FCA regulation of cryptoassets: overview, Practical Law UK Practice Note w-026-1787

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FCA regulation of cryptoassets: overviewby Practical Law Financial Services

Practice notes | Maintained | United Kingdom

This note outlines the UK financial services policy and regulatory responses to the emergence of cryptoassets. Itexplains what cryptoassets are and how the FCA's regulatory perimeter applies to market participants carrying onactivities (both regulated and unregulated) relating to the different types of cryptoasset.

Scope of this note

Currently, there is no single global definition of cryptoasset, or any commonly agreed global taxonomy for classifyingcryptoassets that distinguishes them according to their features or use. However, the UK legislators and regulatorsrecognise that clarity and certainty for market participants as to the rules that apply to cryptoasset issuers and relatedservice providers is essential to encourage and support future innovation in the financial services sector, as well asensuring optimal consumer outcomes.

This note outlines the current regulation of cryptoassets within the UK. It explains what is regulated by the FCA,where regulation applies and how this impacts on firms (that is, whether the activities relating to the cryptoassetfall within the FCA's regulatory perimeter). It will also help you to assess whether a person carrying on activitiesrelating to that asset needs to be authorised by the FCA under Part 4A of the Financial Services and Markets Act2000 (FSMA). Although the main focus of the note is the application of the regulatory regime under FSMA, it alsoconsiders, where relevant the extent to which cryptoassets fall within the FCA's regulatory perimeter under theElectronic Money Regulations 2011 (SI 2011/99) (EMRs) and the Payment Services Regulations 2017 (SI 2017/752)(PSRs 2017). In addition, the note outlines ongoing and anticipated consultations by the FCA and the governmentin this area.

The content of this note is based primarily on the FCA's non-Handbook guidance on cryptoassets which isappended to FCA: Policy statement Guidance on cryptoassets: Feedback and final guidance to CP19/3 (July 2019)(PS19/22)).

The FCA's anti-money laundering (AML) and counter-terrorist financing (CTF) regime for cryptoasset exchangeproviders and custodian wallet providers under the Money Laundering, Terrorist Financing and Transfer of Funds(Information on the Payer) Regulations 2017 (SI 2017/692) (Money Laundering Regulations 2017 or MLRs 2017),which came into force on 10 January 2020, falls outside the scope of this note. For information on that regime, seePractice note, Money Laundering Regulations 2017: implications for cryptoasset businesses.

What are cryptoassets?

Definition

As is explained in Scope of this note, there is currently no internationally accepted definition or taxonomy tocategorise cryptoassets. In the absence of international consensus, the UK government established a Cryptoassets

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Taskforce, comprised of the FCA, the Bank of England (BoE) and HM Treasury, to assess the policy and regulatoryimplications of cryptoassets, and the underlying technology (distributed ledger technology (DLT)) in financialservices (see Cryptoassets Taskforce). The taskforce has established a framework for categorising cryptoassets,which the FCA has subsequently used as starting point for producing guidance on the extent to which different typesof cryptoasset fall within the regulatory perimeter set by FSMA and the Financial Services and Markets Act 2000(Regulated Activities) Order 2001 (SI 2001/544) (RAO).

The Cryptoasset Taskforce has defined cryptoassets as:

"cryptographically secured digital representations of value or contractual rights that use [that is, are built on] sometype of DLT [this includes blockchain] and can be transferred, stored or traded electronically."As explained below (see UK categorisation of cryptoasset tokens), the taskforce has categorised cryptoassets intotypes of token, which are distinguished by their different characteristics.

The UK regulatory authorities prefer the term cryptoassets, rather than cryptocurrencies, as it is more neutral andcaptures a broader range of tokens than just those designed to act as a means of exchange in online transfers (to whichthe term cryptocurrency typically applies). It should be noted that in some cases the terms virtual asset and digitalasset, and virtual currency and digital currency are used interchangeably with cryptoasset and cryptocurrency.However, sometimes the scope of the assets that fall within those terms is different and care should be taken notto assume the terms have the same meaning.

The term cryptoasset is not defined in legislation or in the FCA Handbook. UK categorisation of cryptoasset tokens

The Cryptoassets Taskforce's October 2018 final report provides a framework for categorising cryptoassets in theUK (see HM Treasury, FCA and BoE: Cryptoassets Taskforce: final report (30 October 2018)). It sub-divides theminto distinct categories of token to reflect their specific characteristics:

• Security token.

• Exchange token.

• Utility token.

For information on the different characteristics of each of these types of token, see Key characteristics of cryptoassettokens.

The final report made it clear that the framework may be updated over time by the FCA as the cryptoasset marketdevelops (see Cryptoassets Taskforce.)

The FCA has used the taskforce's framework as a basis for developing its opinion on how the different types ofcryptoassets fall within the regulatory perimeter. For the purpose of defining the regulatory perimeter, the FCAreframed the taskforce's taxonomy and separated out a fourth type of token, electronic money (e-money) tokens thatmeet the definition of e-money under the EMRs (see Practice note, Regulated activities: issuing electronic money:What is electronic money?) from other exchange tokens. Key characteristics of cryptoasset tokens

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Cryptoassets have a variety of features. Different types of cryptoasset are used to conduct a wide range of activities,some of which are regulated in the UK under FSMA and the RAO, or under the EMRs or PSRs 2017, or are notregulated at all.

Cryptoasset tokens have a variety of sometimes multiple uses, which are typically:

• As a means of exchange. The token functions as a decentralised tool to enable the buying and selling ofgoods and services, or to facilitate regulated payment services.

• For investment. Firms and consumers gain direct exposure by holding and trading tokens, or indirectexposure by holding and trading financial instruments that reference certain tokens.

• Capital raising. Tokens are used to support capital raising (as an alternative to traditional methods) or thecreation of decentralised networks through initial coin offerings (ICOs) (that is, token sales). Once issued,these tokens can be traded on a secondary market.

The categories of token and their key identifying characteristics are summarised in the table below. The categoriesare not mutually exclusive and, depending on the way that it is used or its features, a cryptoasset could fall underseveral categories at any one time or at different points in its lifecycle. For example, a firm may use an ICO to issuea new cryptoasset, while an investor may buy that cryptoasset as an investment. A token issued as a utility token (toaccess a current or prospective product or service) might, during its lifecycle, be used as an exchange token (thatcould be used as a means of exchange).

Cryptoassetcategorisation

Common uses and key characteristics (Note: all types of cryptoasset could be used as a means ofdirect or indirect investment for speculative purposes)

Are the tokens within theregulatory perimeter?

Security tokens • Specific characteristics mean they provide rights andobligations akin to specified investments, like a share ora debt instrument, as set out in the RAO.

• To grant some rights of ownership or rights to paymentof a specific sum of money, or entitlement to futureprofits. These rights are associated with traditionalregulated securities.

• As potentially transferable securities under the MiFID IIDirective (2014/65/EU).

• Could be used as a capital-raising tool.

Yes (see Regulatedtokens: security and e-money tokens).

E-money tokens • Tokens that meet the definition of e-money under theEMRs.

Yes (see Regulatedtokens: security and e-money tokens).

Exchange tokens(for example,cryptocurrenciessuch as, Bitcoin,Litecoin, Ethereum):not including e-moneytokens

• Usually a decentralised tool intended and designed tobe used as a means of exchange (that is, payment)for buying and selling goods without traditionalintermediaries. However, they are not widely acceptedor recognised as such.

• Do not grant the holder any rights associated withspecified investments.

No. Often referred toas cryptocurrencies,exchange tokens arenot regulated (seeUnregulated tokens:exchange and utilitytokens)).

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• Used as an alternative to fiat currencies, but not issuedor backed by any central authority and too volatile tobe a good store of value. They do not meet the coreeconomic criteria of fiat (that is, government issued)money.

• Generally, more volatile than fiat currencies.

• Must express their own value in other currencies.

• Can be traded on a regulated market.

• Utility tokens • To grant holders access to a current or prospectiveproduct or service within a discrete network orecosystem that is typically provided using a DLTplatform.

• Cannot be used as a means of payment in any othernetwork or ecosystem.

• Do not grant holders rights that are the same as thosegranted by specified investments.

• Can be used as a capital-raising tool.

• May meet the definition of e-money in somecircumstances.

• Can be traded on a regulated market.

No (see Unregulatedtokens: exchange andutility tokens), unlessthe token satisfies thedefinition of e-money, inwhich case they might fallwithin the FCA's regulatoryperimeter and would beclassified as an e-moneytoken (see Regulatedtokens: security and e-money tokens).

Why are cryptoassets on the regulatory agenda?

A key element of the UK regulatory response, from the government, the FCA and the BoE, initially to the emergenceof digital currencies and more recently to cryptoassets generally, is to find a balance between how regulationcan protect consumers and businesses on the one hand, without restricting innovation on the other. Indeed, thegovernment recognises that this is a rapidly developing market and that benefits may arise in the future. Thesecould include increased speed and reduced costs of cross-border money remittance with cryptoassets being used asa vehicle for exchange.

There have been numerous studies that identify the risks as well as the opportunities presented by cryptoassets,most notably that carried out by the Cryptoassets Taskforce culminating in its final report published in October2018 (see Cryptoassets Taskforce). Since then, the FCA has published two qualitative research reports exploringthe motivations and behaviours of consumers buying cryptoassets to help it identify areas of potential harm (seeFCA report (by Revealing Reality): How and why consumers buy cryptoassets (March 2019) and FCA report(Kantar TNS): Cryptoassets: Ownership and attitudes in the UK (March 2019)). While the research was exploratoryin nature and was not conclusive, the results showed how consumers interact with cryptoassets. They revealedthat, while many consumers did not understand cryptoassets, the vast majority did not buy or use them at thetime of the research. This suggested that, while there had been some harm to individual cryptoassets users, therewas not a large impact on the wider society, indicating that the overall scale of harm may not be as high aspreviously thought. FCA consumer research published in June 2020, suggested that the dominant retail use case forcryptoassets is speculative investment, with 89% understanding that they are not subject to regulatory protections(FCA: Cryptoasset consumer research report (June 2020)).

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Nevertheless, the government is conscious of the potential harm to consumers as more mainstream financial servicesfirms enter the cryptoasset market and innovation in this area continues. These concerns were reflected in findingsof the House of Commons Treasury Committee's inquiry into digital currencies in the UK (see House of CommonsTreasury Committee twenty-second report of the 2017-19 session: Cryptoassets (12 September 2019)), whichquestioned the adequacy of the regulatory response to the emergence of cryptoassets. Among other things, the reporthighlighted the following concerns, some of which the government and FCA are taking steps to address (see UKreform relating to cryptoassets):

• Cryptoassets have been embedded in certain pockets of society and industry. However, cryptoassetsand ICOs are extremely risky for investors. The absence of regulation of cryptoasset exchanges (throughwhich individuals convert cryptoassets into conventional currency) was identified as being particularlyproblematic.

• Regulation should be introduced. Self-regulation within the cryptoasset industry was insufficient and theambiguity that existed around the government's and UK regulators' positions was not sustainable. As aminimum, regulation should address consumer protection and AML. In deciding the regulatory approach,the government and regulators should evaluate the risks of cryptoassets and assess whether their growth inthe UK should be encouraged.

For details of the AML regime for cryptoasset businesses (specifically cryptoasset exchange providers andcustodian wallet providers) that was introduced by the MLRs 2017 (but which is outside the scope of thisnote), see Practice note, Money Laundering Regulations 2017: implications for cryptoasset businesses.

• Extending the RAO to introduce the regulation of cryptoassets and associated activities would be thequickest means of providing the FCA with the necessary legal powers to carry out its duties of protectingconsumers and maintaining market integrity. The government should consider what activity related tocryptoassets should be specified in the RAO, and the consequences of this. The activity should include, as aminimum, ICO issuance and cryptoasset exchange services provision.

The government plans to consult on the regulatory approach to cryptoassets in Q4 2020/Q1 2021 (seeRegulation of stablecoins: HM Treasury consultation).

• The FCA's consumer warnings are a "feeble corrective" to advertisements for cryptoasset investing thatare misleading to consumers. The FCA needs more power to control how cryptoasset exchanges and ICOissuers market their services, by bringing the activities they perform into the regulatory financial promotionperimeter.

HM Treasury is consulting on proposals to expand the perimeter of the financial promotion regime tobring the promotion of certain types of unregulated cryptoassets within its scope. It is also consulting onproposals to tighten up the approval process for financial promotions, proposing in one option that theapproval of financial promotions should be regulated under the RAO as a regulated activity (see Cryptoassetpromotions: HM Treasury consultation (July 2020)).

• Cryptoasset markets are particularly vulnerable to manipulation, however they fall outside the scope ofmarket abuse rules (see Practice note, Market Abuse Regulation (MAR): overview). The FCA shouldconsider the approach it would take to market manipulation were these markets to fall within its remit.

FCA regulatory perimeter

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The boundary between who and what is, and is not, regulated by the FCA and the PRA is described as the regulatoryperimeter (see Practice note, Dual regulation of firms by PRA and FCA). It determines which activities businessesneed to seek authorisation to carry on.

The perimeter includes:

• Specified activities and investments set out in FSMA and the RAO. Firms that carry on an activitythat is related to financial services, but is not classified as a regulated activity under the RAO or otherrelevant UK and EU legislation, do not have to be authorised under FSMA. This may be because, althoughthe activity itself is caught by the RAO, the business can benefit from an exclusion under the RAO, orbecause the business is an exempt person under FSMA. For more information on the "general prohibition"in section 19 of FSMA, which requires those carrying on regulated activities to be authorised or exempt, seeWhen is a regulated activity under FSMA being carried on?. For more information on the authorisationregime under FSMA, see Practice note, Applying to FCA or PRA for authorisation under Part 4A FSMA:Who needs authorisation?.

• Activities regulated by the FCA by virtue of other legislation. For example, payment services underthe PSRs 2017 or issuing e-money under the EMRs. Consequently, some payment services providers (PSPs)and e-money institutions (EMIs) only need to be registered with the FCA (under the PSRs 2017 and EMRs)and not authorised under FSMA. However, issuing e-money is also a regulated activity under FSMA whenthe activity is carried on by credit institutions, credit unions and municipal banks (see E-money tokens).Equally, some FSMA-authorised firms carry on payment services under the PSRs 2017, such as banks andbuilding societies and so do not need to be registered under the PSRs 2017 (see Cryptoassets that facilitateregulated payments services).

Largely speaking, the FCA regulates the regulated activities of firms that fall within the regulatory perimeter,although it does have some limited powers when FSMA-authorised firms conduct unregulated activities (seeRequirements that apply to authorised firms using unregulated cryptoassets).

The scope of the regulatory perimeter is a matter for legislation (so, is for the government and Parliament) and thecourts. The perimeter is kept under review by the government and the FCA, the PRA and the BoE to ensure thatthe actions of financial services providers do not harm consumers and the regulators other statutory objectives,including market stability.

In its first annual perimeter report, the FCA explained that the intangible nature of cryptoassets presents challengesto the regulatory perimeter. This is because they display different characteristics through their life and can be usedfor different functions, leading to uncertainty as to which cryptoassets fall within the regulatory perimeter (see FCA:Perimeter report 2018/19 (June 2019) and Article, Pushing the boundaries of FCA regulation: Cryptoassets).

The FCA's cryptoassets guidance (which is non-Handbook perimeter guidance and is discussed in more detail inthe following section) is designed to clarify for firms and consumers where the perimeter lies for cryptoassets.

FCA cryptoassets perimeter guidance

The purpose of the FCA's cryptoassets guidance is to clarify the extent to which it believes that the different tokensidentified by the Cryptoassets Taskforce are likely to fall within the existing regulatory perimeter:

As a specified investment as set out in the RAO (see Security tokens).

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As a financial instrument under the MiFID II Directive (see Security tokens).

As e-money, the issuing of which is regulated under the EMRs (for information on the EMRs, see Practice note,UK implementation of the second Electronic Money Directive) and under FSMA (see Practice note, Regulatedactivities: issuing electronic money).

Under the PSRs 2017, which regulates the provision of payment services (for information on the PSRs 2017, seePractice note, Understanding the Payment Services Regulations 2017).

The guidance is supplemented by a Q&A section which can be found alongside the cryptoassets guidance (inAppendix 2 to PS19/22).

The FCA's cryptoassets guidance considers both unregulated and regulated tokens. Broadly speaking, there aretwo types of regulated token: security tokens and e-money tokens (see Regulated tokens: security and e-money tokens). Tokens that do not provide any rights or obligations akin to specified investments, other than e-money tokens, are generally considered to be unregulated: exchange tokens and utility tokens (see Unregulatedtokens: exchange and utility tokens). The guidance also provides further clarity on tokens referred to as stablecoins(some, but not all of which, will meet the definition of e-money or a specified investment) (see Stablecoins).

Cryptoasset market participants (which, in this context, is wider than FCA authorised or registered firms) that carryon business in the UK are expected to take account of the guidance to help them understand how they should treatcertain cryptoassets. The guidance should be read alongside the FCA's Perimeter Guidance manual (PERG). TheFCA explains within the cryptoassets guidance that, while it is not binding on the courts, if a firm acts in line with theguidance it will treat the firm as having complied with the relevant rule or requirement. However, the FCA points outthat definitive judgments on whether a particular cryptoasset falls within the regulatory regime can only be madeon a case-by-case basis. Businesses should seek legal advice if they are unsure how the guidance applies to theirproposition. FCA Innovate is also available to provide support to eligible firms developing innovative propositions,helping them to better understand the implications of proposed activities falling within the regulatory perimeter(that is, whether they need to be authorised/registered and the FCA's rules, processes and guidance) and to test theirpropositions in a live environment (within the regulatory sandbox) (see Practice note, FinTech and innovation: UKfinancial regulators supervisory approach: FCA Innovate).

Case studiesThe FCA's cryptoassets guidance includes several case studies based on different propositions to help businessesestablish whether they are dealing with a regulated cryptoasset and, if so, whether they are likely to be carrying ona regulated activity in relation to that cryptoasset requiring the firm either to seek authorisation to carry on thatactivity under FSMA or apply to be registered under the EMRs or PSRs 2017.

Regulated tokens: security and e-money tokens

Two types of cryptoasset token are regulated by the FCA: security tokens and e-money tokens.

In summary, security tokens (that is, those tokens that are specified investments under the RAO, excluding e-moneytokens) are within the FSMA perimeter. E-money tokens are regulated under the EMRs and, if issued by a creditinstitution, a credit union or a municipal bank, are also within the FSMA perimeter. Where a market participantcarries on cryptoasset activities that involve payment services relating to any type of token, they may be subject toregistration requirements under the PSRs 2017 (see Cryptoassets that facilitate regulated payments services).

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The requirement to have the appropriate authorisation or registration applies regardless of the underlyingtechnology, as the UK's financial services regulatory regime is technology neutral. For an indicative list of keycryptoasset market participants, their activities and the permissions they are likely to need under FSMA, see Part4A permissions for cryptoasset market participants.

The key characteristics of security and e-money tokens and their uses are summarised in the table above (see Keycharacteristics of cryptoasset tokens).

Security tokens

Security tokens are a type of cryptoasset that fall within the regulatory perimeter under FSMA.

A security token is a token that meets the definition of specified investment under the RAO because it provides rightsand obligations akin to specified investments, including those that are financial instruments under the MiFID IIDirective (see Practice notes, Specified investments in the RAO and What is MiFID business?: What are MiFIDfinancial instruments?). For example, these tokens have characteristics that mean they are the same as, or akin to,traditional instruments like shares, debentures or units in a collective investment scheme (CIS). Security tokensinclude tokens that grant holders some or all of the rights conferred on shareholders or debtholders, as well as thosetokens that give rights to other tokens that are themselves specified investments.

The FCA considers a security to refer broadly to an instrument (that is, a record, written or not) that indicates anownership position in an entity, a creditor relationship with an entity or other rights to ownership or profit. A tokenwill be a security based on its structure (even if nothing is received for it).

The FCA is of the opinion that if it is clear from the outset that a utility token may become a security token duringits lifecycle, then it is likely to be a security token from the outset (Utility tokens).

Firms carrying on specified activities involving security tokens need to ensure that they have the correct Part 4Apermissions and are following the relevant FCA rules and requirements (see Part 4A permissions for cryptoassetmarket participants). E-money tokens

An e-money token is any token that meets the definition of e-money under the EMRs because it is:

"electronically (including magnetically) stored monetary value, as represented by a claim on the electronic moneyissuer, which is issued on receipt of funds for the purpose of making payment transactions; accepted as a means ofpayment by a person other than the electronic money issuer; …"and is not otherwise excluded under the EMRs. For more information, see Practice note, UK implementation of thesecond Electronic Money Directive: What is electronic money?.

E-money must enable users to make payment transactions with third parties, so must be accepted by more partiesthan just the issuer. It includes fiat balances in various types of online wallets or prepaid card. Electronic storage ofmonetary value includes using DLT and cryptographically-secured tokens to represent fiat funds. This means thatcryptoassets that establish a new sort of unit of account, rather than representing fiat funds, are unlikely to be e-money, unless the value is pegged to fiat currency (see Stablecoins).

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E-money tokens are a type of cryptoasset that falls within the FCA's regulatory perimeter:

• Credit institutions, credit unions and municipal banks carrying on specified activities involving e-moneytokens must ensure that they have the correct Part 4A permission to carry on those activities. For anexplanation of how a market participant's activities involving e-money fall within the regulatory perimeterunder FSMA, see When is a regulated activity under FSMA being carried on?

• A separate authorisation and registration regime applies for all other e-money issuers (that is, EMIs underthe EMRs).

For more information on the application of the regulatory regime under the EMRs, and the conduct andprudential requirements that apply to EMIs, see Practice note, UK implementation of the second ElectronicMoney Directive: What requirements must electronic money issuers comply with?.

EMIs that do not issue e-money (and so are not caught by the EMRs), but which provide payment services inconnection with a cryptoasset (whether or not the cryptoasset is regulated), may need to be registered under the PSRsfor the payment services aspects of their businesses (see Cryptoassets that facilitate regulated payments services).

Some utility tokens may meet the definition of e-money (see Utility tokens).

Unregulated tokens: exchange and utility tokens

Any token that is not a security token or an e-money token is an unregulated token. This includes utility tokens (thatare not e-money) and exchange tokens.

For those cryptoassets that are unregulated, and so fall outside the regulatory perimeter, there is no protectionfor individual investors who choose to buy them and use them as a means of payment or exchange. Whether acryptoasset (including crypto tokens issued as part of an ICO) falls within the perimeter will be fact specific.

With the exception of the application of the MLRs 2017 to cryptoasset business (see Practice note, MoneyLaundering Regulations 2017: implications for cryptoasset businesses), the FCA does not regulate the sale ortransfer of exchange tokens or intervene on behalf of consumers who lose their investments, whether as a result ofvolatility, loss of cryptographic keys or hacking of exchanges. Although, it does offer guidance to consumers on howto avoid scams (FCA webpage: Cryptoasset investment scams).

However, certain activities that are not regulated under FSMA, but which use unregulated tokens, may be regulated,for example, under the PSRs 2017 when used to facilitate regulated payments (this is explained further inCryptoassets that facilitate regulated payments services).

The key characteristics of exchange and utility tokens and their uses are summarised in the table above (see Keycharacteristics of cryptoasset tokens).

Exchange tokens

Exchange tokens are used as an alternative to fiat currency. They fall outside the regulatory perimeter and so areclassified by the FCA as unregulated tokens. The FCA likens them to other assets that remain outside the regulatoryperimeter (such as fine wine or art), which can be bought speculatively with a view to realising profits if they risein value. This means that activities involving the transfer, purchase and sale of exchange tokens, including the

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commercial operation of cryptoasset exchanges for exchange tokens, are not regulated by the FCA. For example,an exchange that simply facilitates cryptocurrency transactions, such as Bitcoin, will not be carrying on regulatedactivities.

Certain exchange tokens do fall within the scope of the UK AML and CTF regime under the MLRs 2017. However,that is a separate regime and falling within it will not bring a market participant into the full FSMA regulatoryregime. For more information on the money laundering regime for cryptoasset business, see Practice note, MoneyLaundering Regulations 2017: implications for cryptoasset businesses.

Stablecoins that are pegged to a currency, such as USD or GBP, or other assets, and are used for the payment of goodsor services on a network could meet the definition of e-money and, if so, would be regulated tokens (see Stablecoins). Utility tokens

Utility tokens provide consumers with access to a current or prospective product or service and often grant rightssimilar to pre-payment vouchers. They fall outside the regulatory perimeter and so are classified by the FCA asunregulated tokens.

The FCA likens utility tokens to rewards-based crowdfunding, where participants contribute funds to a project inexchange, usually, for some reward (for example, access to products or services at a discount).

The FCA's cryptoassets guidance (at paragraph 50) provides further examples of utility tokens highlighting variouscharacteristics that mean they lack the features to be classified as a security token or be used as either a means ofexchange other than with the issuer. Situations covered by the case studies include:

• A token that grants the holder early access to a new line of clothing to be release at a discounted rate.

• An online casino.

• A token issued by a luxury car manufacturer to test drive a new limited-edition car.

• A cryptoasset firm raising funds to build a network for data.

• A token to improve the speed of a firm's back-office functions through a permissioned DLT system.

• A transferable token allowing the holder storage rights on a specific network,

Case study 7, provides an example where a firm that initially issued tokens used as a rewards mechanism for loyalcustomers, alters the rights conferred by the token to entitle token-holders to share in the company's profits inproportion to their token holding. This means that the utility token would now provide rights similar to a specifiedinvestment, and so is likely to be a security token (see Security tokens). The FCA's view is that if it is clear from theoutset that a token will convert to a security token later in its lifecycle, then it is likely to be a security token fromthe outset (see Q&A 7 in PS19/22). Stablecoins

As the FCA explains in its cryptoassets guidance, there is no single definition of stablecoins. However, what allstablecoins have in common is their purpose as tokens that attempt to stabilise their value using a variety ofmechanisms.

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Stablecoins vary in terms of structure and arrangement, meaning that they cannot be classified as a single type oftoken. Many are backed with fiat currencies (by pegging their value to that currency: fiat-backed stablecoins).Some are backed with different types of assets (including other cryptoassets (crypto-collateralised)) or otherassets such as specified investments or commodities such as oil or gold (asset-backed)) with a view to providingstabilisation. Algorithmically stabilised tokens attempt stabilisation through algorithms that may, for example,control the supply of the tokens to influence price.

Stablecoins may fall within the definition of an e-money token or a security token (either as a derivative, a unit ina CIS, a debt security, e-money, or another type of specified investment) provided they meet all the conditions ofsecurity tokens and e-money tokens. This will depend on the nature of the underlying assets, the rights granted bysuch tokens and other relevant arrangements.

HM Treasury is consulting on bringing stablecoins that fall within the definition of a new category of token (stabletokens) within the regulatory perimeter (see Regulation of stablecoins: HM Treasury consultation).

FCA example: stablecoin backed by gold Gold is not a specified investment in the RAO. However, a token that gives token holders a right or interest togold held by a token issuer, or rights to payments from profit or income generated from the holding, buying orselling of gold, may in certain circumstances be a specified investment (for example, as a unit in a CIS or a debtsecurity).Stablecoins may also be used to facilitate regulated payments (see Cryptoassets that facilitate regulated paymentsservices).

Stablecoins that are not regulated tokens will not fall within the regulatory perimeter at all. However, some of theactivities performed may still subject them to regulation such as AML requirements (for a summary of the issues, seePractice note, FATF international AML and CTF standards: implications for financial institutions: FATF reporton risks associated with stablecoins). Requirements that apply to authorised firms using unregulated cryptoassets

Although a FSMA-authorised firm may not need to be authorised in respect of its activities relating to unregulatedcryptoassets, where they fall outside the perimeter then, in certain circumstances, some FCA requirements mayapply to that unregulated activity. For example:

• Principles for Businesses. The Principles apply to "ancillary activities" (that is, unregulated activitiescarried on in connection with, or held out for being for the purpose of, a regulated activity). The FCAcan take action for breach of the Principles. For more information, see Practice note, FCA Principles forBusinesses.

• Threshold conditions. Unregulated activities may also be relevant in assessing whether the firmcontinues to comply with the Threshold Conditions for authorisation. For more information, see Practicenote, FSMA threshold conditions.

• Senior Managers and Certification Regime (SM&CR). The SM&CR requires individuals performingcontrolled functions within authorised firms to be approved by the regulator (FCA or PRA). The individualconduct rules under the SM&CR apply to all relevant individuals within an authorised firm to which therules apply and apply to both regulated and unregulated activities. This means that activities involvingunregulated cryptoassets when carried on by relevant individuals within authorised firms may be covered by

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the SM&CR conduct rules. The FCA is able to act against those individuals for breaches where the conduct iscovered by those rules. For more information on the SM&CR, see Practice note, Overview of the SM&CR.

• Financial promotion requirements. Where a firm promotes an unregulated product or service in anadvertisement for a regulated product or service, then the financial promotion rules will apply to the wholepromotion. In particular, a firm must not indicate or imply that it is regulated or otherwise supervisedby the FCA in respect of business for which it is not regulated by the FCA (see Practice note, Financialpromotion: overview: Unregulated business of regulated firms). For more information on the FCA'sfinancial promotion regime, see Marketing cryptoassets.

Cryptoassets that facilitate regulated payments services

The PSRs 2017 regulate activities with regards to funds, which are defined as "banknotes and coins, scriptural moneyand electronic money". This means that services relating to cryptoassets themselves, such as the operation of acryptoasset account or transmission of cryptoassets are not within the scope of the PSRs 2017 (unless the cryptoassetin question meets the definition of e-money (see E-money tokens)).

However, a payment service that relates to funds and uses cryptoassets to facilitate the service will be in scope.The regulated payment service is the payment service provided to specific clients (for example, clients at each endof a money remittance service). The dealings between PSPs to deliver the end payment arising from that service(which might involve the use of cryptoassets) is not regulated. This is explained in more detail in PERG 15.5 Q37.The example below shows how unregulated cryptoasset tokens can be used as an intermediary between PSPs, withthe aim of making fiat cross-border transfers faster and cheaper.

FCA example: money transmission services A firm receives fiat funds from a payer to transfer to a payee in a different jurisdiction and in another fiat currency.On receipt of the fiat funds from the payer, the firm converts them to a cryptoasset, which is then converted tothe target fiat currency. The payee receives a pay out in fiat currency. Neither payer nor payee takes any directexposure to the cryptoassets.PSPs that fall within the scope of the PSRs 2017 must register with the FCA, and comply with various requirements,including on how they conduct their business. For an outline of how the PSRs 2017 apply and the requirements thatapply to firms falling within their scope, see Practice note, Understanding the Payment Services Regulations 2017.

Payment system and stablecoins

The BoE's Financial Policy Committee (FPC) has considered stablecoin-based payment chains against its principlethat the regulation of payments activities should reflect the financial stability risks they pose, rather than their legalform. It believes that where stablecoins are used in systemic payment chains in place of money, they must offer theequivalent protections to stable and reliable money currently used in traditional systemic payment chains, whethercentral bank money (in the form of reserves held at the central bank or cash), or private commercial bank money, orbank deposits. Equivalent standards to money include in relation to stability of value, robustness of legal claim, andthe ability to redeem at par in fiat. In its December report, the FPC noted that the current UK regulatory frameworkwould need adjustment in order to accommodate innovation in payments. (See BoE: Financial Policy Committee:BoE's Financial Stability Report no 46 (December 2019) and Financial Stability report (August 2020)).

Investment products referencing cryptoassets:

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FCA ban on derivatives and ETNs referencing certain types of cryptoassets (fromJanuary 2021)

The FCA has imposed a ban on the marketing, distribution and sale to retail clients of derivatives and exchangetraded notes (ETNs) referencing certain types of cryptoassets from 6 January 2021 (see FCA: Policy statement,Prohibiting the sale to retail clients of investment products that reference cryptoassets (6 October 2020)(PS20/10)). The ban applies to products referencing unregulated transferable cryptoassets. It does not relate tosecurity tokens (that is, those that qualify as specified investments), which fall inside the FCA's regulatory remit (seeSecurity tokens). So, derivatives referencing security tokens are not within scope of the ban. The FCA has publisheda technical annex, which provides a description of the supporting data and analysis for CP19/22 and PS20/10.

The final rules are in the Conduct of Business (Cryptoasset Products) Instrument 2020 (FCA 2020/34). The FCAamended the date of entry into force of the ban due to a delay in publishing the policy statement, which is reflectedin the Conduct of Business (Cryptoasset Products) (Amendment) and Associated Exiting the European UnionAmendments Instrument 2020 (FCA 2020/46).

The ban applies under product intervention requirements in Article 42 of UK MiFIR. New FCA Handbook Glossarydefinitions have been introduced for cryptoasset derivative, cryptoasset exchange traded note and unregulatedtransferable cryptoasset. The ban was implemented through changes to the product intervention rules in chapter22 of the Conduct of Business sourcebook (see COBS 22.5: Restrictions on the retail marketing, distribution andsale of contracts for differences and similar speculative investments) and by the introduction of a new COBS 22.6(Prohibition on the retail marketing, distribution and sale of cryptoasset derivatives and cryptoasset exchange tradednotes).

Scope of the banThe ban affects regulated and unregulated firms that market, distribute or sell crypto derivatives or cryptoassetexchange traded tokens, including:

• MiFID investment firms, including Capital Requirements Directive (2013/36/EU) (CRD) credit institutionsas appropriate, who are marketing, distributing or selling cryptoasset derivatives in, or from, the UK to retailclients.

• MiFID optional exemption firms who are marketing, distributing or selling cryptoasset derivatives in, orfrom, the UK to retail clients.

• UK branches of third-country investment firms who are marketing, distributing or selling cryptoassetderivatives in, or from, the UK to retail clients.

• EEA MiFID investment firms that operate in the UK after 6 January 2021 under the temporary permissionsregime or the financial services contracts regime.

For the purposes of this ban, "marketing" includes but is not limited to communicating and approving financialpromotions. Distribution or sale includes dealing in relation to cryptoasset derivatives and cryptoasset exchangetraded notes.

What next?

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Retail clients with existing holdings can remain invested following the prohibition, until they choose to disinvest.There is no time limit on this and the FCA does not require or expect firms to close out retail clients' positions unlessconsumers ask for this.

The FCA expects firms to comply with the prohibition. Its supervision will focus on attempts to avoid the effect of thenew Handbook rules by inappropriately "opting up" retail clients to become elective professional clients or movingretail clients to associated non-UK entities. It will also consider the conduct of inward passporting firms operatingunder the temporary permissions regime.

The FCA will keep the prohibition under review in line with Article 42(6) of the retained EU law version of theMarket in Financial Instruments Regulation (600/2014) (UK MiFIR). It will consider whether there is a need toreview the prohibition if it sees robust evidence indicating that the cryptoasset market has changed in ways thatmaterially tackle the drivers of the harms it has identified.

Consultation and reason for the banThe ban addresses the FCA's concern that retail consumers cannot reliably assess the value and risks of derivativesand exchange traded products that reference certain cryptoassets. This is due in part to the nature of the underlyingassets (which have no inherent value), the presence of market abuse and financial crime in the secondary market forcryptoassets, extreme volatility in cryptoasset processes, and inadequate understanding by retail consumers. TheFCA believes that these issues cause retail consumers harm from potentially sudden and unexpected losses if theybuy these products.

The FCA launched a consultation, in July 2019, on proposals to ban the sale, marketing and distribution by firmsin or from the UK to retail clients of derivatives (including contracts for difference (CfDs), options and futures asdefined in the RAO) and exchange traded notes (ETNs) that reference certain types of unregulated, transferablecryptoassets, as described in the table below). It committed to consult in the Cryptoassets Taskforce's final report(see Cryptoassets Taskforce) (also see FCA consultation paper: Prohibiting the sale to retail clients of investmentproducts that reference cryptoassets (July 2019) (CP19/22)).

It is notable that while 97% of respondents opposed the FCA's proposal, the FCA decided to proceed with the rulechanges as consulted on subject to minor technical amendments.

Explanation of different types of cryptoasset derivative products• Cryptocurrency futures. A derivative contract in which each party agrees to exchange cryptocurrency at a

future date and at a price agreed by both parties.

• Cryptocurrency contracts for differences (CFDs). A cash-settled derivative contract where the partiesseek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value ofthe cryptoasset CFD contract at its outset and at its termination. The FCA warned consumers in December2017 that "cryptocurrency CFDs", which are often offered through online platforms, were extremely high-risk, speculative products (FCA: Consumer warning about the risks of investing in cryptocurrency CFDs, 1December 2018). The FCA's concerns about them include the potential for price volatility, leverage, chargesand funding costs, and price transparency.

• Cryptocurrency options. A contract that grants the beneficiary the right to acquire or dispose ofcryptocurrencies. The FCA warned consumers in January 2018 of the risks of investing in binary options(see FCA: Consumer warning about the risks of investing in binary options, 3 January 2018). The FCAexplained that binary options allow a consumer to make a bet on the value or price of something that iscapable of being measured in financial terms (for example, a stock, commodity, currency or index). Binaryoption scams commonly promise higher than average returns for bets that never occur and manipulatesoftware to distort prices and payouts. They also commonly refuse to return client funds and break all

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contact with customers. The FCA's concerns about binary options included the potential for tradinglosses, the difficulties for consumers to make informed decisions based on the information provided tothem, conflicts of interest and fraud. (Binary options have been regulated by the FCA, as opposed to theGambling Commission since 3 January 2018 when the EU Markets in Financial Instruments Regulation(600/2014) (MiFIR) came into force.)

When is a regulated activity under FSMA being carried on?

Under the general prohibition in section 19 of FSMA, a person may not carry on a regulated activity in the UK, orpurport to do so, unless they are either an authorised person (that is, a person appropriately authorised under FSMA)or an exempt person. Breaching the general prohibition is a criminal offence. For more information, see Practicenote, Section 19 of FSMA: the general prohibition.

A person will be carrying on a regulated activity that is likely to require them to be authorised where that activityis of a specified kind that is carried on by way of business and relates to a specified investment or property of anykind (section 22, FSMA). A cryptoasset market participant will need to obtain authorisation where they engage ina specified activity, by way of business in the UK, that involves a cryptoasset (that is, a specified investment: so, asecurity token or an e-money token issued by a credit institution, credit union or municipal bank).

As explained above, there is no bespoke regulatory regime for cryptoassets. This means that to determine whether aninstitution is carrying on a regulated activity relating to a cryptoasset that requires it to be authorised under FSMA,the same considerations apply as for any other activity (see Flowchart: When does a person or firm need FCA orPRA authorisation).

The questions market participants need to ask themselves to determine whether their activities relating to regulatedtokens fall within the FSMA regulatory perimeter and are regulated by the FCA are considered in the followingsections:

Is there a specified investment?

Is there a specified activity?

Is the activity carried on by way of business?

Is the activity carried on in the UK?

Does an exclusion or exemption apply?

The market participants that will most likely need to be authorised to carry on activities involving regulatedcryptoassets are exchanges and trading platforms, custodian and wallet providers, payment providers and advisers,brokers and other intermediaries. Issuers of security tokens (which are equivalent to shares and debentures) areunlikely to be carrying on a regulated activity when they issue tokens, although they will need to comply with otherregulatory obligations (see Other regulations applicable to cryptoasset activities).

Is there a specified investment?

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The full list of specified investments is set out in Part III of the RAO (see Practice note, Specified investments inthe RAO).

The following bullets outline which specified investments regulated cryptoassets may be, and why they are specifiedinvestments:

• Security tokens. The FCA's cryptoassets guidance (at paragraph 68) explains how security tokens mightqualify, depending on the circumstances, as a number of specified investments under the RAO, includingshares (article 76), debt instruments (article 77), warrants (article 79), certificates representing certainsecurities (article 80), units in CISs (article 81) and rights and interests in investments (which also constitutespecified investments under the RAO in their own right). The guidance also provides case studies providingpractical examples.

The FCA recognises that it can be difficult to determine whether a security token is a specified investmentand identifies a number of indicative factors in paragraph 30 of its cryptoassets guidance.

The FCA clarifies that a specified investment is not contingent on the investment being purchased for value.This means that a token can be a security token even if nothing is received for it. Therefore, whether a tokenis sold at value, or distributed for free to consumers via an airdrop, will not be a factor in deciding whether atoken is a security token.

(PERG 2.6.)

• E-money tokens. E-money tokens are specified investments under article 74A of the RAO when they areissued by credit institutions, credit unions and municipal banks.

The FCA clarifies that, unlike security tokens, under the EMRs a token must be issued on the receipt of fiatfunds to fall within the definition of a specified investment.

Is there a specified activity?The full list of specified activities is set out in Part II of the RAO (see Practice note, Specified activities in the RAO).

The following bullets outline which specified activities apply to regulated cryptoassets:

Security tokens. The RAO activities involving a security token that a cryptoasset market participant is most likelyto be engaged in are those that relate to investment activities (such as, dealing as principal (article 14 , RAO), dealingas agent (article 21, RAO), arranging deals (article 25, RAO), managing (article 37, RAO), advising (article 53, RAO)and safeguarding and administering (article 40, RAO). For links to notes on all of these regulated activities, seePractice note, A guide to key resources: regulated activities.

E-money tokens. Issuing e-money is a specified activity under article 9B of the RAO if the token is issuedby a full credit institution (essentially banks and building societies), a credit union or a municipal bank. Thoseinstitutions must comply with provisions on issuance and redeemability of e-money in the EMRs. EMIs that arecredit institutions, or otherwise authorised under FSMA for a separate regulated activity, are also subject to therelevant conduct of business requirements of the PSRs 2017 in addition to their obligations as outlined in the FCAHandbook and (in some cases) the PRA Rulebook and other requirements (see Practice note, UK implementationof the second Electronic Money Directive: What requirements must electronic money issuers comply with?).

Is the activity carried on by way of business?

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For an activity to be a regulated activity under section 22 of FSMA, it must be carried on by way of business. Thisis known as the business test. The test will be different depending on the nature of the regulated activities beingcarried on. For information on the nature of the test, see Practice note, Carrying on regulated activities by wayof business.

The FCA has not addressed when a firm might be carrying on a cryptoasset-related activity by way of businessin its cryptoassets guidance. However, in the context of the regulation of cryptoasset businesses under the MLRs2017, the FCA has set out examples of the variety of factors that are relevant when determining whether cryptoassetactivity is carried on by way of business (see Practice note, Money Laundering Regulations 2017: implications forcryptoasset businesses: Is cryptoasset activity carried on by way of business?). Although the same content has notbeen reproduced for the purposes of the FSMA regime, the following example may be of interest.

FCA example In the context of cryptoasset business, it is unlikely that a person who occasionally advises a few friends aboutwhich security tokens to buy, where they receive no benefit, will satisfy the test. However, it is more likely thatactivity will be by way of business (and the test satisfied) where a person holds themselves out as an adviser andadvises people on a regular basis on which security tokens to buy, and receives a benefit as a result in the formof a fee, commission, or other non-monetary reward.

Is the activity carried on in the UK?The general prohibition provides that the requirement to be authorised under FSMA only applies to activities thatare carried on by way of business in the UK.

The decentralised nature of cryptoassets means that they are traded, and activities relating to them occur, acrossborders. This can make it difficult to determine whether the activity is being carried on in the UK.

Guidance in PERG 2.4 explains that even where part of the activity occurs outside the UK, a person may still becarrying on an activity in the UK (see Practice note, Territorial scope of regulated activities: What is meant by "inthe UK"?).

The FCA has not addressed when a firm might be carrying on a cryptoasset-related activity by way of business in itscryptoassets guidance. However, in the context of its regulation of cryptoasset businesses under the MLRs 2017, theFCA has set out examples of the variety of factors that are relevant when determining whether cryptoasset activityis carried on in the UK (see Practice note, Money Laundering Regulations 2017: implications for cryptoassetbusinesses: Is cryptoasset activity carried on in the UK?). Although the same content has not been reproduced forthe purposes of the FSMA regime, the following example may be of interest.

FCA example A person that is situated in the UK and is safeguarding and administering security tokens that are securities orcontractually based investments for clients overseas will be carrying on activities in the UK even though the clientmay be situated outside the UK.

Does an exclusion or exemption apply?A person does not need to be authorised under FSMA if the regulated activity they are carrying on falls within one ofthe exclusions in the RAO. The exclusion stops an activity from being a regulated activity. This is explained in moredetail in Practice note, Regulated Activities Order: overview: Exclusions from the RAO.

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Certain individuals will also be exempt from the need to be authorised under the RAO. The exemption effectively"removes" an activity from being regulated. For more information on exempt persons, see Practice note, Section 19of FSMA: the general prohibition: Who is an exempt person?.

Part 4A permissions for cryptoasset market participants

If a firm establishes that it intends to carry on a regulated activity under the FSMA regime relating to a regulatedcryptoasset, it will need to apply for a Part 4A permission if it is carrying on that activity by way of business in theUK (see Practice notes, Applying to FCA or PRA for authorisation under Part 4A FSMA and Preparing to applyto FCA or PRA for authorisation under Part 4A FSMA).

Which activities a firm needs to apply for permission to carry on will depend on the nature of the cryptoasset inquestion. Firms can hold permissions to carry out more than one regulated activity.

The table below sets out the main types of market participant who may need to consider whether their cryptoassetactivities are straying into regulated territory requiring them to apply for authorisation under FSMA. It also providesa non-exhaustive list of the Part 4A permissions they are likely to have to apply for (and highlights where a firm mayalso need to consider other requirements). The content of the table is based on figure 2 in the cryptoassets guidance.

For links to notes on all the regulated activities referred to in the table below (including details of potentialexemptions and exclusions), see Practice note, A guide to key resources: regulated activities: Resources onindividual regulated activities.

Market participants and potentialactivities relating to regulated tokens

Indicative list of Part 4A permissions relating to regulatedtokens (Note: this is a non-exhaustive list as the actual requiredpermissions will depend on the nature and scope of the activityand, in some cases, the identity of the participants. Exemptions andexclusions from the need to hold the permission may be available.)

Issuers and designers of cryptoassettokens: issuing regulated tokens (includingissuing tokens through ICOs).

Regulatory permissions are not usually needed where a companyacts as issuer of its own security tokens where these are equivalentto shares or debentures. However, in issuing its own shares an issuer may, in the course ofpromoting their issuance, be advising on investments or carrying onother activities that may require permission. Consideration should also be given to other regulations that mayapply to the issuance, such as prospectus and transparencyrequirements (see Other regulations applicable to cryptoassetactivities). Issuers of regulated tokens (such as e-money tokens) are likely toneed permission either under FSMA (if a credit institution, creditunion or municipal bank) or under the EMRs.

Exchanges and trading platforms:facilitating transactions between participants. This includes recognised investmentexchanges (RIEs), multilateral tradingfacilities (MTFs) and organised tradingfacilities (OTFs).

• Operating an MTF or OTF.

• Dealing in investments as principal.

• Dealing in investments as agent.

• Arranging deals in investments.

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• Safeguarding and administering investments.

• Making arrangements with a view to investments.

• Sending dematerialised instructions.

See example of required permissions for exchanges and tradingplatforms in paragraph 79 of the FCA's cryptoassets guidance.

Custodians and wallet providers: holdingor providing safe storage of regulatedtokens.

• Managing investments.

• Safeguarding and administering investments.

Payment providers: enabling customers topay merchants in fiat currency, or transferfiat currency via a cryptoasset.

• Issuing e-money (permission applicable to full creditinstitutions, credit unions and municipal banks only).

• Permissions under the PSRs 2017, including, but not limitedto:•

• money remittance;

• operating a payment account; and

• execution of payment transactions.

PERG 15.2 provides guidance on when authorisation underFSMA or registration under the PSRs 2017 is needed whenproviding payment services in the UK.

• Permissions under the EMRs may also be required (see E-money tokens).

PERG 3A.2 provides guidance on when authorisation underFSMA or registration under the EMRs is needed for thepurposes of issuing e-money in the UK.

Investment advisers and otherintermediaries (such as brokers):providing advice to consumers aboutdifferent tokens and enabling the purchasingof tokens.

Those advising on investment would need the advising oninvestments permission. Intermediaries that facilitate the purchasing of tokens, may requirethe following permissions: • Dealing in investments as principal.

• Dealing in investments as agent.

• Arranging deals in investments.

• Making arrangements with a view to investments.

• Sending dematerialised instructions.

Marketing cryptoassets

Summary of financial promotion regime

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The promotion of a financial service or product is not itself a regulated activity for which a firm needs to beauthorised under FSMA. However, it is essential that unauthorised firms that market products and services relatingto regulated tokens comply with the financial promotion restriction under FSMA and understand how the FCA'sfinancial promotion rules may apply to their marketing material, whether written or verbal, even though theythemselves are not authorised.

Section 21 of FSMA imposes a general restriction on the communication of financial promotions. By virtue of section21(2)(b), when an unauthorised firm wishes to communicate a financial promotion, the promotion must be approvedby an authorised firm (unless the promotion can otherwise be communicated under an applicable exemption in theFinancial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO)).

Practice note, Financial promotion: overview: Investment activity: controlled activities and controlledinvestments outlines how the financial promotion regime prohibits unauthorised persons from communicating aninvitation or inducement to engage in investment activity. Engaging in investment activity is defined by referenceto the carrying on of controlled activities listed in Part I of Schedule 1 to the FPO, or exercising of rights conferredby controlled investments listed in Part 2 of Schedule 1 to the FPO. Issuing a financial promotion in breach ofthis restriction is a criminal offence. For a high-level summary of the financial promotion restriction and links tomore detailed content, including details of the exemptions available under the FPO, see Practice notes, Financialpromotions: a guide for unauthorised persons and Financial promotion: useful exemptions for corporate practice.

The content of promotions relating to regulated tokens that fall within the financial promotion restriction (whoeverthey are issued by) must comply with the FCA's financial promotion rules for investment business in chapter 4 ofthe Conduct of Business Rules sourcebook (COBS 4) (see Practice note, COBS 4 rules: communicating with clients,including financial promotions). While this is a detailed set of rules and includes content requirements (for example,relating to risk warnings and prominence), the primary requirement is that all promotions are clear, fair and notmisleading.

Application to regulated tokens

Currently, only security tokens that fall within the regulatory perimeter of the RAO are captured by the FPO ascontrolled investments. E-money tokens are regulated separately under the EMRs. However, the promotion of eithertype of token is subject to the FCA's financial promotion regime.

The FCA has made it clear in PS19/22 (the policy statement to which the FCA's cryptoassets guidance isappended) that it expects all authorised cryptoasset market participants to apply the financial promotion rules andcommunicate financial promotions for products and services (whether or not regulated) in a clear, fair and notmisleading way.

Where an authorised firm decides to offer access to unregulated cryptoassets (such as exchange tokens, like Bitcoin)it must not suggest in the communication that their authorisation extends to those unregulated cryptoassets. Thecommunication should be transparent to ensure consumers are aware which activities the firm is authorised for(and so which activities the consumers have regulatory protections for). The FCA addressed this issue in a DearCEO letter to firms that explained the need for clarity in promotions about regulated and unregulated business (seeFCA Dear CEO letter: Clarity in Promotions about Regulated and Unregulated Business: the FCA’s Expectations(9 January 2019)).

The government is consulting on proposals to bring certain additional cryptoassets into the scope of financialpromotion regulation (see Cryptoasset promotions: HM Treasury consultation (July 2020)).

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Other regulations applicable to cryptoasset activities

As well as the financial promotion regime, which may apply where firms communicate and promote a regulatedcryptoasset (see Marketing cryptoassets), firms carrying on cryptoasset business may also have to comply with:

• Prospectus Regulation (2017/1129). If a token is a transferable security and the tokens are offered to thepublic in the UK or admitted to trading on a regulated market, an issuer must publish a prospectus unless anexemption applies (see paragraphs 84-90, and Q&A 4 in Appendix 2, of the FCA's cryptoassets guidance).For more information on the Regulation, see Practice note, New Prospectus Regulation (corporate aspects).

• Market Abuse Regulation (596/2014) (MAR). For a discussion about which cryptoassets are subject to MARand the challenges that this may present, see Article, Cryptoassets and the Market Abuse Regulation: mainchallenges. For an overview of MAR, see Practice note, Market Abuse Regulation (MAR): overview.

• MLRs 2017 which set out FCA's AML and CTF regime for certain cryptoasset businesses (see Practice note,Money Laundering Regulations 2017: implications for cryptoasset businesses).

• Disclosure Guidance and Transparency Rules which apply to issuers listed, or applying for listing, onthe FCA's Official List and their sponsors (see Practice note, Listing Rules, Prospectus Regulation Rules,Disclosure Guidance and Transparency Rules: overview).

• Listing Rules where companies are seeking listing on a regulated exchange (see Practice note, Listing Rules,Prospectus Regulation Rules, Disclosure Guidance and Transparency Rules: overview).

• Rules of any relevant trading exchange or platform.

• Local laws in all jurisdictions where an offer is available, where the offer is made available internationally.

Other UK and overseas requirements may also apply, depending on the precise nature of the cryptoasset activitiescarried on.

Cryptoassets Taskforce

The taskforce is a joint initiative between HM Treasury, the BoE and the FCA that was announced at the launch of theUK government's FinTech strategy (see Practice note, FinTech and innovation: UK financial regulators supervisoryapproach: UK government FinTech sector strategy). The taskforce is exploring the risks of cryptoassets and thepotential benefits of the underlying DLT. Its purpose is to assess the policy and regulatory implications of DLT andcryptoassets in financial services.

The taskforce first met on 21 May 2018 and convenes every six months to monitor and review market developmentsand the UK's approach in this area (gov.uk: Cryptoassets Taskforce). The taskforce published its final report inOctober 2018 (see following section for details). For details of the taskforce's future planned work, see Regulationof stablecoins: HM Treasury consultation.

Alongside the taskforce's work, the UK authorities continue to monitor financial stability risks associated withcryptoassets (the BoE) and to assess the adequacy of the prudential regulatory framework (the PRA).

To promote a co-ordinated international response to ensure a consistent regulatory approach to cryptoassets, allthree authorities continue to engage internationally through the G20, G7, Financial Action Task Force (FATF),Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS), the Global Financial Innovation

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Network (GFIN), the International Organization of Securities Commissions (IOSCO), the European Commissionand the European Supervisory Authorities (ESAs) and bilaterally.

Final report: framework for cryptoassetsThe Cryptoasset Taskforce's final report was published alongside the Autumn 2018 Budget. The report outlined theUK's approach to cryptoassets and DLT technologies in the financial services sector. The taskforce concluded thatwhile DLT was still at an early stage of development, it had the potential to deliver significant benefits in financialservices and other sectors, and all three authorities would continue to support its development. The taskforcereported that it had seen little evidence of the existing generation of cryptoassets delivering benefits, but noted thatthis could change as the market develops. However, given the substantive risks that are associated with cryptoassets(as outlined in chapter 4 of the report) the authorities' most immediate priority was to mitigate the risks and preventthe use of cryptoassets for illicit activity, as well as guarding against potential future threats to financial stability andencouraging responsible development of legitimate DLT and cryptoasset-related activity in the UK. To that end thetaskforce set out a table of actions to be undertaken by the authorities.

The report developed a framework for different types of cryptoassets and detailed the different activities that shouldbe assessed for regulation. As explained earlier in this note, the framework identified three types of cryptoasset:exchange tokens, security tokens and utility tokens (see definitions in What are cryptoassets?), which offer varyinglegal rights and have different uses.

The FCA developed the classification framework established by the taskforce when it provided guidance on how itsregulatory perimeter applies to different types of token (see FCA regulatory perimeter).

Related UK developments

Legal characterisation of a cryptoasset: UKJT statement

The UJKT is one of the taskforces of the LawTech Delivery Panel, which comprises a team of industry experts andmembers of the government and the judiciary that has been formed to help the UK legal sector grow and fulfil itspotential (see Tech Nation: Lawtech Delivery Panel).

The UKJT co-ordinated the preparation and publication of an authoritative legal statement on the status ofcryptoassets and smart contracts under English private law (see UKJT: Legal statement on cryptoassets and smartcontracts, November 2019). The purpose of the statement was to bring some legal certainty in this area, to improvemarket confidence.

The UKJT has not sought to define the term cryptoasset, saying that it would not be a useful exercise to do sogiven the rapid development of technology. Instead, it has focused on identifying the key features of a cryptoasset,and on answering key questions to do with ownership, transfer and whether under English law cryptoassetsconstitute "property". The statement, therefore, provides an important and useful starting point from which marketparticipants can consider their own rights and obligations. The UK is the first jurisdiction to formulate a legalposition on the legal status of cryptoassets.

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In summary, the UKJT concluded that cryptoassets have all the legal characteristics of property and are, as a matterof English legal principle, to be treated as property (although whether a particular cryptoasset will be property willdepend on the facts). Further:

• Despite being property, cryptoassets are not things in possession because they are "virtual" and cannottherefore be possessed.

• The novel or distinctive features possessed by some cryptoassets (intangibility, cryptographic authentication,use of a DLT, decentralisation and rule by consensus) do not disqualify them from being property.

• Cryptoassets are not disqualified from being property as pure information, or because they might not beclassifiable either as things in possession or things in action.

• A private key is not in itself to be treated as property because it is information.

Cryptoassets are not documents that can be physically transferred and so do not fit easily into the existing lawon documents of title as the latter are only recognised as such under statute or where there is an establishedmercantile usage (neither of which applies to cryptoassets). Nor are cryptoassets documentary intangibles ornegotiable instruments.

For a more detailed outline of the statement, see Legal update, Cryptoassets and smart contracts: UK JurisdictionTaskforce publishes legal statement.

In a speech launching the Legal Statement, Sir Geoffrey Vos stated that the next step was for the Law Commission toconsider whether a legislative or regulatory response is needed to address the issues in this area (www.judiciary.uk:Speech by Sir Geoffrey Vos, Chancellor of the High Court and Chair of the UKJT: The Launch of the Legal Statementon the Status of Cryptoassets and Smart Contracts). Since then, the government has committed to consulting onthe broader regulatory approach to cryptoassets (see Regulation of stablecoins: HM Treasury consultation).

The legal statement was published by the UKJT following a May 2019 consultation, aimed at identifying key issuesof legal uncertainty concerning cryptoassets, DLT and smart contracts (see UK Jurisdiction Taskforce consultationpaper: Cryptoassets, DLT and smart contracts (May 2019)). For commentary on the consultation, see Article,Slaughter and May's banking and investment services column: July 2019: Legal uncertainty in the world ofcryptoassets, DLT and smart contracts.

Caselaw on cryptoassets

There is currently no caselaw that considers cryptoassets and the regulatory perimeter or indeed the financialservices regulation of cryptoassets.

However, there are a small number of cases that consider whether cryptoassets constitute property. At the timethe UKJT's legal statement on cryptoassets was published (see Legal characterisation of a cryptoasset: UKJTstatement), the findings were untested in the English courts, although they were expected to have persuasiveauthority.

Since the legal statement was published, the Commercial Court has applied and accepted the analysis set out by theUKJT, holding that a cryptoasset such as Bitcoin is a form of property capable of being the subject of a proprietaryinjunction in AA v Persons Unknown [2019] EWHC 3556 (Comm) (17 January 2020). In Liam David Robertson vPersons Unknown [2019] (not yet reported), Moulder J did not explicitly decide that Bitcoin was property, although

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she held that there was a serious issue to be tried as to whether a proprietary claim existed. For more informationon this case, see Article, Time to clarify the legal status of cryptocurrencies?.

UK reform relating to cryptoassets

The existing UK legislative framework was not developed with the regulation of cryptoassets in mind. As theregulatory framework under FSMA is technology neutral, the FCA has applied the existing legislation to cryptoassetsas it would to other financial products and services.

Feedback to the FCA's guidance consultation on cryptoassets provided examples of areas where the currentframework could be amended to bring a wider range of cryptoassets (such as all exchange tokens) within theregulatory perimeter. However, as the application of the financial services regulatory framework is determined bylegislation, any changes to the regulatory perimeter will require legislative change.

The following sections of this note outline the ongoing and anticipated consultations by the FCA and the governmentthat propose changes to the regulatory regime (both the legislative framework and specific FCA rules) that mayimpact on the extent to which cryptoassets fall within the regulatory perimeter.

For a summary in table format of the key anticipated UK cryptoasset developments, see Practice note: overview,Horizon scanning for financial services practitioners: FinTech and cryptoassets.

Cryptoasset promotions: HM Treasury consultation (July 2020)

HM Treasury is consulting on proposals to expand the perimeter of the financial promotion regime to bring thepromotion of certain types of unregulated cryptoassets within its scope (see HM Treasury: consultation document:Cryptoasset promotions (20 July 2020)).

The government believes that many types of unregulated cryptoassets (that is, exchange tokens and utility tokens)expose consumers to unacceptable levels of risk and give rise to market integrity and financial crime risks. Theseconcerns were identified in the Cryptoasset Taskforce's final report, which identified misleading advertising and alack of suitable information as a key consumer protection issue in cryptoasset markets, with adverts often overstatingbenefits and rarely warning of volatility risks.

The government's proposals are outlined below.

Proposed changes to controlled investments and activitiesAs explained above (see Marketing cryptoassets) security tokens that fall within the regulatory perimeter of theRAO are captured by the FPO as controlled investments.

To bring the relevant cryptoasset activities into scope, the government proposes amendments to Part 2 of Schedule1 to the FPO to include certain unregulated cryptoassets in the list of controlled investments and to amend someof the current controlled activities. The proposals identify the unregulated cryptoassets that will be covered by theFPO as controlled investments by introducing qualifying cryptoasset as a new category of controlled investment.The definition of qualifying cryptoasset will capture any cryptographically-secured digital representation of value orcontractual rights that uses a form of DLT and which:

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• Is fungible (that is, is an asset that is freely replaceable (that is, interchangeable by another of a similarnature or kind)). An example of a non-fungible token is digital collectibles, such as Cryptokitties (ablockchain game where players breed, collect and sell token virtual cats), which are traded as “non-fungibletokens” on the Ethereum blockchain.

• Is transferable, confers transferable rights or is promoted as being transferable or as conferring transferablerights. This will exclude cryptoassets used within a closed system (such as supermarket loyalty schemes builton a DLT system) where only redemption via the issuer is possible, rather than transfer to other users.

• Is not any other controlled investment as described and is not e-money within the meaning of the EMRs.

• Is not currency issued by a central bank or other public authority.

The effect of the changes is that unregulated stablecoins that are not already in scope of the FPO as security or e-money tokens will be controlled investments as they will fall within the definition of qualifying cryptoassets. Thismeans that promotions of most stablecoins would need to comply with the FCA's financial promotions regime eitherbecause they already be in scope of the FPO, as security tokens or e-money tokens, or because they are qualifyingcryptoassets.

Fungibility and transferability are two critical features that make a cryptoasset significantly more likely to give riseto consumer protection concerns. They are the core characteristics of money, as well as of a range of widely used,regulated products, from stocks to bonds. Consumers that buy tokens with these characteristics are liable, therefore,to buy them with similar expectations as they have when buying regulated financial services (for example, they havea stable value and markets are liquid).

The government proposes amending the following controlled activities, which it considers are most relevant, toincorporate activities relating to the buying, selling, subscribing for or underwriting of qualifying cryptoassets:

• Dealing in securities and contractually based investments.

• Arranging deals in investments.

• Managing investments.

• Advising on investments.

• Agreeing to carry on specified kinds of activity.

The government is of the view that cryptoasset exchanges (where customers can buy, sell or exchange cryptoassetsfor fiat currency or other cryptoassets), cryptoasset ATMs (where customers can exchange cryptoassets into cashand vice versa) and airdrops fall within the above list of controlled activities where they facilitate the acquisition,disposal, underwriting or conversion of qualifying cryptoassets.

This consultation should be read alongside the government's consultation setting out proposals to strengthen theFCA's ability to ensure the approval of financial promotions issued by unauthorised firms operates effectively. Asexplained above (see Marketing cryptoassets), a financial promotion relating to a regulated cryptoasset token must,when issued by an unauthorised person, be approved by an authorised firm. However, the government is concernedthat too many authorised firms are failing to satisfy its requirements in approving the financial promotions ofunauthorised persons. This includes cases in which the approving firm has failed to undertake adequate duediligence to ensure promotions it has approved meet FCA requirements, and instances of firms approving financialpromotions that relate to products that are beyond their sphere of expertise (including cryptoassets) and that, as a

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result, fail to comply with FCA rules. For a more detailed summary of this consultation, see Practice note, Financialpromotion: overview: HM Treasury proposes changes to approval regime for financial promotions.

The deadline for responses to both of HM Treasury's consultations was 25 October 2020. Regulation of stablecoins: HM Treasury consultation

When the Cryptoasset Taskforce published its final report in October 2018, HM Treasury committed to consult onpotential changes to the FCA's regulatory remit to extend it to cryptoassets with comparable features to specifiedinvestments. It also said that it would explore whether and how exchange tokens (such as Bitcoin) and related firms(such as exchanges and wallet providers) could be regulated effectively to the extent that other proposed measures donot adequately address all relevant risks. In its March 2020 Budget, HM Treasury further committed to consultingon the broader range of regulatory approach to cryptoassets, including new challenges from so-called stablecoins.

In January 2021, HM Treasury published a consultation paper (which reflects advice from the CryptoassetsTaskforce) setting out proposals to bring so-called "stable tokens" within the FCA's regulatory perimeter. Theconsultation paper also includes a call for evidence on cryptoassets used for investment and the broader useof distributed ledger technology (DLT) in financial markets (HM Treasury: Consultation and call for evidence:UK regulatory approach to cryptoassets and stablecoins (7 January 2021)). The deadline for comments on theproposals and on the call for evidence (which are outlined in the following sections) is 21 March 2021.

The paper is described as the first phase of HM Treasury's consultative process on its approach to cryptoassets. Inthe paper HM Treasury makes it clear that any adjustments to the regulation of cryptoassets, including stablecoins,must be incremental and phased, and proportionate to regulation that is sensitive to risks posed and responsive tonew market developments. The approach would be rooted in the principle of "same risk, same regulatory outcome".Objectives and principles would be set by the government and HM Treasury, with detailed rules set by the regulators.HM Treasury intends to maintain the current division of UK regulator responsibilities as far as possible.

For practitioner comment on HM Treasury's proposals, see Article, Lucy Frew's FinTech column: January 2021.

Consultation proposals on stablecoinsHM Treasury's consultation paper focuses on establishing a sound regulatory environment for stablecoins, thisbeing an area where HM Treasury judges that the risks and opportunities associated with cryptoassets are mosturgent. This is because of the increasing value in transactions using stablecoins (compared for example to Bitcoin)and the fact that stablecoins are the most likely to be used as a means of payment (as opposed to investment) (seeFCA cryptoasset consumer research). If appropriate standards and regulation can be met, HM Treasury considersthat certain stablecoins have the potential to play an important role in retail and cross-border payments, includingsettlement.

In summary, HM Treasury is considering whether it may be necessary to introduce:

• A new regulated category of token: stable tokens. Stable tokens are defined as those tokens thatstabilise their value by referencing one or more assets, such as fiat currency or a commodity and could,therefore more reliably be used as a means of exchange or store of value. The category would also includeother forms of tokenised payment and settlement assets, as well as tokenised forms of central bank money.This classification does not depend on the technology underpinning its use (so it is irrelevant whether or notthe stable token relies on DLT).

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• A new regulatory regime for stable tokens that are used as a means of payment. This regimewould bring both the tokens and associated activities into regulation. It would therefore cover firms issuingstable tokens and firms providing services relating to them, either directly or indirectly, to consumers (sowould capture issuers or systems operators, cryptoasset exchanges and wallets). Firms carrying on regulatedactivities would need to be authorised by the FCA and comply with high-level requirements. Enhancedrequirements (for example, capital and prudential requirements) will apply if specified systemic thresholdsare met. For an outline of the proposed regime for stablecoins (activities and requirements) see Summary ofproposed regime for stable tokens.

The FCA intends to base the rules and requirements of the new regime on the UK's current approach toe-money and payments regulation, drawing on existing rules as far as possible. The main pieces of UKlegislation governing payments regulation are the EMRs 2011 and the PSRs 2017, which provide the FCA andPayment Systems Regulator (PSR) with powers to regulate and supervise firms engaged in relevant paymentactivities. Key points to note about the proposals include:

• HM Treasury is considering a lighter touch regime for smaller firms below a certain turnover, akin tothe current payments regulation.

• Single-fiat tokens would be required to meet the requirements of e-money under the EMRs, withpossible adaptation and additional requirements where needed.

• It also considers that stable token arrangements which play a similar function to existing paymentssystems may be appropriate candidates for regulation by the PSR and is considering whether legislativeadjustments are required to clarify this.

• Interbank payment systems that have systemic importance are subject to a process of formalrecognition (and de-recognition) by HM Treasury under Part 5 of the Banking Act 2009 (see Practicenote, Recognised inter-bank payment systems). It is proposed that Part 5 should be applied to systemsthat facilitate the transfer of new types of stable tokens so that the criteria for systemic paymentsystems should extend to stable tokens that perform a retail or wholesale payment system function. TheBoE will be required to consult on the proposed supervisory approach and enhanced requirements tobe applied to systemic stable token systems and service providers.

The UK government and authorities are also considering whether, due to the digital, decentralised and cross-bordernature of stable tokens, firms actively marketing to UK consumers should be required to have a UK establishmentand be authorised in the UK.

HM Treasury expects financial crime including anti money laundering (AML) requirements will apply to all walletsand issuers and that these will also have to register under AML registration for their activities in relation to alltypes of cryptoassets. The AML registration may not cover issuers; we would expect issuers to be subject to AMLrequirements in line with other regulated entities. For more information, see [sara note]

Which tokens are not in scope of phase 1?HM Treasury proposes that the following types of tokens are excluded from the scope of the first phase of its workon cryptoassets, although they may be subject to future regulation or (for security tokens) changes to the way inwhich they are regulated:

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• Security tokens that meet the definition of specified investment under the RAO and are already regulated(see Security tokens).

• Algorithmic stablecoins (unregulated). These are tokens that seek to maintain a stable value through the useof algorithms to control supply, without any backing by a reference asset. The UK government judges thesetypes of token to more closely resemble unbacked exchange tokens and may pose similar risks in relation totheir ability to maintain stability of value, so may not be suitable for retail or wholesale transactions.

• Utility tokens (unregulated). These tokens are used to access a current or future service, for example, accessto a DLT platform, but may also be exchanged (see Utility tokens).

E-money tokens that are already fall within the existing e-money authorisation regime are also outside the scope ofthis proposed regime. Existing requirements will continue to apply (see E-money tokens).

Summary of proposed regime for stable tokensStable token activities that would be regulatedsubject to appropriate exclusions applying

High-level requirements that would apply to allregulated activities

• Issuing, creating or destroying asset-linked tokens:the activity of the token issuer in minting andburning tokens.

• Issuing, creating or destroying single fiat-linkedtokens: the activity of the token issuer in mintingand burning tokens.

• Value stabilisation and reserve management: theactivity of managing the reserve assets that arebacking the value of a stable token and providingcustody/trust services for those assets to ensurestabilisation of the stable token.

• Validation of transactions: the activity ofauthorising or verifying the validity of transactionsand records.

• Access: the activity of providing services orsupport to facilitate access of participants to thenetwork or underlying infrastructure.

• Transmission of funds: the activity of ensuring thecorrect and final settlement of transactions whilelimiting counterparty and default risk.

• Providing custody and administration of a stabletoken for a third party: the activity of managingtokens on behalf of owners, including the storageof private keys.

• Executing transactions in stable tokens: theactivity of conducting transactions on behalf ofanother.

• Exchanging tokens for fiat money and vice versa:the activity of purchasing/exchanging a stabletoken with fiat money.

Authorisation requirements with associated thresholdconditions. Prudential requirements, including capital and liquidityrequirements, accounting and audit requirements. Requirements for the maintenance and management ofa reserve of assets underlying the token’s value. Orderly failure and insolvency requirements. Safeguarding the token (principally applicable to walletsand exchanges) including the privacy and security ofkeys to those tokens. Systems, controls, risk management and governancerelating to effective overall management of an issuer orservice provider. Notification and reporting: disclosures to regulators andcustomers. Record keeping relating to firms' internal record keepingprocesses. Conduct requirements. Financial crime requirements to ensure properimplementation of AML and CTF rules. Outsourcing requirements. Operational resilience, service reliability and continuityrequirements. Security requirements (including cyber and cloud).

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Call for evidence on investment and wholesale issues: future regulatory actionIn the future, HM Treasury will consider the case for bringing a broader set of cryptoasset market actors or tokenswithin the scope of regulation. For the time being its intention is that the use of currently unregulated tokens andassociated activities primarily for speculative investment purposes, such as Bitcoin, would initially remain outsidethe regulatory perimeter for conduct and prudential purposes. Utility tokens (those used to access a service) wouldalso remain outside the perimeter.

Accordingly, the UK government is currently considering whether those tokens deemed out of scope from theseminimum requirements should be subject to restrictions with respect to marketing or promotion for use in retail orwholesale payments activity. To this end, the call for evidence (CfE) (in chapter 4 of the consultation paper) seeksfeedback on the regulation of cryptoassets used for investment and the broader use of distributed ledger technology(DLT) in financial markets.

The CfE seeks feedback on a several issues, including:

• Is there any value in value in the government capturing tokens typically used by retail consumers as aform of speculative investment (that is exchange tokens such as Bitcoin and Ether) under the regulatoryperimeter in the future? The government is already consulting on holding cryptoasset promotions to thesame standards as other financial promotions, ensuring that they are fair, clear and not misleading (seeCryptoasset promotions: HM Treasury consultation (July 2020)) which is intended to address key riskswith respect to consumer awareness.

• What are the benefits and risks posed by Decentralised Finance (DeFi)? The government does not intend tobring DeFi activities and the tokens that facilitate them into the regulatory perimeter but acknowledges theincreasingly important role played by DeFi. It is also keen to understand views in relation to the practicalitiesof any future regulation given their decentralised nature, and lack of financial intermediaries.

• What changes may be necessary to remove obstacles and enable the use of cryptoassets or DLT-basedinnovations. HM Treasury notes that het existing regimes were not originally intended to support theuse such new technologies, and asks whether there any areas of existing regulation where clarification oramendments are needed to support the use of security tokens?

• The potential of DLT to transform financial markets, the steps needed to be taken to fully realise thispotential, and the barriers standing in the way of adoption? This includes the potential benefits of theadoption of DLT by financial markets infrastructures (FMIs) and the benefit for trading, clearing andsettlement, drawbacks of DLT got wholesale markets and FMIs, how FMI regulation and legislation canbe optimised for DLT, and whether common standards, for example on interoperability, transparency/confidentiality, security or governance, help drive the uptake of DLT/new technology in financial markets.

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