In a two-for-one, the Upper Tribunal used its decision in Moneybrain to weigh in on two important regulatory themes: more stringent expectations for financial promotions (with the FCA proposing a new regulatory gateway for those approving financial promotions) and the regulation of "backed" cryptoassets (readying for their use in payments and against the backdrop of a recent stablecoin collapse).

And it has important implications for UK issuers of backed cryptoassets.  Read on.

Money on my mind

Moneybrain (a crypto wallet provider) issues and sells "BiPS Tokens", retains 5% of the proceeds and pays the rest to the "BiPS Foundation" which purchases assets and lends money.

According to Moneybrain, a BiPS Token holder has no right to or charge over the BiPS Foundation's assets.  Perhaps (and to be clear, we don't know) this was an attempt to skirt the UK's regulatory perimeter.  At the time of writing, Moneybrain's website claims that the BiPS Token isn't a specified investment, collective investment or unit trust, gives no rights as might be enjoyed by a security-holder, isn't a stablecoin and isn't electronic money because it doesn't represent any claim against any issuer.

But: Moneybrain's website said that the tokens were "digital currency backed by real assets", that "95% of the money is used to purchase property or other assets" and that the tokens "will have a stable underlying value firmly based on those assets".  It said that this stabilisation would occur "tacitly" through "the publication of the value of assets purchased" by the BiPS Foundation.

"Tacitly" backed ... really?

According to the FCA, those statements are misleading and, because Moneybrain made them, it isn't fit and proper.  

The FCA refused Moneybrain's application for cryptoasset registration under the MLRs with immediate effect.  Moneybrain referred this decision to the Upper Tribunal.  And the Upper Tribunal refused Moneybrain's application to suspend the effect of the FCA's decision pending determination of the reference.  

Now this is an interim decision so it's all about what's "arguable" - the Upper Tribunal has made no findings - but its decision has persuasive force.

The Upper Tribunal comes down hard

The Upper Tribunal decided that a firm's promotional material can be relevant to its fitness and propriety.  Seems obvious.

It decided that it's plainly arguable that Moneybrain's statements (which were arguably made at least recklessly) would lead a token purchaser to believe the token to be backed by collateral in the form of an asset - which was arguably false because:

• The underlying assets were held by a separate entity to the token issuer.
• The token issuer merely published the value it claimed those assets to have.
• Moneybrain said that tokenholders have "no direct claim" to the assets, but in truth tokenholders had no claim to them at all.

Finally, Moneybrain didn't say it would alter its website should it be permitted to continue business in the UK.  Quelle surprise.

Obvious, in hindsight

To tease out the implications, let's go back to basics.

One of financial regulations' raisons d'être is to give customers well-placed confidence in their claims against financial product and service providers.  For this reason, financial regulations have a wide scope, capturing all manner of financial products and services where customers have enforceable claims against product and service providers.

Now, decentralisation is one of crypto's founding ideals.  But issuers of asset-backed tokens must necessarily be centralised.  And such a centralised issuer might desire to structure itself in a way that attempts to skirt regulation (we're going west, there's gold in them thar hills, et cetera.)

It naturally follows that in its attempt to skirt regulation, the issuer is likely to degrade the enforceability of customers' claims against it and/or the confidence that such claims will be met.  And this is an obvious problem for the token's marketability and value.  After all, would you buy a token from an issuer who said it would send the proceeds of sale to a third party for them to buy assets and:

• You would have no claim to the assets, but would have a claim upon the issuer, or a third party, for their value?  Sounds like this introduces counterparty credit risk.  Fine, provided you do your homework.  FTX, anyone?
• You would have no claim at all to the assets or against the third party?  Aaaaaand it's gone.

There's no way out but through

The Upper Tribunal takes a clear-eyed view about all this.  Asset-backed token issuers must not make inflated claims about the collateral (at least if they want to stay in business in the UK).

Instead, they should clearly, fairly and accurately describe the nature and quality of the collateral, including what it is, who holds it, and the nature of a tokenholder's claim - distinguishing between a claim to an asset directly and a claim upon the assetholder.  This of course empowers purchasers to make informed decisions, as well as the market to price poorly-backed tokens accordingly.

And all this will get increasingly important if token issuers want to get in the game and stay in the game into the future as the UK builds out a regulatory regime for asset-backed tokens including stablecoins.

In other words: for long-term success, don't structure your crypto project to avoid regulation.  Structure your crypto project to embrace it.