The UK's crypto-asset market and its underlying distributed ledger technology are developing quickly and participants often wonder whether they fall under the Financial Conduct Authority's aegis, requiring authorisation for their activities. The FCA itself has been far from clear in the past about where its 'perimeter' should lie and is therefore proposing to issue some rules.

Consultative paper 19/3 caters for the mainstream financial firms that are entering the crypto-asset market and the small derivatives market that is beginning to develop around it. The paper sets out the circumstances in which the FCA would like and/or believes tokens to be:

• 'specified investments' as defined in the UK's Regulated Activities Order;
• financial instruments regulated by the European Union's second Markets in Financial Instruments Directive;
• E-Money that is regulated by the E-Money Regulations and the Payment Services Regulations.

The paper is relevant to financial advisors; professional advisors; investment managers; firms that issue or create crypto-assets, firms that market crypto-asset products and services; firms that buy or sell crypto-assets; firms that hold or store them; consumers and others. When the FCA finalises its guidelines it hopes that they will "help market participants to understand whether the crypto-assets they employ are within the regulatory perimeter."

The FCA prides itself on being a 'technology neutral' regulator, so the use of IT alone does not alter its perception of what fits within its regulatory perimeter and what lies outside.

Kingsley Napley partner Jill Lorimer told Compliance Matters: “This consultation follows the commitment made in the report produced by the UK Cryptoassets Taskforce last year to provide extra clarity to firms regarding the boundaries of regulation insofar as crypto-asset activities are concerned. It is also part of a broader strategy to make the UK a safe place to do business and hostile to financial crime.

"It will be warmly welcomed by firms that are operating in this space, or that seek to do so. A clear regulatory framework is absolutely essential to the UK maintaining its position as one of the most attractive destinations for crypto-asset innovation. It will give investors much-needed comfort and help to attract more interest in the sector. Regulation will help 'crypto' come of age.

"The UK is already ahead of other jurisdictions in the number of crypto-operators and users it has spawned. Greater rules to govern this area of business will help to further legitimise and grow the industry at a time which must be very welcome to the UK financial services sector."

'Technological neutrality' is an old and commonplace aim of regulators, going back in the UK to the earliest days. Only this week at the World Economic Forum in Davos, Ueli Maurer, a member of Switzerland’s Federal Council (often referred to as the "seven-headed president"), affirmed his own faith in the policy by stating that Swiss rules for innovations such as blockchain will continue to target “processes, not technologies.” In other words, he said, the aim is to regulate the behaviour that IT can enable and not the IT itself. He contrasted this approach with the regulations of other countries, which he described as "sometimes heavy-handed." He thought that technological neutrality on the part of regulators allowed a country to take risks with the aim of advancing its interests in the digital world. Not to take risks, he implied, would be to court stultification.