Fintelum participated in the round of feedback to the UK financial regulator Financial Conduct Authority (FCA) to ensure the final guidance planned by summer 2019 to accurately reflect the market needs. Earlier this year FCA published document “CP19/3: Guidance on Cryptoassets” and invited crypto market participants to provide feedback on crypto assets classification and answer several questions by 5 April 2019.
Q1: Do you agree that exchange tokens do not constitute specified investments and do not fall within the FCA’s regulatory perimeter? If not, please explain why.
We agree that exchange tokens (like bitcoin or ethereum) are not specified investments. However, we think that market abuse regulations and rules regarding client asset security could be applied to the operators of exchange token and utility token trading venues (in a similar manner that AML/KYC requirements are applied to such venues without being authorised firms).
Q2: Do you agree with our assessment of how security tokens can be categorised as a specified investment or financial instrument? If not, please explain why.
We generally agree with the assessment. However, we think that any additional authorisation requirements, where issuance is exempted from a prospectus, in relation to the issuer of a security token (e.g. activities like promotion of issuer’s own security token) are excessive. Security token issuer should be allowed to promote its own security token freely as long as the information is not misleading. Also the issuance and distribution of a security token which is not subject to a prospectus requirement (small amount fundraise below the prospectus threshold) should not require the involvement of an FCA authorised firm (investment advisor).
Q3: Do you agree with our assessment of utility tokens? If not, please explain why.
Yes.
Q4: Do you agree with our assessment that exchange tokens could be used to facilitate regulated payments?
Yes.
Q5: Are there other use cases of cryptoassets being used to facilitate payments where further Guidance could be beneficial? If so, please state what they are.
New use cases are made available regularly, and regulators should not unnecessarily hinder the innovation.
Q6: Do you agree with our assessment of stablecoins in respect of the perimeter?
Yes, we agree that most stablecoins which derive value from underlying fiat deposit constitute e-money.
Q7: Do all the sections above cover the main types of business models and tokens that are being developed in the market?
There is still not sufficient clarity in respect of utility tokens which have some security token features e.g. commissions payment token for services on a platform with a buy-back price formula depending on company’s profitability.
Q8: Are there other significant tokens or models that we haven’t considered?
FCA should clarify if listing prospectus is needed when security tokens without issuance prospectus are listed for secondary trading on MTF or OTF.
Q9: Are there other key market participants that are a part of the cryptoasset market value chain?
For instance firms like Fintelum provide token sale compliance, security token issuance and after-services, like the management of token holder registry, announcements, voting etc. Fintelum has developed its own security token implementation which allows exchange only among KYC “white-listed” persons. Fintelum also intends to provide a web service where KYC “white-listed” persons can post their buy and sell intentions as advertisements in relation to security tokens on a peer-to-peer basis (only in relation to tokens where Fintelum has provided compliance services to the issuer). We believe such activities fall outside the regulated activity listing but would like to see a further clarification.
Q10: Are there activities that market participants carry on in the cryptoasset market that do not map neatly into traditional securities?
In addition to Q9, security token issuance smart contract is often created as a multisignature contract, where compliance and blockchain solutions providers (like Fintelum) hold one of the keys. This is necessary to ensure smooth issuance and maintenance of security tokens. We believe such activity should not constitute safeguarding of securities.