All Things FinReg


Regulators on both sides of the Atlantic continue to monitor and address cryptoasset and distributed ledger technology activities. We recently posted on the guidance issued by the US Financial Crimes Enforcement Network on cryptocurrencies and in another post touched upon differences in the regulatory treatment of cryptoassets across jurisdictions. Today we report on two new developments relating to the treatment of cryptoassets by UK and US regulators.

UK: New Category of Regulated Tokens and Clarity on Stablecoin Treatment

Following its consultation on cryptoassets published earlier this year, the UK Financial Conduct Authority (FCA) published on July 31 its policy statement PS19/22, setting out final guidance on cryptoassets. The guidance is intended to help firms understand whether their cryptoasset activities fall under FCA regulation and clarify what this means for firms and consumers. The FCA has confirmed that it will treat firms as having complied with the relevant rules if they act in line with the guidance, which provides firms some much needed certainty in this area. While the final guidance mainly follows the draft guidance consulted on, it also

  • reframes the taxonomy of cryptoassets by including a new category of regulated tokens, “e-money tokens,” and distinguishes more clearly between (1) regulated security tokens and e-money tokens and (2) unregulated tokens (i.e., utility tokens and exchange tokens); and
  • provides further clarity on the treatment of “stablecoins” and when a token may be e-money or a security, confirming that (1) any determination must be made on a case-by-case basis and will depend on the design and rights associated with the specific token, and (2) a token can be a security even if it is not purchased for value.

The guidance applies immediately and is expected to inform other FCA and HM Treasury initiatives relating to cryptoassets, including

  • the FCA’s consultation on potentially banning the sale of derivatives linked to certain types of unregulated cryptoassets to retail clients;
  • the Treasury’s consultation on whether further regulation is required in the cryptoasset market, particularly in relation to unregulated cryptoassets; and
  • the transposition of the Fifth EU Money Laundering Directive into UK law.

United States: Gaming Token Not a Security

As the FCA’s final guidance gives more regulatory certainty for the UK cryptoasset market, the US Securities and Exchange Commission (SEC) also gave more clarity on the treatment of certain cryptoassets in the United States with its no-action letter issued to Pocketful of Quarters Inc. (PoQ) on July 25. The SEC confirmed in the letter that PoQ’s proposed gaming rewards token (known as a Quarter) is not a security and therefore does not need to be registered under the Securities Exchange Act of 1934. In granting the relief, the SEC’s Division of Corporate Finance (CorpFin) relied on several representations, including that the Quarters (1) are not used to build the platform, which is already developed and will be fully functional and operational upon its launch prior to the sale of Quarters; and (2) will be immediately usable for their intended purpose at the time they are sold. CorpFin also noted that developers and influencers who may be compensated in Quarters are subject to know-your-customer and anti-money laundering checks. Gamers who purchase or earn Quarters may only use Quarters across a network of participating games, and are prohibited from transferring Quarters to other users or trading Quarters on secondary markets. As a result, gamers may not “monetize price appreciation,” if any.

While the relief is relatively straightforward, the request for relief is useful in that it illustrates the structure that PoQ has in place to distribute the Quarters and to attract and compensate investors. The request describes the Quarters, another token (Q2, a token that PoQ concedes is a security), two smart contracts used to facilitate Quarter and Q2 transfers and related disbursements, and the Quarter Hot Wallet. The smart contracts control the sale of Quarters and automatically execute certain functions. For example, the Q2 smart contract specifically allows Q2 token holders who are investors in the PoQ Quarter initiative to instruct the Q2 smart contract to calculate and make a distribution of the proceeds that are generated from gamers’ purchases of Quarters.

We will continue to monitor and report on UK and US developments relating to the treatment of cryptoassets as they occur.