United Kingdom of Crypto?
On the 23rd January the UKs Financial Conduct Authority posted a consultation paper on cryptoassets and set out the details on where different types of cryptoassets might fall in the regulatory perimeter. We read the paper expecting the worst but were excited to see independent and level headed thinking that was not towing any line set by our America SEC. The conclusion is that if this gets approved (as its currently in consultation phase and comments are welcome before April 5th) it’s a BIG DEAL for the UK. We are supporters of crypto and blockchain solving many of the issues in the UK and providing a new financial opportunity for the country. The authors of the paper showed a great understanding of where we are and where we could be in a regulated environment. It set out to support the nascent industry in new definitions rather than bash a square peg in a round hole.
This FCA Guidance proposal is to garner thoughts to provide regulatory clarity for market participants carrying on activities in this space and focuses on where cryptoassets interact within the FCA ‘perimeter’. In particular, it looks at where cryptoassets would be considered ‘Specified Investments’ under the Regulated Activities Order (RAO),3 ‘Financial Instruments’ such as ‘Transferable Securities’ under the Markets in Financial Instruments Directive II (MiFID II),4 or captured under the Payment Services Regulations (PSRs),5 or the E-Money Regulations (EMRs).6 It also covers where cryptoassets would not be considered ‘Specified Investments’ under the RAO.
The topline takeaway for us all to consider are…
These tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by Specified Investments. Although utility tokens are not Specified Investments, they might meet the definition of e-money in certain circumstances (as could other tokens), in which case activities in relation to them may be within the perimeter.
Q: My network is/aims to be fully decentralised and I will not have any control over the network anymore. Does this have an impact on whether the tokens could be regulated or not?
A: No. The nature of the network does not determine whether a token is a security or not. A security token is determined by its intrinsic characteristics and the rights it confers on holders … However, the more decentralised the network the less likely it is that the token will confer enforceable rights against any particular entity, meaning it may not confer the same or equivalent rights as Specified Investments.
These are tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument.
Q: Does a definition of security translate easily to the digital world?
A: … we appreciate there can be particular difficulty in categorising tokens as security tokens given the potential for tokens to change in structure over the course of their lifecycle (i.e. a utility token becoming an exchange token, or an exchange token becoming a utility token etc.) as well as the sometimes-ambiguous nature of rights conferred by tokens.
Q: If you deem my token a security, what does this mean for my international business/clients/token holders? Can I still sell, distribute and market my token globally?
A: If a token is considered a Specified Investment under the RAO including a Financial Instrument under MIFID and any activity in relation to it is carried on in or from the UK, it will be subject to relevant securities regulations in the UK.
….the nature of the token has to be assessed for every jurisdiction in which the token is sold or in which the firm operates separately to establish whether a specific token constitutes a security in this jurisdiction and therefore triggers the application of any respective securities regulation.
Q: Can I issue a security token without being FCA authorised?
A: The issuance of one’s own securities does not require permission and issuers of security tokens will not be regulated in the way that exchanges and advisers are regulated.
Q: Would exchanges and other dealers need to be authorised to deal with security tokens? Do I have to ensure that all intermediaries that deal in my security tokens have the appropriate permissions?
A: Yes. Any intermediaries that help with the issuance of securities are likely to need permission
Q: If I accept only cryptoassets as a form of payment for my token, can it still be a security token?
A: Yes. Unlike e-money regulations where a token must be issued on the receipt of fiat funds, security tokens will still be considered security tokens regardless of whether they are exchanged for fiat funds, exchange tokens, or other forms of cryptoassets. In certain cases (like airdrops), a token can also be a security, even if nothing is received 52 In general, the MIFID financial instrument categories have been mapped into the existing RAO specified investment categories.
… We consider a token to be a security based on its structure: the intrinsic nature of the token is important, not the mechanism by which it was acquired.
Q: If my token is a security in the UK, is it a security in the whole of the EU?
A: The UK RAO sets out ‘Specified Investment’ beyond the MIFID II definition of a ‘Financial Instrument’. However, the two regimes are very closely linked, and a security token in the UK is likely to be deemed a security token in the rest of the EU.
These are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They are, usually, a decentralised tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter.
An Exchange Token consultation paper is the next step in the FCA’s work on cryptoassets and sets out details on where different types of cryptoassets might fall in the regulatory perimeter — read intro here and the full paper here. You can fill out the response form yourself here.
So good so far. And there are plenty more nuggets …
While cryptoassets can be used as a means of exchange, they are not considered to be a currency or money, as both the Bank of England and the G20 Finance Ministers and Central Bank Governors have previously set out. They are too volatile to be a good store of value, they are not widely accepted as a means of exchange, and they are not used as a unit of account.
UK is a small market
In relation to capital raising activity, the Taskforce estimated that there are 56 projects in the UK that have used ICOs, accounting for less than 5% of projects globally … and account for less than 1% of the $24 billion raised globally.
The Taskforce agreed to take action to mitigate the risks that cryptoassets pose to consumers and market integrity…
- potentially expanding the FCA’s regulatory perimeter to bring in further types of cryptoassets
- broadening the Anti-Money Laundering/ Counter Terrorist Financing (AML/CTF) regulation further in relation to cryptoassets
- The FCA to consult separately on a potential prohibition on the sale to retail consumers of derivate products and transferable securities linked to certain cryptoassets.
The FCA will publish feedback and the final text of the guidance in summer 2019. So we hope that the outline provided will get adopted and this will lead to a precambrian explosion of quality blockchain and crypto projects in the UK.
We endorse the fine work produced and wish to make it public we support the framework.
On behalf of KR1 PLC, Keld van Schreven and George McDonaugh.
Facebook and Blockchain?!
The big news in the last few days has been the acquihire of Chainspace by Facebook. Being early supporters of projects is a double-edged sword, the risk of project failure is much higher and the road to success is paved with failure yet the returns can be fantastic. It was with some surprise to get the news about the Facebook acquisition of the Chainspace team. To be clear, while we were very excited about what the team was up to (see our Tweets from the Chainspace meetup at Devcon IV in Prague or the photos in Gibraltar), helped out as we could and were also intending to come in on the funding round that was going on, KR1 had not contributed any funds at the time when Facebook scooped them up, thus, KR1’s balance sheet does not benefit from the deal in any way. The Chainspace team made the difficult call ‘to sell’ (as, technically, it wasn’t selling) early. In the normal tech world (albeit not necessarily in the blockchain/crypto/digital asset world), selling your company to a giant or IPO-ing is often the goal. The difference here is that Chainspace is open source and thus there was no IP to be acquired, just the brainpower behind the tech. The technology and any research published so far remains open-source, it might become a community platform. Definitely an unusual situation for everyone involved. Whether you think Facebook is the enemy or not we applaud the Chainspace team for the move and hope the tech prospers with billions of users using the protocol, we definetly feel that the team will have a very beneficial impact on whatever Facebook is up to with the blockchain team as all of them share the ethos of this decentralised, permission-less and trust-less space!
We were proud to announce a new wholly owned KR1 subsidiary, KRX Ltd in Gibraltar. KRX’s main function is to list projects on the GBX, source new investment opportunities and be our vehicle on the ground in Gibraltar (given the regulatory and organizational ease of The Rock). Due to Brexit and the bear market, Gibraltar is in a state of flux and we look forward to seeing a clear path through. Alongside this we are pleased to announce our first GBX listing, one of our portfolio project, OST/ Simple Token: OST token will list on the GBX in February. We are long OST and impressed with Jason Goldberg and his team!
Nash had a well-attended meetup in Amsterdam, with lots of questions and good energy in the room. The big reveals were… New branding (from NEX to Nash)!, US trading (this is a big deal!) and non-custodial trading.
At launch, there will be USDC, NEO, NEP-5, ETH, ERC-20 cross-chain assets and the NEX token staking contract. Still to come are BTC, NEX (their own token listed), LTC, XRP (booo!), fiat gateways, security tokens, tokenized equity etc.
The big deal about Nash is that its a new financial ecosystem allowing truly decentralised trading of Crypto, Security tokens and then Tokenized stocks. The NEX token allows you to stake your tokens for a period and earn a slice of trading fees called Staking dividends, like share dividends. The amount of dividends you earn is dependant on the exchange volume. Staking dividends and distributions are handled by the Nash matching engine, which is fairly nifty as it’s decentralised and has some neat features like non-custodial trading and more secure private key management.
We are confident in the ability of the team to deliver and excited about the future of Nash!
There was much excitement in the bear market about the launch of one of our favourite projects: Grin. We donated a little bit to one of the core developers funding campaigns earlier last year and were represented at Grincon0 in Berlin.
Grin is a new privacy coin, which launched properly on mainnet recently with lots of GPUs actively mining. We were early supporters of Grin and we are amazed to see so much VC money poured into Grin mining! For now, we’re still waiting for a proper opportunity to get exposed to the ecosystem or for everything to calm down a little to actually take a position in the underlying GRIN asset. No exposure to our balance sheet yet.
More info and what’s going on with Grin here: https://twitter.com/grinMW
Cosmos is launching the mainnet very soon, possibly in late February or early March :). Confused as to what Cosmos is and how important it is? Read a great comparison of Cosmos vs Polkadot here. Polkadot is another of our favourite investment so it's a great comparison (written by someone at Parity Technologies, the people actually building Polkadot). We hold quite a few Cosmos ATOMs (and lot of Polkadot’s DOTs too!)