The cryptocurrency craze has been taking over the world, getting gradually more and more popular year on year. However, since the popularity has grown, so has the need for effective regulation.
Within the last month, Binance, ‘the world’s largest crypto exchange’ was banned by the UK Financial Conduct Authority (‘FCA’). They ruled that Binance cannot conduct any “regulated activity” in the UK without the prior written consent of the FCA. It had until Wednesday 30th June to comply with the ruling. The regulator also stressed that not one entity in the Binance Group holds any form of the necessary authorisation, registration or license to conduct regulated activity in the UK. It also issued a consumer warning about Binance.com, advising people to be wary of adverts promising high returns on cryptoasset investments.
The current FCA guidance for companies on cryptoassets in its most basic form is clearly displayed on the FCA website at https://www.fca.org.uk/publication/documents/cryptoasset-registration-flowchart.pdf. While the FCA does not regulate crypto-currencies, it does regulate cryptoassets. Firms must be authorised by the regulator in order to advertise or sell such products in the UK. This means that people in the UK are not allowed to use Binance’s services to speculate, or bet, on whether the price of a crypto-currency like Bitcoin goes up or down. However, they are still allowed to use the website to purchase and sell crypto-currencies, which is not regulated, crypto-currency analyst Colin Stone told the World Business Report programme on BBC World Service.
You may ask what the difference between cryptocurrencies and cryptoassets?
According to the definition provided by the Bank of England (https://www.bankofengland.co.uk/knowledgebank/what-are-cryptocurrencies) ‘well, let’s start by breaking down the word ‘cryptocurrency’. The first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ reflecting the secure technology used to record who owns what, and for making payments between users. The second part of the word, ‘currency,’ tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.’ Cryptoassets are defined by the FCA (https://www.fca.org.uk/firms/cryptoassets) as ‘cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.’
A distributed ledger is an append-only data storage mechanism in which data is stored at multiple locations on a shared network. A distributed ledger will often store data in the form of a blockchain, a type of data structure consisting of blocks of data with a strict sequential ordering, but not all distributed ledgers use a blockchain as their underlying data structure.The FCA categorises cryptoassets (as they stand at the time of writing this blog however, regulations are ever changing) as being regulated and unregulated.
- Security tokens: These are tokens that amount to a ‘Specified Investment’ under the Regulated Activities Order (‘RAO’), excluding e-money. These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instrument under the EU’s Markets in Financial Instruments Directive II (MiFID II). These tokens are likely to be inside the FCA’s regulatory perimeter.
- E-money tokens: These are tokens that meet the definition of e-money under the Electronic Money Regulations (‘EMRs’). These tokens fall within regulation.
- Any tokens that are not security tokens or e-money tokens are unregulated tokens. This category includes utility tokens which can be redeemed for access to a specific product or service that is typically provided using a DLT platform.
- The category also includes tokens such as Bitcoin, Litecoin and equivalents, and often referred to as ‘cryptocurrencies’, ‘cryptocoins’ or ‘payment tokens’. These tokens are usually decentralised and designed to be used primarily as a medium of exchange. We sometimes refer to them as exchange tokens and 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.