Metaverse 101: Cryptoassets (including NFTs)- Selling and Distribution
22 June 2022
In this next instalment of our Metaverse 101 series, we look at some of the regulatory issues to consider when selling and distributing cryptoassets (we covered regulatory issues concerning the advertising of cryptoassets in our earlier article). As this is a new and developing area of law, there are often more questions than there are answers. This post explores the relevant regulatory regimes applicable to cryptoassets for which the UK Financial Conduct Authority has responsibility.
Cryptoassets and financial services regulation
Different regulatory regimes adopt different definitions of cryptoasset, so it is possible to be caught under one regime and not another. Or to put it another way you cannot assume that if you are out of scope of one regulatory regime then none of the regulatory regimes will apply.
Is your cryptoasset or token a regulated token, and will you need FCA authorisation to carry on regulated activities in relation to that token?
The FCA published guidance in 2019 on the types of tokens that would be regulated. These include security tokens and e-money tokens. E-money tokens are those tokens that satisfy the definition of e-money. Security tokens are tokens with specific characteristics that meet the definition of a specified investment under the Financial Services and Markets Act 2000 (“FSMA”) and subsidiary legislation. A security token could, for example, be a share, a unit in a collective investment scheme, or a debt instrument.
All other tokens, if they are not security tokens or e-money tokens, are unregulated. These may include for example utility tokens and exchange tokens. Basic NFTs, which constitute a digital certificate of ownership of a digital collectible, for example, are likely to be unregulated.
Businesses operating in the UK in relation to security tokens or e-money tokens should consider whether the activities they plan to carry on may be regulated and whether they need to be authorised by the UK FCA under FSMA or the Electronic Money Regulations 2011. Activities that may be caught include dealing in investments as principal or as agent, arranging deals in investments, advising on investments, safeguarding and administering investments, or issuing e-money and money remittance.
Will you be carrying on exchange or custodial activities in relation to cryptoassets that require you to be registered with the UK FCA as a cryptoasset exchange provider or custodian wallet provider?
Even if, upon analysis, you conclude that the token in question is unregulated and that you will not be carrying on regulated activities requiring authorisation by the FCA, it is then necessary to consider whether the services you are providing in relation to cryptoassets will require you to be registered with the UK FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR”). The definition of cryptoasset under the MLR is sufficiently wide that the vast majority of cryptoassets will be within scope, and it is necessary to consider the nature of the activity being carried out in relation to those cryptoassets.
Firms that provide the service of exchanging cryptoassets for money or for other cryptoassets will be caught under the MLR as cryptoasset exchange providers. The definition goes further, and will also capture firms that “arrange” or “make arrangements with a view to” the exchange of cryptoassets for money or for other cryptoassets. This could capture, for example, those firms who have referral arrangements with cryptoasset exchanges.
Firms that provide the service of safeguarding private cryptographic keys on behalf of customers in order to store, hold and transfer cryptoassets will be caught under the MLR as custodian wallet providers.
Firms that are already authorised by the UK FCA under FSMA will need an additional registration under the MLR to carry on cryptoasset exchange provider or custodian wallet provider services.
What can firms do if their planned activities may be in scope of the MLR?
Seeking registration with the UK FCA under the MLR is time-consuming and expensive, with a potentially low probability of success. Firms may consider either changing the scope of their activities in the UK to remain outside scope of the MLR, or alternatively to establish themselves offshore and target UK customers from outside the UK.