participants need to be clear on where they are conducting activities that fall within the scope of the FCA’s regulatory remit and for which they require authorisation,” the FCA stated, introducing the paper.

It is a big step for the cryptocurrency ecosystem within the United Kingdom as this paper will not only provide legal certainty for the market, but it also seems to be taking a different stance on other less inviting regulatory framework being established across the globe.

United Kingdom Opens the Doors for ICOs

Equivalent to the United States’ SEC, the FCA has decided that utility tokens are not securities within their jurisdiction, regardless of functionality.

This differs substantially with the US and its SEC’s “fully decentralized” or Howey test for utility tokens. The FCA says there are two kinds of tokens: “Exchange Tokens” (such as cryptocurrencies like Bitcoin, Litecoin, and others) which are totally out of their jurisdiction, and “Security Tokens” (tokenised equity, royalty streams,) are within their purview.

In this sense, to be securities, utility tokens must have hallmarks of traditional securities. In other words, they must confer rights that correspond to these particular obligations.

For ICOs in the United Kingdom, this is positive news. Their token sales are more akin to crowdfunding, as there is no form of Howey test, or equivalent, within the UK legislation. The FCA has said that the decentralization of a network does not determine its status as a security.

In recent times, there has been more of a drive from governments and regulatory bodies to set out a framework for the cryptocurrency industry to work within. South Africa has also released a similar consultation paper as they try to set a framework for the crypto asset ecosystem in the African country.

Given that the UK is one of the globe’s financial hubs, and one of the more trusted places to do business, the classification could be a reason for cryptocurrency companies to avail themselves to those laws. By extension, the clarity is may have positive ramifications on the market.

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