UK’s Financial Conduct Authority (FCA) classifies digital assets in three categories: exchange token, utility Tokens, and security tokens. And this very critical because they define the use cases for each token and XRP is classified as exchange token due to its role in cross-border transactions.
In a blog post on Ripple Insights page Michelle Bond, the global head of government relation at Ripple, talks about the regulatory policy of the UK’s Financial Conduct Authority (FCA) saying that it provides a role model for digital asset regulation.
According to her, the current regulatory framework is a barrier to innovation. She says:
Despite policymakers’ commendable efforts in this space, a similar understanding is lacking in the world of digital assets and blockchain. Having a clear and consistent language and regulatory approach is important for innovation to flourish. But to date, the current frameworks have muddied the water.
She said that without a clear and consistent framework, financial companies have to rely on outdated laws and rules that are unfit for these new technologies. These laws require companies to have large amounts in expensive pre-funded accounts for the cross-border transaction but even with these pre-commitments, transactions take long delays and are prone to risks.
According to her, Ripple is here to meet-up with this challenge. It offers instant and real-time settlements and eliminates the need for pre-funded accounts and any intermediaries.
But realizing this promise is challenging without effective frameworks and guidance on the use of digital assets.
But a new effort from the UK Financial Conduct Authority (FCA) has the potential to solve these regulatory issues. In October 2018, the UK Cryptoassets Taskforce also called The Taskforce published a report that set out the UK’s regulatory approach to crypto-assets and Distributed Ledger Technology (DLT). In line with the Taskforce, the Financial Conduct Authority (FCA) categorized digital assets into three.
According to a document published by FCA, these three categories are explained as:
- Exchange Token: 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 decentralized tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter.
- Security Token: These are tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument.
- Utility Token: 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.
According to her, these guidelines are important because they can protect consumers while allowing innovation to take hold and businesses need this clarity.