FCA Handbook - PERG 18.7 Activity: operating a qualifying cryptoasset trading platform

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PERG 18.7 Activity: operating a qualifying cryptoasset trading platform

Question 7.1: What is a qualifying cryptoasset trading platform (QCATP)?

(1) A QCATP is a system in which multiple third-party buying and selling interests in qualifying cryptoassets are able to interact within that system and which brings together multiple third-party buying and selling interests in qualifying cryptoassets in a way that results in a contract for the exchange of qualifying cryptoassets for money (including electronic money) or other qualifying cryptoassets.
(2) As such, a QCATP comprises each of the following elements:
1. (a) it is a trading system;
2. (b) multiple third-party buying and selling interests interact within the system;
3. (c) the system brings together these multiple interests in a way that results in a contract; and
4. (d) the contract is for the exchange of qualifying cryptoassets for either money (including electronic money) or other qualifying cryptoassets.
5. Guidance on each of these elements is provided in (3) to (6).
(3) Characteristics of a trading system:
1. (a) A trading system functions on the basis of a set of rules. The rules relate to how multiple third-party buying and selling interests are brought together in the system (see (4) and (5)). A system is technology-neutral for these purposes.
2. (b) General-purpose communications systems do not, in and of themselves, amount to operating a system for the purposes of the definition of a QCATP, which therefore does not include simply:
  1. (i) acting as an internet services provider;
  2. (ii) providing a telephone network;
  3. (iii) providing a website; or
  4. (iv) providing chatroom facilities.
3. (c) Conversely, a person using that system to operate a trading system will operate a QCATP if the other elements of the definition in (2)(a) to (d) are met.
4. (d) If a system has features specifically designed to enable the interaction of trading interests in qualifying cryptoassets, this would indicate that it is a trading system. More generally, the FCA will consider the role of the operator and its monitoring of the use of the system. Operating the platform requires more than simply providing technology (including blockchain technology) or software. The FCA’s assessment of whether there is a trading system or facility will also take into consideration a wider range of factors including, for example:
  1. (i) its target users and the actual use of the system by its users;
  2. (ii) any relevant restrictions on how the system may be used, and their practical effect;
  3. (iii) whether the system is designed to enable trading of any kind among users, and how; and
  4. (iv) the determinants of the remuneration of the operator and the extent to which these are linked to the trading of interests in qualifying cryptoassets in the system.
5. (e) Accordingly, while general communications systems, for example, are used for the purposes of trading qualifying cryptoassets, they will not amount to a trading system unless they were ever operated by a person for these purposes and then subject to these criteria.
6. (f) It is possible for a person to operate more than one piece of technology which, when taken together, have the characteristics of a trading system operated by the same person.
(4) Multiple third-party buying and selling interests interacting within the system:
1. (a) The inclusion of the words ‘third-party’ in the definition makes it clear that the interests in question are not those of the QCATP operator, although a firm operating a UK QCATP may apply for separate permission to execute trades on a matched principal basis on its QCATP.
2. (b) The fact that, when any 2 persons negotiate within the system, they do so between themselves, does not mean that there are not multiple third-party buying and selling interests interacting within the system. Instead, what matters is whether the system, at the point of entry, enables 1 person to interact potentially with multiple others other than the operator itself. This is the service a person receives as a user of the system.
3. (c) A system which enables information to be inputted and then responded to in the system is one in which multiple third-party buying and selling interests interact and includes:
  1. (i) the matching of buying and selling interests within its system; or
  2. (ii) allowing users to respond within the system to other users’ interests, including by bids or offers, or communicating in relation to, negotiating or accepting essential terms of a transaction.
(5) Multiple interests brought together in a way that results in a contract:
1. (a) The system is one which brings together the multiple interests in the system in a way resulting in a contract.
2. (b) It follows that, where there is no trade execution brought about by the system, such as in the case of bulletin boards used for advertising buying and selling interests, the system will not amount to a QCATP.
(6) Exchange of qualifying cryptoassets for money or other qualifying cryptoassets:
1. (a) The contracts arising must be for the exchange of qualifying cryptoassets for money (including electronic money) or other qualifying cryptoassets. It follows that financial instruments, such as derivatives of a qualifying cryptoasset falling within paragraph 10 of Part 1 (Financial instruments) of Schedule 2 (Financial instruments and investment services and activities) to the Regulated Activities Order (see PERG 13.4 Q34) or a cryptoasset exchange traded note, cannot be traded on a QCATP. As regards the trading of financial instruments on multilateral systems, see MAR 5AA.1.1R and PERG 13.3 Q24C and the need for these to be traded on a trading venue and not a QCATP.
2. (b) A firm may operate both a UK QCATP and a trading venue in the UK, but it cannot offer the instruments traded on a UK QCATP on a trading venue and vice versa.

Question 7.2: We operate a cryptoasset trading platform with multiple buyers and sellers and we offer an execution facility on the platform and a crypto wallet for our users. What permissions are we likely to require?

The activity of operating a qualifying CATP does not extend to the provision of safeguarding services before or after a transaction has been entered into between a buyer and seller on that platform. As such, you require an operating a qualifying CATP permission and a safeguarding cryptoassets permission (and one for agreeing to carry on these regulated activities).

You will not require permission for arranging deals in qualifying cryptoassets to the extent that the only arranging you undertake with users of the platform all forms part of the activity of operating a qualifying CATP. This is the effect of article 9Z5(2) (Article 9Y: other exclusions) of the Regulated Activities Order.

Where you engage in matched principal trading for the purpose of executing client orders on a QCATP you operate, you will also require permission to deal in qualifying cryptoassets as principal to carry on such trading. Accordingly, a firm carrying on these separate activities will require permission for both operating a qualifying CATP and dealing in qualifying cryptoassets as principal. When you undertake matched principal dealing, the required permission should comprise a limitation limiting the latter to matched principal trading. ‘Matched principal trading’, for these purposes, means a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never itself exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction.

Question 7.3: We operate a cryptoasset trading platform offering an execution facility on the platform. We operate a float model for our UK users, where cryptoassets are moved from the client wallet to a global settlement wallet to settle transactions off-chain with an internal ledger. What permissions are we likely to require?

You require permission to operate a qualifying CATP and safeguard cryptoassets (and one for agreeing to carry on these regulated activities). For the FCA’s location policy regarding authorisation of an operator of a QCATP, including one which offers access to a global liquidity pool, see ‘Finalised Guidance: Approach to International Cryptoasset Firms (AICF)’.

Where your safeguarding activities are restricted to the activities above, you may wish to apply for a requirement on your permission which reflects your business model – for example, if you wish to take advantage of the exception from acting as a trustee for QCATPs in the FCA’s cryptoasset safeguarding rules.

Question 7.4: We operate a cryptoasset trading platform from overseas offering an execution facility on the platform to UK users but only when these are authorised persons. Do we require FCA authorisation to offer this service and do overseas users require FCA authorisation to use our platform?

No. If your platform is not made available for use by UK consumers – that is, individuals in the UK acting for a purpose other than for any trade, business or profession carried on by the individual – you will not be carrying on regulated activities in the UK. This is the effect of section 418 of the Act. Accordingly, where an authorised person trades on your platform on the basis of its Part 4A permission to deal in qualifying cryptoassets as principal, you will not be deemed to be carrying on the activity of operating a qualifying CATP in the UK. Conversely, if it trades on your platform on behalf of consumers, on the basis of its Part 4A permission to deal in qualifying cryptoassets as agent, you will be carrying on the activity of operating a qualifying CATP in the UK and require authorisation to do so.

Your overseas members will not require authorisation in relation to their use of your platform.

Question 7.5: What about interfaces connecting users to automated protocols that enable the exchange of qualifying cryptoassets? Do such interfaces require authorisation?

Whether or not an interface is in scope of the regulatory perimeter will depend on whether a regulated activity is carried on by way of business in the UK by an identifiable person. This will depend on the facts and circumstances of the case, and needs to be assessed on a case-by-case basis. Persons who provide arrangements which allow for trading in qualifying cryptoassets should consider the guidance at PERG 18.8.4 in relation to arranging deals in qualifying cryptoassets. Persons who provide arrangements in relation to arranging qualifying cryptoasset staking should see the guidance at PERG 18.10.1.

Question 7.6: I am involved in post-transaction settlement of cryptoasset trades. What permissions do I need?

As set out in PERG 18.6.6, ‘settlement’ is likely to cover actions required for the parties to fulfil their obligations under a transaction. This may involve a number of regulated cryptoasset activities, depending on the business model and subject to any exclusions. Persons who are involved in settlement of transactions of qualifying cryptoasset trades should consider the guidance at PERG 18.6 and PERG 18.8 in relation to safeguarding cryptoassets, arranging cryptoasset safeguarding, dealing in qualifying cryptoassets (as principal or agent) and, in particular, arranging deals in qualifying cryptoassets.