Government and Financial Conduct Authority Responses to the Committee’s Twenty-Second Report: Crypto-assets

Appendix 2: Financial Conduct Authority Response

I am writing in response to the Treasury Committee’s Cryptoassets report of 19 September 2018, published following its inquiry into digital currencies and distributed ledger technology.

In its report, the Committee recommends that the cryptoasset market be regulated, with anti-money laundering and consumer protection considerations given priority. Your report specifically recommends that Initial Coin Offerings and cryptoasset exchanges be brought within the Regulated Activities Order (RAO) and into our perimeter.

As I am sure you are aware, the Cryptoasset Taskforce, a combined effort between the FCA, Bank of England and HM Treasury, published its final report on 29 October 2018 The report commits to prioritising actions which mitigate risks to consumers, ensure market integrity and prevent the use of cryptoassets for illicit activity.

As I said when I wrote to the Committee earlier this year on the regulatory perimeter and its impact, cryptoassets are a good example of activity for which the perimeter was not specifically designed at the time it was put into effect, and therefore there is a strong case to reassess the perimeter definition and scope.

For the purposes of assessing the perimeter, it is important to start with a more basic point, namely what are crypto-assets? We need a clear taxonomy. The report does this by separating cryptoassets into three categories:

1.Exchange tokens - which are often referred to- incorrectly in my view- as ‘cryptocurrencies’, such as Bitcoin, Litecoin and equivalents. They utilise a distributed ledger technology 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. We do not believe that they constitute money or currency.

2.Security tokens - which amount to a ‘specified investment’ as set out in the Financial Services and Markets Act (2000) (Regulated Activities) Order (RAO). 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 financial instruments under the EU’s Markets in Financial Instruments Directive II (MiFID II).

3.Utility tokens - which can be redeemed for access to a specific product or service that is typically provided using a DLT platform. I hope it is helpful to summarise what we are doing in this field.

Financial Crime

We will not tolerate the use of cryptoassets for money laundering, fraud or criminal financing. Money-to-crypto exchange firms and custodian wallet providers will be in scope of the Fifth Anti Money Laundering Directive (SMLD). As the Taskforce indicated, the Government will consult next year on broadening the UK’s regime to go beyond the activities listed in SMLD. This will include exchange between different cryptoassets, cryptoasset ATMs, peer to peer platforms and noon-custodian wallet providers. As the Government has indicated, they have asked us to consider taking on the role of supervising firms in fulfilling their AML/counterterrorism financing obligations but will seek views on this through consultation before confirming the identity of the supervisor. We are working closely with the Government on transposition of SMLD.

Consumer protection

Following ESMA’s restriction on the sale of contracts for difference which reference cryptoassets, we have committed to consult on a prohibition of the sale of all derivatives referencing exchange tokens like Bitcoin to retail consumers. We are concerned that retail consumers are purchasing complex, volatile and often leveraged derivatives products based on exchange tokens. This consultation will include CFDs, futures, options and transferable securities. In addition, some regulatory provisions within our Handbook- including the Senior Managers Regime and the Principles for Business- can apply to unregulated activities carried out by regulated firms. We will continue to hold this in mind through our supervision of regulated firms using cryptoassets.

Market integrity

The Committee’s report asks what steps we would take with regard to market manipulation were the entire cryptoasset market to be brought within our remit. We will not authorise or approve the listing of a transferable security or a fund that references exchange tokens (for example, exchange-traded funds) unless we have confidence in the integrity of the underlying market and other regulatory criteria for funds authorisation are met. We would have to be satisfied that any listing of a security with cryptoassets as the underlying asset would not be detrimental to investors’ interests. We have not approved such a listing to date.


As part of the Taskforce’s work, we have committed to consult on perimeter guidance for security tokens- which already fall within the RAO- in order to clarify the way regulation applies to them. In the interim we will continue to monitor for potential breaches by those carrying out regulated activities without the appropriate authorisation. Where firms issue cryptoassets which are similar to specified investments (e.g. shares) through Initial Coin Offerings or other mechanisms, we want to ensure these are not structured so as to avoid regulation. The Government has committed to consulting on whether this is something which can and should be addressed through FCA regulation. There is a need to consider whether regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate as a result. The Government will consult next year in order to explore whether and how exchange tokens and the firms which provide them could be regulated. I hope that the Taskforce’s report has given some of the clarity that the Committee’s report calls for. We will of course continue to monitor developments in the market both domestically and work with international partners, and will keep the Committee updated on our work in this area as it progresses.

Andrew Bailey

Published: 20 December 2018