Crypto assets challenges: are tokens a security or utility?

Cryptoassets have attracted significant and growing attention from consumers, markets, governments, and regulators globally. Tokens, although not ‘rocket science’, is a quite complicated area even for businesses and individuals dealing with it.

In accordance with FCA Guidance currently there are three types of tokens:

  1. Exchange tokens(not issued or backed by any central authority and used as a means of exchange, usually outside the FCA regulation perimeter).
  2. Securitytokens(tokens with specific characteristics; classify as a Specified Investment like a share or a debt instrument; within the FCA regulation perimeter.
  3. Utility tokens: (support capital raising and/or the creation of decentralised networks; can be used or traded on the secondary market; usually outside the FCA regulation, although might meet the definition of e-money in certain circumstances, in which case – within the FCA regulation perimeter)

However, firms should note that 5th EU Anti-Money Laundering Directive will be implemented into UK law by the end of 2019 and will extend the FCA regulation, as a result, all crypto exchange platforms will fall within an FCA Regulation.

Regardless of technology – if regulated crypto asset activities(e.g. Managing or advising on investments, including security tokens, dealing with warranties, etc.) are undertaken,  an appropriate FCA authorisation is required unless you are exempted. You will also need to ensure you have appropriate authorisation if your tokens constitute e-money.


E-money is electronically stored monetary value which is:

  • issued on receipt of funds for the purpose of making payment transactions;
  • accepted by a person other than the electronic money issuer ;
  • not excluded by regulation 3 of the Electronic Money Regulations 2011.

Exchange tokens like Bitcoin, Ether, and other equivalents are unlikely to represent e-money because, amongst other things, they are not usually centrally issued on the receipt of funds, nor do they represent a claim against an issuer.

Voting rights and security tokens

Tokens would classify as security tokens if they represent ownership or control (e.g. via voting rights), provide access to a dividend of company profits or the distribution of capital upon liquidation. However, this is not always the case as some tokens give voting rights on the direction without it being considered as control. For example, a token that provides the token holder with the right to vote on future ICOs the firm will invest in and no other rights would likely not be considered a share as the voting rights don’t confer control-like decisions on the future of the firm. It must be noted that whether a token that provide voting rightsrepresents a share in the capital of a body corporate or similar entity incorporated outside the UK will depend on the operation of the company and corporate law. In addition, negotiability on the capital markets can be an indicator of the transferable security nature of a token.

Decentralisationis also an important factor in determining whether a token is a security or utility. Decentralisation allows for trade directly with another party, using a blockchain to finalise the operation. The FCA approach is, the greater the degree of decentralisation the less likely it is that a token will confer enforceable rights and be a security.

Despite the fact that issuers of tokens don’t need to be authorised to issue their own securities, in the course of promoting their issuance, they may be advising on investments or undertaking other activities that may require FCA permission.

Sterling Law can provide tailored advice on the nature of your tokens and other crypto asset related matters. Our team can also obtain FCA Crypto team confirmation on the issue of whether specific tokens are security or not.