UK Law and Practice Contributed by: James Burnie, Kathryn Dodds, Olga Antonova and Holly Joseph, gunnercooke llp
10. Blockchain 10.1 Use of Blockchain in the Financial Services Industry The authors are seeing a steady increase in both the acceptance of blockchain by traditional play - ers and increasing interest regarding its utilities for such businesses. This has grown beyond simply considering crypto-assets as an invest - able asset class to increasing discussion as to how to deliver traditional products in a cheaper and more efficient way using blockchain tech - nology. 10.2 Local Regulators’ Approach to Blockchain The FCA has generally been supportive of the use of blockchain, and indeed a common use of the FCA sandbox has been to test new innova - tions using blockchain technology. More recent - ly, the FCA has been involved in the fund indus - try and real-world asset initiatives to encourage the use of blockchain. In terms of actual regulation, the FCA has gen - erally adopted an approach of applying existing regulation to blockchain solutions – on the basis that blockchain solutions should manage the risks covered by existing regulation, and there should be a level playing field between tradition - al and blockchain-based methods of operating. However, in providing the sandbox, the FCA is recognising that in certain cases assumptions regarding how risks may be mitigated may prove false for blockchain solutions – and so this gives firms the ability to show the FCA where exist - ing FCA rules may be properly adapted to take advantage of the new technology. 10.3 Classification of Blockchain Assets Whether a blockchain asset is considered a form of regulated financial instrument depends on the
features of the asset – as an asset having the features of a regulated financial instrument shall be regulated as such. Broadly, this means that the classification of crypto-assets splits into three categories. • Security tokens – these are tokens, other than e-money tokens, with specific characteris - tics which mean they meet the definition of “Specified Investment” under the RAO, and which are therefore within the FCA’s perim - eter. This means that firms that deal in these tokens generally need to be authorised by the FCA under the FSMA to do so. • E-money tokens – these are tokens which meet the definition of e-money, in which case certain activities in relation to them, particu - larly those linked to payments, may be within the FCA’s perimeter. • Unregulated tokens – these consist of tokens that are not e-money tokens and are not security tokens. Dealing in these tokens does not require FCA authorisation. Regardless of the classification of crypto-assets, UK firms need to register with the FCA under the MLRs if they engage in any of the following activities. • Exchange, or arrange or make arrangements with a view to exchange crypto-assets for money or vice versa, or one crypto-asset for another crypto-asset. • Operate a machine which uses automated processes to exchange money for crypto- assets or vice versa (eg, an ATM). • Provide custodian services for: (a) crypto-assets on behalf of customers; and/or (b) private cryptographic keys to hold, store and transfer crypto-assets.
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