Clifford Chance

Global regulators have taken a range of approaches to responding to virtual currencies.

Law Business Research Ltd have published the fourth edition of The Virtual Currency Regulation Review. The Review is a country-by-country analysis of developing regulatory initiatives aimed at fostering innovation, while at the same time protecting the public and mitigating systemic risk concerning trading and transacting in virtual currencies

The UK chapter of The Virtual Currency Regulation Review, written by Laura Douglas,  provides an overview of how crypto assets fit into the current UK regulatory framework. It covers the following issues: 

• Introduction to the legal and regulatory framework
• Securities and investment laws
• Banking and money transmission
• Anti-money laundering
• Regulation of exchanges
• Regulation of miners
• Regulation of issuers and sponsors
• Criminal and civil fraud and enforcement
• Tax
• Other Issues
• Looking ahead

Introduction to the legal and regulatory framework

In the United Kingdom, the term 'cryptoasset' is defined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) as 'a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology (DLT) and can be transferred, stored or traded electronically'. Similarly, other UK regulatory rules and guidance generally use the term cryptoasset (rather than virtual currency) and so, where we refer in this chapter to virtual currencies, this should be understood as a reference to all types of cryptoassets (as well as e-money tokens).

At present, some (but not all) types of virtual currencies are regulated in the UK. In general, the structure and substantive characteristics of a virtual currency will determine whether or not it falls within the UK regulatory perimeter, and if so, which regulatory framework or frameworks will apply. In its Guidance on Cryptoassets, the UK Financial Conduct Authority (FCA) identifies three broad categories of virtual currencies, with the following features:

1. Security tokens: virtual currencies with characteristics that mean they provide rights and obligations akin to traditional instruments such as shares, debentures or units in a collective investment scheme, meaning that they fall within the UK regulatory perimeter as 'specified investments' under the Financial Services and Markets Act 2000 (FSMA).
2. E-money tokens: virtual currencies that meet the definition of electronic money (or e-money) under the Electronic Money Regulations 2011 (EMRs). Again, they fall within the UK regulatory perimeter as specified investments under the FSMA.
3. Unregulated tokens: virtual currencies that are neither security tokens nor e-money tokens. They are not specified investments under the FSMA and so fall outside the UK regulatory perimeter (other than in relation to anti-money laundering-related requirements; see Section IV). They include virtual currencies that are not issued or backed by any central authority and are intended and designed to be used directly as a means of exchange, which the FCA refers to as exchange tokens but are often called cryptocurrencies. Unregulated tokens also include 'utility tokens', which grant holders access to a current or prospective service or product but exhibit features that would make them akin to securities. Utility tokens may be the same as or similar to reward-based crowdfunding.

In its Guidance, the FCA states that although it recognises these three broad categories of cryptoassets 'they may move between categories during their lifecycle' and assessing whether a particular virtual currency falls within the UK regulatory perimeter 'can only be done on a case-by-case basis, with reference to a number of different factors'. More generally, the Guidance sets out the FCA's views on when virtual currencies fall within the current UK regulatory perimeter. This Guidance is not binding on the courts but may be persuasive in any determination by the courts, for example when enforcing contracts.

Read the full UK Chapter.

PDF Chapter reproduced with permission from Law Business Research Ltd.