On September 12, 2017, following a recent SEC statement relating to offerings of digital tokens, the UK Financial Conduct Authority (FCA) published its own statement1 warning investors to be conscious of the risks involved in investing in ICOs. It advised that investments should be made only by experienced investors who are confident in the quality of the specific ICO project and are prepared to lose their entire investment.
The FCA highlighted a number of general risks facing ICO investments. These include the fact that most ICOs are not regulated by the FCA and/or are based overseas, rendering it unlikely that they will have access to UK regulatory protections. Additionally, ICO projects do not tend to issue regulated prospectuses – instead, they usually provide only a “white paper”, which can often be incomplete or misleading. Other risks include: the volatile nature of token values (as with cryptocurrencies generally); the potential for fraud; and the experimental business models used for ICO projects.
As with other regulators, whether or not an ICO falls within the FCA’s regulatory scope can only be decided on a case-by-case basis. Many will not fall within this scope, however – depending on their structure, some ICOs may involve “regulated investments” and firms assisting with ICOs may be considered to be “conducting regulated activities.” Businesses must consider whether their involvement in an ICO could amount to arranging, dealing or advising on regulated financial investments or another FCA-regulated activity. It is an offence to carry on regulated activities in the UK without FCA authorisation unless an exemption applies. Promoters and digital currency exchanges facilitating the exchange of certain tokens should consider whether they need to obtain FCA authorisation in order to continue delivering their services.
The FCA has indicated that, at the end of the year, it plans to publish further information following on from its Discussion Paper DP17/3 on distributed ledger technology (DLT) of April 2017. The questions to be addressed in the upcoming paper will include whether there is a viable case for the use of DLT in the context of asset management, “where should responsibility lie in fully decentralised applications such as the DAO” and “what governance arrangements do firms plan to have in place when using applications on public, permissioned networks.” The answers to these questions are likely to influence the FCA's future regulation of this fast-developing sector.