Regulation of Cryptocurrency and Initial Coin Offerings (ICOs) in United Kingdom (UK)
On 12 September 2017, the UK Financial Conduct Authority (the FCA) released a statement on ICOs, warning consumers that ICOs are very high-risk, speculative investments. The FCA cautioned that persons should only invest in an ICO if they are experienced investors, confident in the quality of the ICO project and are prepared to lose their entire stake.
The FCA warned of risks associated with ICOs, including that most ICOs are not regulated by the FCA, the lack of investor protection, price volatility, the potential for fraud, and that most are in a very early stage of development. Further, ICOs are not subject to regulated prospectus requirements, but rather typically issue a ‘white paper’, which may be unbalanced, incomplete or misleading.
Whether ICOs are regulated by the FCA is determined on a case-by-case basis, and depends on how the ICO is structured. While noting that many ICOs fall outside the regulated space, the FCA has stated that some involve regulated investments and pointed to the parallels between some ICOs and initial public offerings, private placements of securities, crowdfunding or collective investment schemes. The FCA has warned businesses that they should carefully consider if their activities could constitute arranging, dealing or advising on regulated financial investments.
The Financial Services and Markets Act 2000 (FSMA) generally prohibits carrying on a regulated activity in the UK unless the relevant person is authorised to do so or is exempted from the authorisation requirement. Activities are regulated if they relate to “specified investments”. ICO tokens may constitute “specified investments” if they create rights which are akin to those provided by shares, debentures or collective investment schemes.
The FSMA also prohibits communicating in the course of a business an invitation or inducement to engage in investment activity unless the person is authorised. “Investment activity” includes (among others) activities in relation to “specified investments”.
Where tokens constitute “transferable securities” , an approved prospectus will be required if the tokens will be offered to the public in the UK or admitted to trading on a regulated market in an EU Member State, unless an exemption is available. Transferable securities are “classes of securities negotiable on the capital markets but excluding instruments of payment”. There is uncertainty as to the circumstances in which the market for tokens might constitute a “capital market”. In any event, the prospectus requirement will apply only if the tokens in question are regarded as “transferable securities”.
Operating an exchange in the UK which provides for the trading of tokens which are financial instruments under the Markets in Financial Instruments Directive II (MiFID II) (which would include most specified investments) may be a regulated activity which would require the exchange to be authorised by the FCA.
Otherwise, however, crypto exchanges are not currently regulated in the UK. CryptoUK, the self-regulatory body established to represent the UK cryptocurrency industry, has however responded to the Treasury Select Committee’s inquiry into cryptocurrencies with proposals for crypto exchanges to be licensed by the FCA. CryptoUK has apparently suggested that regulation should focus on the platforms facilitating the interaction between digital and fiat currencies.
Note: The above represents Charltons’ current understanding of the regulation of ICOs in different jurisdictions. Charltons advises only on Hong Kong law and while the above represents our understanding of the legal position in certain other jurisdictions, legal advice from qualified lawyers in the relevant jurisdictions should be sought in relation to any particular transaction or situation. Further, this note is intended for educational purposes and it does not constitute Hong Kong legal advice. Specific advice must be sought in relation to any particular situation.
- As defined in the Markets in Financial Instruments Directive / MiFID II.