Amid the chaos imposed by the Brexit Referendum, U.K. regulatory agencies are still at work weighing how they’ll deal with the cryptocurrency space.
They have at least one answer that is a departure from how the United States is attempting to regulate the new asset class.
The U.K. securities regulator, the Financial Conduct Authority (FCA), has just released its Guidance of Crypto Assets. While regulations are not concrete, this guideline allows for market feedback before solidifying regulations. As of now, the paper is rather lenient toward the classification of tokens as securities — a major concern for ICO developers and customers and exchanges that offer them. The FCA is attempting clarity, not trying to create strict new regulations:
“We have tried to make sure that our Guidance is as clear and complete as possible so we don’t create inappropriate barriers to entry, or conflicts with our aims and objectives.”
The FCA has indicated three token classifications for use: exchanges tokens such as Bitcoin (BTC) and Litecoine (LTC), securities tokens such as PolyMath (POLY), and utility tokens, which has garnered the greatest interest because of early signaling from the U.S. Securities and Exchange Commission that its default setting is to see most tokens as securities.
“The majority of tokens that are issued through ICOs to the market tend to be marketed as utility tokens, although it is difficult to comment on whether those tokens are true utility tokens,” according to the paper.
The FCA intends to clarify the language so it better describes what is a utility token and what is a security. If a token is deemed a security, the ICO must abide by specified investment regulations. If a token is considered a utility, however, the FCA says it is outside their perimeter of regulation.
Securities tokens are classified as tokens that offer: Contractual rights by holding, dividends, entitlements (such as voting rights), language in a white paper that says the token is an investment, being listed on exchanges or other secondary markets, and direct flow of payment from the issuer.
The classification seems to allow for leniency on most of these points, however.
According to the FCA, utility tokens, “can usually be traded on the secondary markets and be used for speculative investment purposes. This does not mean these tokens constitute Specified Investments.”
This sounds like a security token under S.E.C. regulations, but the FCA has cleared the way for more leniency in the crypto space.
Furthermore, the decentralization of a project increases the likelihood of a utility classification, due to a creators inability to uphold entitlements such as dividends,voting, and contractual rights. These rights may exist in some capacity for investors, but a lack of direct issuance of these rights from token developers may remove them from the regulatory eye.
It would seem that in order to classify a token as a security, it must meet many if not all of the requirements listed by the FCA. Utility tokens will be able to function as intended without the blockade imposed by regulation if this ends up being true. Even if services and products are only prospective, the classification can still be as utility regardless of the likelihood of speculation. The intent of the companies is taken into account, rather than relying on investor manipulated price swings.
Often looked at as the rule of law on financial regulation, the SEC holds very different opinions on cryptos as securities. Blockchain and fintech advisor, Marco Santori reminds us that “The UK has *very* different securities laws than the US does.”
He says that due to the lack of the U.S. Howey Test, “There’s no notion of an “investment contract” – the catch-all that catches so much in the US.
Sure there’s a “collective investment scheme” but that has some pretty strict requirements in the UK.” The determining factors of securities in the crypto space are significantly more lenient in the U.K. due to this.
In order to create a legal predilection toward crypto, it takes individuals to voice their opinions and support for the industry. Citizens of the U.K must speak up and express how they wish the FCA to proceed. The implications of doing so may favor growth and prosperity without the hindrance of erroneous classifications and laws.
We at Crypto.IQ see this as a solid, thoughtful approach to regulation that takes into account the ideas of those already in the space. We think the U.S. is risking being squeezed out of a revolutionary technology while other countries position themselves to be leaders in this brave new world.