Apr 12, 2022

How are tokens currently defined and regulated in the UK?

According to a recent survey conducted by BlockFi, 1 in 10 people gifted blockchain-linked digital tokens over the festive period. The 'boom' in recent years has a lot to say for those who are converting their high street 'tokens' to blockchain-linked digital tokens, in order to invest for the future, rather than investing in retail therapy.

The Financial Conduct Authority (FCA) released its Policy Statement on 'crypto assets' (PS19/22) in July 2019, which divides ‘crypto assets’ into three subcategories: unregulated tokens (such as BTC, BSV and XRP); e-money tokens; and security tokens.

Unregulated Tokens

The FCA considers unregulated tokens and their purchase, sale and exchange outside the regulatory perimeter – that is, the Financial Services and Markets Act (Regulated Activities) 2001, the Second Markets in Financial Instruments Directive 2004 (MiFID II) and Electronic Money Regulations 2011 (“EMRs”).

E-money Tokens

E-money tokens are tokens:

  • with an electronically stored monetary value that represents a claim on the issuer;
  • that are issued on receipt of funds to make transactions;
  • that are accepted by a person other the issuer; and
  • that are not excluded by Regulation 3 of the Electronic Money Regulations 2011.

These meet the definition of ‘electronic money’ under the Electronic Money Regulations and fall within regulation. The issuance of e-money is a ‘regulated activity’ under the Regulated Activities Order 2001. ‘Stablecoins’ can sometimes be considered e-money due to their design and will, therefore, be regulated.

Security Tokens

Security tokens provide rights and obligations akin to ‘specified investments’ as set out in the Regulated Activities Order (ie, shares or debentures), including those that fit the definition of ‘financial instruments’ or ‘transferable securities’ under MiFID II and are regulated.

For all questions regarding the topics raised in this blog, please contact a member of our team of digital asset legal experts.

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