The UK comes out on crypto-asset sales

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There is a trend here..

Today the UK Financial Conduct Authority issued a consumer warning on ICOs (initial coin offerings) clarifying its stance on this nascent sector following the their discussion paper on distributed ledger technology.

The statement is clear on the risks of ICOs and are absolutely correct in noting the risks and that:

“ You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.”

Indeed, they also note the variety of different uses tokens can fulfil, noting:

“digital tokens may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all”.

It is likely that the majority of tokens sold this year will be worthless and a disturbing number of these new issues are effectively designed to be so.

Light regulation?

The really interesting part of this statement was the FCA noting that most ICOs are not regulated by the FCA being based overseas and thus lack certain investor protections.

They also note that many ICOs fall outside the regulated space, but this is not necessarily indicating that they do not constitute securities or engage in certain regulated activities.

There are also further protections to consumers even if the ICOs themselves are not regulated, particularly in the case of frauds and scams.

There is not the equivalent of a “Howey Test” for securities in the UK, but tokens can easily fall under this under the terms of the Prospectus Directive mentioned in passing in this statement, which are particularly pertinent when the tokens start trading to all and sundry.

Similar to the SEC, where promotion is undertaken for nefarious means or consumers are impacted we can expect a crackdown, but thus far the FCA has one of the lightest touch stances of the major jurisdictions.

This is unsurprising as they are pushing to stay cutting edge with initiatives like the challenger banks and the FCA regulatory sandbox.

Doing it right

While Swiss Foundations and Singaporean companies limited by guarantee have been popular legal structures for ICOs to date, we may see more UK-based token sales/governing bodies as more clarity comes through.

We based our own structure as a UK foundation due to the high level of regulatory cover and governance inherent there, making it easier to show an ethical and correct approach to our token usage and future activity.

We were also comfortable that we are deploying a utility token that has a specific set of uses to access and develop resources on our dynamic data platform, as well as having value intrinsic of itself due to the token economy that we outline in our white paper.

However, even tokens that approximate securities can take advantage of the UK’s encouragement of crowd funding provided appropriate disclosures and procedures are undertaken.

This actually provides an interesting potential route for organisations looking to deploy tokens that are clearly securities and want to have them listed worldwide as they can benefit from safe habour provisions of the US Securities Act (Reg S) and equivalent legislation in other major markets.

Tokens: easy to deploy, hard to deploy right

This comes back to a central point about tokens: they are easy to spin up and deploy, but they are incredibly hard to do right.

Too often they are used to cut corners in terms of regulation designed to protect the purchaser or have minimal actual value to the platform in question as bolt-ons or structures that can effectively be abstracted away by holding ethereum or bitcoin once they solve scaling and off-chain computation.

There is an opportunity for one of the key jurisdictions to lay down an infrastructure for token sales done “right” that achieve the balance of offering real value, utility, governance and protection for purchasers, many of whom for these mega sales and useless tokens will round on the promoters with vicious fury over the next few years.

Whoever gets this right will attract considerable global capital to drive innovation in the coming years and the time to move is now.

Emad is Co-CIO of Capricorn Fund Managers and Co-founder of Ananas, a UK-based charity using cryptocurrency to create a decentralized global knowledge base for peace.

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