Nature of crypto assets in the UK

What is a "cryptoasset"?


  • According to the ML Regs, a cryptoasset is a cryptographically secure digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically; cryptoassets include both those that are centralized, i.e., issued by an administrator, and those that are decentralized.

    Co-written by Merkle Science & FinReg 



    The UK framework of cryptoassets consists of "regulated tokens" and "unregulated tokens". Regulated tokens include "security tokens" and "e-money tokens" only, while unregulated tokens include everything else including "utility tokens", "exchange tokens" and NFTs.

    According to FCA,

    Regulated tokens
    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.

    Unregulated tokens
    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.

    You can find out more about which cryptoasset activities we regulate in PS19/22: Guidance on Cryptoassets. Any firm carrying on a regulated activity will need to be authorised by us. Find out more about the authorisation process.

    According to FCA (Guidance on Cryptoassets)
    last revised July 2019

    34. Unregulated tokens are those tokens that do not provide rights or obligations akin to specified investments (like shares, debt securities and e-money).

    35. These tokens can be centrally issued, decentralised, primarily used as a means of exchange, or grant access to a current or prospective product or service. They might be used in one or many networks or ecosystems. They can be ‘privacy tokens’, ‘fungible utility tokens’, ‘non-fungible tokens’, ‘access tokens’ etc. They can be fully transferable or have restricted
    transferability.

    36. The key thing to note is that any token that is not a security token, or an e-money token is an unregulated token.

    2.2 Our consultation broadly described exchange tokens as those types of cryptoasset that are usually decentralised and primarily used as a means of exchange. These tokens are sometimes known as ‘cryptocurrencies’, ‘crypto-coins’ or ‘payment tokens’. These tokens are designed to provide limited or no rights for tokens holders, and there is usually not a single issuer to enforce rights against.

    2.21 Our consultation described utility tokens as those tokens that provide consumers with access to a current or prospective product or service and often grant rights similar to pre-payment vouchers.

FinReg business tip

Cryptocurrencies in the UK are regulated for anti-money laundering (AML) purposes. Tokens are also regulated by their characteristics. Depending on the token (i.e if it is a utility token or e-money token) they may subject to different regulations.