Security Token Offerings (STOs) have been grabbing a lot of headlines lately. Security tokens are unique in that they are backed by real tradeable financial assets, i.e. securities. When you own a security token, you are promised a share in the issuing company’s profits, for instance. This is unlike a utility token which allows companies to raise funds with the promise of goods and services to investors later in the project when it materializes.
The security tokens function under the securities rules of the applicable jurisdiction under concern. In the case of the UK, the financial regulator recently took steps in the direction of establishing the legal framework surrounding cryptocurrency and digital tokens. Let’s dive deep into the STO regulations in the UK and the proposed new framework.
Utility Tokens Are Not Securities: UK Regulator
One of the most important aspects of the recent consultation paper released by the UK regulator, the FCA (Financial Conduct Authority) is that it attempts to define the tokens which fall under the regulatory umbrella.
Released on January 23, the paper is open for consultation until April 5 this year. The FCA has clarified that the paper intends to remove the ambiguity in the crypto space considering that DLT (Distributed Ledger Technology), the underlying technology, is developing at an extremely rapid pace.
It is important to note that the FCA has taken a different approach from the other regulators across the world. While the US SEC, for example, has resorted to the use of the Howey test to ascertain if a token can be deemed security, the UK regulator has stated that irrespective of their function, utility tokens cannot be called securities.
In this regard, the Financial Conduct Authority has identified three types of cryptocurrencies: the security tokens, which are royalty streams or tokenized equity, for instance, exchange tokens which include cryptos such as Bitcoin and Ether, and lastly utility tokens.
The latter would allow the holder access to certain features, products or services enabled by decentralized technology.
This is a major new announcement that is expected to have important implications for the fundraising ventures including ICOs. This will help establish STO regulations in the UK, which is one of the major financial hubs.
Closing: STO Regulations In The UK
The verdict is clear: the FCA would not declare a utility token security unless it grants rights to holders in a manner similar to the traditional financial assets. Security tokens will likely fall under the Regulated Activities Order (RAO) and thus within the regulator’s perimeter.
A network’s decentralization would not establish its status as security, said the FCA.
The UK, having taken a step forward, will be a part of the group of a select few countries that have stated their stance on cryptocurrencies with a defined legal framework.
Once the consultation period for the proposed paper titled “Guidance on Cryptoassets” is over, the final text is expected to be released in the summers this year.