Name
Global FinTech Guide
Country _ Name
United Kingdom
SectionTitle
ICO / token sale
Body
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms.  While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.

Introduction

Attitude of the country towards ICOs/token sales

In 2017, the FCA issued a consumer warning on ICOs being very high risk, speculative investments and are therefore unlikely to be suitable for retail investors. Investors are not covered by the Financial Ombudsman Service or the FSCS. Many financial institutions do not allow their customers to purchase cryptocurrency on their credit cards. The mainstream banks are generally unenthusiastic about ICOs / token activities because of the perceived high risks of money laundering, and the difficulty for banks carrying out their KYC and identification of source of funds obligations.

The government recognises that crypto assets could be used as a widespread means of payment to deliver improvements on cross-border transactions. However, they also pose financial stability and consumer risks. The government and regulatory bodies are continuing to assess their regulatory approach to crypto assets and the need to enhance consumer protection. 

For the moment, the Government and the FCA are generally adopting a “wait and see” approach, but in the longer term, it is likely that crypto assets will be brought into regulation in the UK.

Legal affairs

Presence of any explicit regulation on ICOs and the issuance of token/coins

ICOs, and tokens or coins, are not specifically regulated.
 
However, in many cases tokens or coins will be categorised as “securities” or in some cases as E-Money for regulatory purposes, and so activities in respect of tokens or coins may be subject to regulation as such in the same way as other securities such as (for example) shares, certificates of deposit, instruments creating or acknowledging indebtedness or units in collective investment schemes, or as E-Money.

The UK’s FCA published Guidance on Cryptoassets in its Policy Statement PS19/22 (July 2019). Although the guidance (and the FCA’s opinions set out in the guidance) do not have the force of law, it indicates the FCA’s own interpretation and approach to the regulation of crypto assets. The FCA categorises crypto assets into three categories for regulatory purposes:

  • Exchange tokens: These are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They tend to be a decentralised tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter of regulation (i.e. unregulated).
  • Utility tokens: These tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by specified investments. Although utility tokens are not specified investments, they might meet the definition of E-Money in some circumstances (as could other tokens). In this case, activities involving them may be regulated.
  • Sec
urity tokens: These are tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. These tokens are within the perimeter, and subject to regulation in the same way as other securities.

Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins

See above.

Obligations and requirements to issue token/coins

There is no specific or overarching regulation dealing with coins or token sales in the UK.

However, offering coins or tokens that can be categorised as securities or E-Money (see above) may be subject to the restriction on financial promotions.

Activities concerning coins or tokens will be subject to regulation in the same way as other securities (such as arranging deals in investments, etc. and in some cases to the UK Prospectus Regulation Rules (which implement the UK version of the EU Prospectus Regulation (2017/1129))) and so require FCA authorisation (unless one of the generally available exemptions applies).

Coins or tokens having the characteristics of E-Money will be regulated as such, and so issuing and so issuing coins or tokens that are E-Money will require authorisation (or registration) as an E-Money institution.

Classification of token/coins in the jurisdiction

By itself, crypto currency is unregulated and treated in the same way as a foreign currency, but please see above with regard to tokens or coins that can be categorised as securities or E-Money.

Where a coin or token has the same characteristics as a security or E-Money, it will be categorised as such and subject to regulation.

Profits made on dealings in token/coins will be subject to taxation (whether as income or capital gains) whether or not regulated.

Presence of a duty to publish a prospectus bevor offering token/coins to investors

Where a token constitutes a transferable security, it may fall within the UK’s prospectus regime (see above)

Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties

Where tokens or coins are not securities or E-Money, no specific AML/ KYC obligations apply.

Regulated firms are subject to AML obligations under the MLRs, whether or not the activity undertaken is regulated.

General law (Proceeds of Crime Act 2002) creates three criminal offences concerning the possession, concealment, conversion, transfer or making of arrangements relating to the proceeds of crime. The offenses all require knowledge (mens rea) of the facts giving rise to the crime (e.g. that the asset dealt in is the proceeds of crime). The definition of proceeds of crime is very wide (including, for example, tax evasion, or assets received in breach of a regulatory obligation imposing a criminal liability). The Proceeds of Crime Act 2002 applies generally whether or not a person is authorised or carrying on a regulated activity.

Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties

The FCA generally takes a cautious approach to dealings in crypto assets and has issued various warnings to consumers and to regulated firms as to the risks.

Dealers in crypto currency are required to register with the FCA, and to comply with MLRs, but are not required to become authorised as such.

Economic conditions

Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction

As the market in ICOs / token sales is not separately
regulated, it is not possible to discern its size, see Payment Services section for a more general overview of the FinTech sector. 

Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area

As mentioned above, the UK Government and FCA continue to take a “wait and see” approach to crypto currencies. It is likely that in the longer-term crypto assets related to investment activity will be brought into regulation (to the extent not already falling into regulation as securities or E-Money).

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