Comment letter
Mar 13, 2025
Response to Financial Conduct Authority
Re: Financial Conduct Authority (FCA) DP24/4 Regulating cryptoassets: Admissions & Disclosures and Market Abuse Regime for Cryptoassets
To whom it may concern,
Owl Explains welcomes the opportunity to respond to the FCA’s Discussion Paper 24/4 on Admissions & Disclosures (A&D) and the Market Abuse Regime (MARC) for cryptoassets. We recognise the FCA’s objectives in fostering market integrity, consumer protection, and regulatory clarity, and we strongly support efforts to ensure a proportionate and well-calibrated regulatory framework.
The FCA’s Discussion Paper (DP) presents several key challenges for users of cryptoassets such as AVAX, the native token of the Avalanche network, but more broadly for the many companies that are creating diverse and novel implementations of blockchain using the Avalanche technology. We strongly urge the FCA to address the practical issues associated with a globalised world of tokenised assets trading on the same platforms without regard to asset class or type.
To this end, we have provided feedback on four specific areas below.
1. The Need for a Sensible Token Classification System
Owl Explains applauds the goal of, and does not underestimate the challenges in, creating a comprehensive regulatory framework for cryptoassets. However, there are areas where we believe the proposals would benefit from greater clarity and differentiation. In particular, our concerns with the proposed framework are:
● It covers an overly broad range of cryptoassets, excluding only security tokens and crypto derivatives, and applies a uniform regulatory approach despite significant differences in asset characteristics and risks.
● The proposed framework does not sufficiently distinguish between different types of cryptoassets (e.g., fiat-referenced stablecoins, native cryptocurrencies, utility tokens, memecoins). These assets vary significantly in their design and function, yet the discussion paper suggests a uniform regulatory approach without clear distinctions, which could lead to disproportionate regulation, particularly for non-financial use cases.
● The inclusion of asset-referenced tokens (ARTs), such as commodity-backed tokens, raises questions about whether they should be regulated under cryptoasset rules or existing commodity market frameworks. Greater clarity would help ensure regulatory coherence and avoid potential duplication or inconsistencies across different areas of financial regulation.
A more tailored framework would ensure proportionality, particularly for non-financial use cases like utility tokens. Other jurisdictions, such as the EU (under MiCA) and the US, are taking more nuanced approaches to crypto regulation, and if the UK does not refine its framework, it risks regulatory arbitrage and reduced attractiveness for crypto businesses. A refined classification system that recognises the diverse functions and risk profiles of cryptoassets would support a balanced regulatory approach that fosters both innovation and market integrity.
In this regard, the “Sensible Token Classification” system proposed by Owl Explains may offer useful insights for the FCA. This concept of tokenisation is a core benefit of blockchain technology that has gone largely unrecognised until very recently. We encourage the FCA, and indeed everyone (see other of our comment letters here), to think of tokenisation more expansively, in accordance with its true potential. We make the following points to describe tokenisation:
● Cryptoassets (tokens) are not all the same. They are not a homogenous asset class.
● This is true because tokens are digital representations of assets, items, and things and therefore can represent anything.
● Accordingly, tokens cannot be treated all the same under law and regulation, and many types of tokens are not financial instruments.
● Many tokens represent assets, items, or things that are already regulated so do not require new regulation.
● Many other tokens represent items that are not regulated in the non-blockchain world because they do not require it and so should not be regulated simply because they are tokenised on a blockchain.
Here is more of how we articulate these points: Blockchain is a new technology, but in essence it is simply a new kind of database or filing cabinet. When it comes to law and regulation, treating all cryptoassets the same simply because they are tokenised representations recorded on a blockchain makes as little sense as treating a sketch, an ID card, a receipt or a share certificate all the same because they are printed on paper and filed in the same filing cabinet.
Instead, policymakers and regulators should treat each token according to what it actually represents - just as they do with things written on paper. By looking at a cryptoasset’s functions and features, we can determine its utilisation, valuation, and classification (including for legal/regulatory purposes). Using the paper analogy, consider a paper deed of title to a home. It is the evidence of ownership of the asset, so it represents the bundle of rights that is ownership of the home. Now consider the paper tickets to a concert or sporting event, which give the right to attend and sit in the assigned seats. That is the bundle of rights received from owning the paper tickets. A final example specific to financial instruments: shares of stock used to be represented with paper certificates. To hold a paper share certificate denominating ownership of 100 shares of Corporation X is to possess the bundle of rights associated with that stock. This podcast and associated paper highlight the benefits of tokenisation for equity securities and this one discusses how it might be accomplished.
Each of these assets (items) can easily be represented on blockchain through tokenisation without changing the nature of the asset.
The good news is that the majority of tokens represent things that already existed before blockchain (land, concert tickets, stock, etc.) and can be treated as legal or illegal, regulated or unregulated just as they always have been. Policymakers should simply scrutinise what the token actually represents - its features, functions and risk profile - and apply existing laws and regulations - or not - accordingly. This way regulation stays consistent across different technologies - same asset, equals same risk, which results in the same legal and regulatory treatment. We believe this point is uncontroversial and should be reflected in any regulation developed by the FCA in order to properly respect its regulatory perimeter.
The Owl Explains sensible token classification system breaks tokens down into the following five high level categories that represent the vast majority of use cases today and into the future:
● Physical asset tokens: Any digital representation of a tangible (real-world) asset created and maintained on a blockchain (also known as “DLT” for distributed ledger technology). This category is very broad and could be divided into smaller categories based on the particular type of tangible asset (e.g., gold coin physical asset tokens, Air Jordan physical asset tokens, cup of coffee physical asset tokens versus coffee cup physical tokens, etc.).
● Services tokens (includes music, digital art); Any digital representation of services to be provided by one or more persons/entities to other person(s)/entities. This category also includes music and purely digital art files (the intellectual property underlying the music or digital art file may be an intangible asset token, discussed next, if not transferred with the file). This category is also quite broad because it includes any type of services and digital art/music such that it is susceptible to sub-categorisation (e.g., cleaning services tokens, personal performance tokens versus concert ticket tokens, legal services tokens, etc.).
● Intangible asset tokens: Any traditional intangible (non-physical) asset. Another broad category susceptible to sub-categories based on the asset class (bond tokens [security tokens], intellectual property rights tokens, government program tokens, loyalty points program tokens, etc.).
● Native DLT tokens: A narrow category of truly DLT-native tokens (e.g., Bitcoin, Ether, AVAX, etc.). Might be a subset of intangible asset tokens in the sense that these tokens are just a bundle of rights with no physical item involved, although some may have an element of services (e.g., when the token is used for resource allocation on the network). The classification system treats native DLT tokens as not a subset of intangible asset tokens because the latter must be something that exists (or can exist) distinct from the blockchain that creates and maintains it. Native DLT tokens have no existence or purpose without the associated blockchain.
● Stablecoins: A narrow category of tokens that do not fall within any other category and are designed to maintain stable value against some underlying, reference or linked asset or pool/basket of assets. Usually applied to fiat currencies. This category should not be broadened to swallow all the other categories.
Additionally, Owl Explains encourages the FCA to consider adopting a similar approach described in the multi-party project “Proposed Information Guidelines for Certain Tokens Made Available in the United States” (available here) to enhance transparency in the UK’s digital assets market. These voluntary guidelines, developed in collaboration with industry organisations, provide a structured framework for disclosing material information about digital assets, particularly “native DLT” tokens. Key areas covered include token offerings and sales, governance structures, the underlying DLT systems and ecosystems, financial data, and associated risks. By endorsing industry-driven disclosure standards, the FCA can support market integrity, improve investor confidence, and align the UK’s regulatory approach with global best practices. We encourage the FCA to continue to engage with industry stakeholders in refining and implementing proportionate disclosure requirements that balance innovation with consumer protection.
2. Addressing the Challenges of Decentralisation, Global Markets, and Open Governance for Native DLT Tokens
Owl Explains is concerned that the FCA’s proposed approach assumes a UK-centric (and centralised) approach that may be difficult to enforce in a pre-existing, internationally distributed market. There is a growing body of academic literature on these markets, some of which is discussed on these podcast episodes with CBER Forum. Without a central authority for much of the global liquidity, UK-based CATPs would bear the responsibility of preparing disclosures using open-source materials, raising concerns about feasibility, liability, and potential new legal obligations for blockchain foundations or developers. Further, open governance models in public blockchains make it unclear how insider information is defined. Finally, while the FCA’s recognition of safe harbours is positive, there is a lack of clarity on how these apply to DeFi liquidity provision, automated market makers (AMMs), and cross-exchange arbitrage.
To ensure compliance remains practical while maintaining market integrity, Owl Explains recommends that the FCA adopt industry-led disclosure frameworks, improve regulatory coordination on market manipulation risks, and clarify how MARC applies to blockchain-native governance models. This is particularly important as given global regulatory approaches are diverging (e.g. MiCA in the EU, SEC rules in the US), in the absence of clear and proportionate proposals in the UK platforms may choose to operate in other jurisdictions, reducing liquidity and innovation in the UK.
3. The Need to Further Assess the Unique Ways in which Market Abuse Occurs in Cryptoasset Markets
The DP acknowledges many of the challenges associated with regulated market abuse in cryptoasset markets. However, the proposed approach appears to largely retrofit the existing Market Abuse Regulation (MAR), which was developed for traditional financial instruments, without fully considering whether it is the most effective tool for mitigating risks of market abuse as they are manifested in the cryptoasset space. This presents several challenges:
● Cryptoassets often lack a central issuer, primary trading venue, or single price discovery mechanism, making jurisdictional oversight and enforcement more complex than in traditional markets.
● Decentralised governance means key developments are openly discussed in forums and code repositories, raising questions about how insider information is identified and regulated.
● The nature of market abuse in crypto differs from traditional finance, requiring tailored solutions rather than simply extending existing rules.
● A UK-specific regulatory approach may lead to misalignment with global frameworks, creating compliance challenges for firms operating across multiple jurisdictions.
We are proponents of market integrity and believe more effective strategy would be to focus on identifying the highest risks, improving transparency on trading platforms, enhancing cross-platform cooperation on surveillance, and ensuring global coordination with standard-setters like IOSCO and the FSB.
4. Ensuring a Proportionate, Risk-Based, and Globally Aligned Regulatory Framework for Cryptoassets
Owl Explains agrees with the FCA’s overarching goal but emphasises the need for a framework tailored to the unique characteristics of public blockchains and native cryptoassets. We are concerned that the proposals do not sufficiently account for the diverse risk profiles of cryptoassets, meaning disclosures could be meaningless and be overly burdensome, particularly for decentralised governance models. Further. The framework does not sufficiently accommodate the transparency of crypto governance, where protocol changes are discussed openly.
The UK’s approach should align with global regulatory developments, such as the EU’s MiCA, to maintain competitiveness and consistency. The FCA should endorse industry-driven guidance on acceptable trading practices and allow CATPs to apply appropriate due diligence measures, with clear segmentation between professional and retail markets. A well-calibrated, internationally aligned regime would support innovation while maintaining high market integrity standards, and the FCA should introduce safe harbours for legitimate market activities like market making and liquidity provision.
We would welcome the opportunity for further engagement with the FCA Cryptoasset Policy Team and would like to invite its members to attend the upcoming Owl Explains Crypto Summit in London on May 22. We will also be available that week for in-person meetings with the FCA Cryptoasset Policy Team in order to discuss any further questions or clarifications you may have on both our response specifically and our business model more generally.
Yours faithfully,
Lee A. Schneider, General Counsel
