UK Law and Practice Contributed by: James Burnie, Kathryn Dodds, Nicky Androsov and Olga Antonova, gunnercooke llp
Given that the application of the MLRs is generally unaffected by the classification of the crypto-asset, rather they are determined by the activities taken in relation to them, MRLs are not considered further here. As regards FSMA, a key question is whether or not the RWA constitutes a unit in a collective investment scheme. In this respect, in very broad terms, there is a distinction between RWAs where the asset is effec- tively inert and those where the asset is managed. The former, which would include – eg, gold stored in a vault, may be structured so as not to be a security. In this respect, the token may be considered equivalent to a warehouse receipt, which is not a type of security. Where discretion is managed in relation to an asset, such as with respect to real estate, then the RWA is generally considered a unit in a collective investment scheme. This is because the act of management may influence the value of the asset, and since day-to-day control of the decision-making process is not with the token holders, as the participants in the asset, the overall set-up is considered a collective investment
scheme. It is worth noting that the definition of collec- tive investment scheme is broader than its EU equiva- lent – the collective investment undertaking – and as such RWAs may be considered securities in the UK but not the EU. The impact of this determination can be stark, and it can result in retail persons being pro- hibited from participating in the RWA. Furthermore, even if the RWA is not sold into the UK, if the manage- ment of the RWA is done in the UK, that can separate- ly trigger the need for a fund management authorisa- tion. Because of this impact, alternative solutions for such RWAs have been considered, for example via the innovative use of debt instruments. Whilst these may work legally, generally the impact of using of these structures is to increase the intrinsic risk of the set-up. Lastly, it is worth noting that the delivery terms of a RWA need to be considered carefully, in terms of whether there is a derivative. This is generally not the case, as most RWAs are either deliverable on demand, or incapable of delivery (ie, holders of the token simply get the fiat value of the RWA on redemption). How- ever, as the ingenuity of RWA structures develop, care needs to be taken not to inadvertently be selling a regulated option, future or contract for difference.
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