PERG 18.4 New specified investments

Question 4.1: What is a qualifying cryptoasset? (article 88F of the Regulated Activities Order)

A qualifying cryptoasset is a cryptoasset that meets both the definition of a cryptoasset in section 417 (Definitions) of the Act and the definition of qualifying cryptoasset in the Regulated Activities Order (as amended by the Cryptoassets Regulations). A qualifying cryptoasset is a specified investment. Section 417 of the Act defines a cryptoasset as any cryptographically secured digital representation of value or contractual rights that:

Question 4.2: What does ‘fungible’ mean? Are non-fungible tokens (NFTs) qualifying cryptoassets?

When a cryptoasset is fungible, it means that it is freely replaceable by another cryptoasset of a similar nature or kind. This means that a cryptoasset will generally be fungible where each unit of that cryptoasset is interchangeable with any other unit of the same cryptoasset, such that one unit can be substituted for another to satisfy an obligation without regard to any unique attributes of the particular unit. If a cryptoasset is not fungible, it will not meet the definition of a qualifying cryptoasset, irrespective of its other features. However, each cryptoasset token should be assessed in relation to its unique features on a case-by-case basis. Fungibility is a question of fact rather than of how a cryptoasset is labelled or marketed; therefore, the fact that a cryptoasset might be described as an NFT will not, on its own, necessarily determine whether it is a qualifying cryptoasset. 

A cryptoasset whose units are ordinarily treated by market participants as equivalent, freely replaceable and interchangeable will ordinarily be fungible. The existence of different token identifiers, metadata or other technical features will not, by itself, necessarily determine whether a cryptoasset is fungible. Where cryptoassets are issued as part of a collection or series, the assessment should consider whether market participants ordinarily regard individual cryptoassets as interchangeable and readily substitutable in practice. In contrast, a cryptoasset whose units are treated as unique because they carry unit-specific attributes that market participants treat as relevant – for example, collectible or unique artistic characteristics – are less likely to be considered fungible.

A cryptoasset that is not fungible will not be a qualifying cryptoasset.

Question 4.3: What does ‘transferable’ mean?

The definition of qualifying cryptoassets in article 88F (Qualifying cryptoassets) of the Regulated Activities Order requires that the cryptoasset be ‘transferable’. Article 88F(3) expressly provides that, for these purposes, ‘transferable’ can include circumstances where the cryptoasset confers transferable rights.

Transferability therefore refers to the capability of the cryptoasset (or rights it confers) to be transferred from one person or address to another, whether on-chain or off-chain and whether for consideration or gratuitously. This is irrespective of any contractual restrictions in respect of a particular cryptoasset that might have the effect of contractually restricting a holder from transferring the cryptoasset to a third party for a period of time or until certain conditions are met (eg, under a token lock-up provision that precludes the ability of certain token holders from selling, trading or transferring the tokens for a specified period).

One indicator that a cryptoasset is transferable may be that the cryptoasset is capable of being traded on cryptoasset markets, but the absence of this capability does not necessarily mean the cryptoasset is not transferable.

Transferability is not confined to the technical ability to move the cryptoasset token on a ledger. It can also be satisfied where the cryptoasset functions as a vehicle for rights that are capable of being assigned or otherwise transferred between persons or addresses (eg, where the relevant legal relationship permits a change of the rights-holder, even if reflected off-chain).

As such, where the cryptoasset represents or confers transferable rights, the cryptoasset would be regarded as transferable for the purposes of the definition in article 88F even if that specific cryptoasset in question cannot be transferred on-chain. Therefore, the fact that a cryptoasset arrangement gives effect to a transfer by cancelling or burning one token and minting or issuing another does not necessarily prevent the cryptoasset from being transferable, where the rights it confers are capable of being transferred to another person and that mechanism is how the transfer is effected.

A cryptoasset may be transferable even if transfers require the use of particular infrastructure or compliance processes, provided that the cryptoasset (or rights it confers) is capable of being transferred between persons or addresses in at least some circumstances. Accordingly, compliance-related requirements or controls – such as know-your-customer (KYC) processes, whitelisting arrangements, transfer approval mechanisms, or the ability to restrict or freeze transfers in specified circumstances – will not, of themselves, prevent a cryptoasset from being transferable.

A cryptoasset that is transferable may still fall outside the definition of a qualifying cryptoasset for other reasons. For example, a cryptoasset that is redeemable only with its issuer and that may only be used to obtain goods or services from the issuer, or within a limited network of service providers, may be excluded from the definition as explained at PERG 18.4.1, notwithstanding that it is transferable.

The definition of a qualifying cryptoasset under the Financial Promotion Order slightly differs in respect of the transferability requirement. For the purpose of the Financial Promotion Order, transferability also includes where a communication made in relation to the cryptoasset describes it as being transferable or conferring transferable rights.

A cryptoasset that is not transferable, such that neither the cryptoasset nor any right it confers is transferable, will not be a qualifying cryptoasset.

Question 4.4: What sorts of cryptoassets would be ‘solely a record’ for the purposes of article 88F(2)(c) of the Regulated Activities Order?

A cryptoasset will be excluded by article 88F(2)(c) of the Regulated Activities Order where, notwithstanding that it may be cryptographically secured and electronically transferable or storable, it is solely a record of value or contractual rights (including rights in another cryptoasset) and does not function in practice as an asset in its own right.

In assessing whether a cryptoasset is solely a record, it is helpful to take a functional approach to assessing the nature of the cryptoasset. This includes considering the role performed by the cryptoasset in relation to any value or contractual rights associated with it. Relevant considerations that would suggest it is not solely a record may include whether, in practice, the controller of the cryptoasset is able to exercise the associated value or contractual rights, and whether transferring the cryptoasset is the mechanism by which that value is, or those contractual rights are, transferred in practice (as opposed to the cryptoasset being merely evidential of rights that are transferred or constituted by other means). The fact that a cryptoasset is used to identify, evidence or record entitlements to value or contractual rights as part of a legally authoritative record or register does not, by itself, mean that the cryptoasset is more than solely a record.

The definition of a cryptoasset under the Act encompasses cryptoassets that embody value or contractual rights directly, as well as cryptoassets that represent value or contractual rights in another asset. In either case, the relevant question for the purposes of article 88F(2)(c) is whether the cryptoasset is solely a record of value or contractual rights.

A cryptoasset does not become solely a record merely because it represents, evidences or is associated with value or contractual rights relating to another asset rather than embodying value or contractual rights directly. Where the ability to exercise or transfer value or contractual rights relating to the underlying asset attaches, in practice, to the controller of the cryptoasset, rather than by reference to a separate register, record or other mechanism, the cryptoasset is unlikely to be solely a record.

By contrast, a cryptoasset that does not function as an asset in its own right may be solely a record where it simply serves to identify value or contractual rights in another asset, and any transfer of the relevant value or contractual rights in the underlying asset is effected by reference to something other than the transfer of control of the cryptoasset itself.

An example of a cryptoasset that is likely to be solely a record is a cryptographically secured or encrypted spreadsheet, database or ledger (or an entry within one). Such records do not function as an asset in their own right, even where they serve as legally authoritative evidence in respect of entitlements to an underlying asset. Although these cryptoassets are cryptographically secured, electronically transferable or storable, and possibly fungible, they are only a record of value or rights that exist independently elsewhere. The controller of the cryptoasset is unable to exercise that value or those rights, nor effect any transfer of them.

It does not necessarily matter whether the value or contractual rights associated with a cryptoasset arise directly through the cryptoasset itself or by reference to another asset. The relevant issue is whether the cryptoasset functions solely as a record of that value or those contractual rights.

So-called liquid staking tokens and some wrapped tokens, which are issued in exchange for a qualifying cryptoasset that is staked or otherwise held by another with a corresponding ability to exchange that qualifying cryptoasset for the staked qualifying cryptoasset in the future, could be described, at a high level, as cryptoassets that record or represent rights in another cryptoasset. Despite this, the controller of such a token may be entitled to redeem it for the corresponding underlying cryptoasset, and may be able to exercise or transfer that entitlement by virtue of controlling the token. Such tokens may therefore function as a liquid investment in their own right, unlike encrypted spreadsheets and databases. These tokens are therefore unlikely to constitute mere records such that they are excluded from the definition of a qualifying cryptoasset.

Question 4.5: What is a qualifying stablecoin? (article 88G of the Regulated Activities Order)

A qualifying stablecoin (article 88G (Qualifying stablecoin) of the Regulated Activities Order) is a qualifying cryptoasset that seeks or purports to maintain a stable value by reference to a single fiat currency and involves the holding of fiat currency and/or other assets (often referred to as ‘backing assets’) for the purpose of maintaining that stable value.

A qualifying stablecoin is a subset of qualifying cryptoasset. It does not need to be issued in the UK or by a person authorised to issue a qualifying stablecoin in the UK to constitute a qualifying stablecoin. 

In the FCA’s view, the requirement to hold backing assets to maintain a stable value means that qualifying cryptoassets which maintain their value partly or wholly through algorithmic methods or other means rather than underlying backing assets do not constitute qualifying stablecoins.

A wrapped token relating to qualifying stablecoins will not itself automatically be a qualifying stablecoin. It will only be a qualifying stablecoin if it meets the criteria set out above but, in the FCA’s view, that is unlikely to be the case because of article 88G(3) of the Regulated Activities Order. PERG 18.4.4 and PERG 18.4.13 contain some further guidance on the status of wrapped tokens. As set out in PERG 18.8.7, a person providing or facilitating wrapping services may fall within scope of certain regulated activities, such as dealing or arranging.

Question 4.7: Which elements of the qualifying cryptoasset definition must a specified investment cryptoasset satisfy?

The conditions that a cryptoasset must satisfy in order to be a specified investment cryptoasset are set out in full at PERG 18.4.6(1) to (3). The discussion below focuses on those conditions that correspond to elements of the qualifying cryptoasset definition.

In determining whether a cryptoasset is a specified investment cryptoasset, the exclusions from the definition of a qualifying cryptoasset in article 88F(4)(a) to (c) of the Regulated Activities Order (described in PERG 18.4.1) are disregarded. As such, cryptoassets that fall within those exclusions may still constitute specified investment cryptoassets.

The remaining elements of the qualifying cryptoasset definition continue to be relevant. In particular, a specified investment cryptoasset must be fungible (see PERG 18.4.2) and transferable (see PERG 18.4.3), and must not constitute solely a record of value or contractual rights (including rights in another cryptoasset) (see PERG 18.4.4). A cryptoasset will not be a specified investment cryptoasset if it fails to satisfy any of those conditions.

In addition, the condition described at PERG 18.4.6(2) means that a cryptoasset will not be a specified investment cryptoasset if it meets both of the following conditions:

Question 4.8: Do fractions or sub-units of cryptoassets constitute qualifying cryptoassets in their own right?

Yes. Whether something is a qualifying cryptoasset depends on whether it satisfies the statutory definition. The FCA does not generally consider that a cryptoasset must consist of a whole unit of a particular asset in order to be a qualifying cryptoasset.

Accordingly, where a cryptoasset is capable of being divided into smaller units or fractions, those units or fractions will generally themselves constitute qualifying cryptoassets, provided that the relevant elements of the definition are satisfied. For example, where bitcoin constitutes a qualifying cryptoasset, a satoshi (being a fraction of a bitcoin) would also generally be regarded as a qualifying cryptoasset. The fact that it represents only a small quantity of the relevant cryptoasset does not, of itself, affect that conclusion.

Question 4.9: Are qualifying cryptoassets and specified investment cryptoassets different?

Yes. Although both are types of cryptoasset, they are distinct statutory categories which serve different purposes within the regulatory perimeter. See PERG 18.4.11 for further guidance on why the difference matters.

A qualifying cryptoasset is a specific category of specified investment introduced by the Cryptoassets Regulations. Broadly speaking, it is intended to capture certain cryptoassets that would not otherwise fall within one of the existing categories of specified investment in Part III of the Regulated Activities Order. A specified investment cryptoasset, by contrast, is a cryptoasset that falls within one of the existing categories of specified investment in Part III and meets certain other conditions. Examples may include cryptoassets that constitute, represent or confer rights equivalent to shares, debt instruments, units or other existing forms of specified investment.

The distinction reflects the structure of the legislation. The Cryptoassets Regulations expand the perimeter by introducing a new category of specified investment for certain cryptoassets that were not previously within scope of the regulatory perimeter (qualifying cryptoassets). Cryptoassets that already fall within one of the existing categories of specified investment remain subject to the existing perimeter.

It should be noted that not every cryptoasset within the meaning of section 417 of the Act will fall within the categories of qualifying cryptoasset, specified investment cryptoasset or relevant specified investment cryptoasset. A cryptoasset may satisfy the definition of ‘cryptoasset’ in section 417 but fall outside those categories if, for example, it is not fungible, is not transferable, is ‘solely a record’ or falls within the limited network exclusion (article 88F(4)(d)(i) and (ii) of the Regulated Activities Order).

A cryptoasset cannot be both a qualifying cryptoasset and a specified investment cryptoasset at the same time. A cryptoasset that falls within an existing category of specified investment is excluded from the definition of a qualifying cryptoasset. Determining which category applies is important because different regulated activities, exclusions and other legislative provisions may be relevant, depending on the classification of the cryptoasset.

The appropriate classification of a cryptoasset depends on its legal and economic substance and should not be determined solely by the terminology used to describe it.

Question 4.10: Are specified investment cryptoassets and relevant specified investment cryptoasset different?

Yes. A relevant specified investment cryptoasset is a particular type of specified investment cryptoasset. All relevant specified investment cryptoassets are specified investment cryptoassets, but not all specified investment cryptoassets are relevant specified investment cryptoassets.

A specified investment cryptoasset is any cryptoasset which falls within the definition in article 3 of the Regulated Activities Order. Broadly speaking, these are cryptoassets that fall within one of the existing categories of specified investment in Part III of the Regulated Activities Order.

A relevant specified investment cryptoasset is a more limited category used for certain purposes in the Cryptoassets Regulations. In particular, article 9N (Safeguarding of qualifying cryptoassets and relevant specified investment cryptoassets) of the Regulated Activities Order applies the safeguarding cryptoassets and arranging cryptoasset safeguarding activities to qualifying cryptoassets and to those specified investment cryptoassets which are securities or contractually based investments.

Accordingly, whether a specified investment cryptoasset is also a relevant specified investment cryptoasset depends on the category of specified investment to which it relates. The distinction is significant because certain provisions in the Cryptoassets Regulations only apply in relation to qualifying cryptoassets and relevant specified investment cryptoassets.

For example, where a cryptoasset constitutes a relevant specified investment cryptoasset, activities involving the safeguarding of that cryptoasset may fall within the scope of the regulated activities of safeguarding cryptoassets or arranging cryptoasset safeguarding. By contrast, a specified investment cryptoasset that is not a relevant specified investment cryptoasset would not be brought within those specific custody-related cryptoasset activities.

The appropriate classification of a cryptoasset will depend on the nature of the specified investment represented by, constituted by or otherwise associated with the cryptoasset. Persons should therefore first consider whether the cryptoasset is a specified investment cryptoasset and, if it is, whether it falls within the narrower category of a relevant specified investment cryptoasset.

Question 4.11: Why does the classification of a cryptoasset matter?

The classification of a cryptoasset is an important step in determining which legislative provisions may apply, whether authorisation may be required and, if so, which permissions are needed. Different categories of cryptoasset can engage different regulated activities, exclusions and other provisions of the regulatory perimeter. It is therefore important to determine whether a cryptoasset is a qualifying cryptoasset, a qualifying stablecoin, a specified investment cryptoasset or a relevant specified investment cryptoasset (or another form of specified investment) before considering whether a person may require authorisation.

In broad terms:

Question 4.12: What about cryptoassets that have multiple functions or whose characteristics evolve over time?

There is no separate category of ‘hybrid’ or ‘evolving’ cryptoassets. The regulatory classification of a cryptoasset described in this way will depend on the characteristics it exhibits at the time the relevant activity is carried on.

A cryptoasset should be assessed against the definitions of a qualifying cryptoasset and a specified investment cryptoasset by reference to the characteristics, rights and arrangements it exhibits at the time that the relevant activity is carried on. Where a cryptoasset has multiple features, or its functionality, rights or other characteristics change over time, those changes should be considered to assess whether they affect its regulatory classification.

Question 4.13: How should wrapped tokens be classified?

A wrapped token is a cryptoasset that is created or issued by reference to another asset (the underlying asset). The term ‘wrapped token’ describes the manner in which the cryptoasset is structured and is not, of itself, a regulatory classification. Whether a wrapped token is a qualifying cryptoasset or a specified investment cryptoasset depends on whether it satisfies the conditions of the relevant statutory definition. A wrapped token should therefore be assessed in its own right.

The fact that the underlying asset is a qualifying cryptoasset or a specified investment cryptoasset does not, of itself, determine the regulatory status of the wrapped token. While a wrapped token may have the same regulatory classification as the underlying asset, this will not necessarily always be the case.