On 9 April 2018, the Financial Conduct Authority (FCA) published its Business Plan 2018/19 (link), in which it identified cryptocurrencies as one of its cross-sector priorities for the year ahead. Shortly before, on 6 April 2018, the FCA also published a statement on cryptocurrency derivatives and their regulatory status under the second Markets in Financial Instruments Directive (MiFID II) (link).
These announcements are made in the context of an ever increasing interest taken by markets and regulators globally in the sale and marketing of cryptocurrencies and cryptocurrency based investments. On 27 March 2018, the European Securities and Markets Authority (ESMA) announced its decision to introduce leverage limits and other trading restrictions for firms offering contracts for difference (CFDs) based on cryptocurrency assets to retail clients (link).
In its recent statement, the FCA confirms its view that cryptocurrency derivatives are capable of being financial instruments under MiFID II and that firms conducting regulated activities in cryptocurrency derivatives will likely need to be authorised.
In particular, dealing in, arranging a transaction in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO) are likely to be within scope.
Authorised firms will need to comply with applicable law, including the FCA’s rules and any directly applicable European Union (EU) regulations relevant in this context.
The FCA considers that the following cryptocurrency derivatives (among potential others) may constitute financial instruments within the scope of MiFID II:
- 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;
- CFDs – a cash-settled derivative contract in which the parties to the contract seek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value of the cryptocurrency CFD at its outset and at its termination; and
- Cryptocurrency options – a contract which grants the beneficiary the right to acquire or dispose of cryptocurrencies.
Note that currently cryptocurrencies are not considered to be currencies or commodities or financial instruments under MIFID II and activities in relation to cryptocurrencies themselves do not generally require authorisation.
Forthcoming Discussion Paper on cryptocurrencies policy
In its Business Plan 2018/19, the FCA announced that it is working with the Bank of England and HM Treasury as part of a joint taskforce to develop thinking on the regulatory treatment of cryptocurrencies and cryptocurrency related activities in the United Kingdom (UK). We understand that the taskforce is aiming to publish a Discussion Paper on the topic in Q2 2018.
Whilst cryptocurrencies do not currently fall within the FCA’s regulatory perimeter, the FCA warned in a statement issued on 12 September 2017 that the regulatory boundaries need to be considered carefully on a case by case basis (link). The FCA now notes that certain models of use or packaging of cryptocurrencies might well bring them within its remit and, potentially, within the scope of MiFID II.
On 22 February 2018, the House of Commons Treasury Committee launched an enquiry into digital currencies and distributed ledger technology (link). The FCA has indicated that it intends to respond to this enquiry.
These developments reinforce the FCA’s stated commitment to foster innovation, whilst also acknowledging that there is a need for regulatory guidance in this area. They also emphasise the FCA’s stance that cryptocurrency related activities need to be approached with great care to ensure that they do not contravene existing regulatory requirements.
It is positive to see that the FCA is combining its efforts with the Bank of England and HM Treasury to develop thinking on cryptocurrencies in the UK market, whilst continuing to build on its co-operation with other regulators in the EU and globally in a space which, ultimately, knows no jurisdictional boundaries.