Authorities seek regulatory pathway for ICOs

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When the UK Financial Conduct Authority (FCA) weighed into the debate developing around initial coin offerings (ICOs) early in September, it amplified the impression that regulatory cogs are starting to move into gear.

In issuing a consumer warning, the UK’s financial watchdog noted that ICOs were “high-risk, speculative investments”, adding that they existed in an unregulated space with no investor protection, a large degree of price volatility and with the potential for fraud.

The FCA notice went on to point investor to the risk of “inadequate information” from white papers that might be “unbalanced, incomplete or misleading” and the potential for them to lose all of their stake.

The warning followed in the wake of similar advice from the US Securities and Exchange Commission (SEC) that suggested that some ICOs should be considered securities, and hence would fall within its purview.

But Joseph Borg, senior advisor at Malta-based legal consultancy WH Partners, is keen to put a positive spin on the FCA intervention.

“I believe the FCA was very fair in its warning, in that it simply stated what the crypto community has known for the past months,” he says. “Some ICOs are scams and before investing one should consider in detail the information provided. However, the statement also implies that not all ICOs are scams and some are actually excellent projects. Before funding projects one should make sure that he or she is well informed about the team behind the ICO and the viability of the project.”

Such positivity is echoed by Brian Donegan, head of operations for fintech and digital development at the Isle of Man department of economic development. The island is somewhat stepping into the breach in terms of regulating ICOs, becoming the first jurisdiction where tokens can be issued under a registration process.

“It’s not a license,” he points out. “In essence a business will incorporate a local Isle of Man company. That company then applies to the IOM Financial Services Authority for registration.”

On a successful application the FSA will issue an IOM Registered Designated Business ICO.
That means the ICO is issued to an IOM company, registered under the Designated Businesses (Registration and Oversight) Act 2015 and overseen for compliance within the orbit of the island’s AML/CFT legislation.

“The registration process and the regulatory framework that supports it, is robust and will be constantly reviewed and policed in a thorough manner such that any activity that steps outside what is allowed will be picked up and addressed,” Donegan adds.

The close links between ICOs, the rise of cryptocurrencies and the Isle of Man’s attempts to – in part – corral their collective regulation should not be surprising.

“It is in the nature of territories who have navigated the regulated egaming space or in fintech to see the crypto economy as a valid opportunity,” says Julian Jarvis, now the chief executive and co-founder of blockchain, distributed ledger and crypto business consultancy Rockchain.

He says that Gibraltar, where Rockchain in unsurprisingly based, is now also working on its own approach to distributed ledger technologies.

Jarvis argues, though, that non-security token sales have no particular need for specific jurisdictional regulation.

“There are many laws and much guidance already out there if you know where to look, that are relevant to consumer protection, data protection and good corporate governance,” he says.

Clearly the current frenzy around ICOs is something of a cause for concern – Jarvis implicitly suggests as much when he says he prefers to call them ‘token events’ – but if an offering is designed and implemented in a way that “promotes transparency, accountability and alignment of interests between stakeholders” then he suggests it can make a “big difference to outcomes.”

Jarvis’s argument finds agreement with Borg who says that the likelihood is that the scam offers will be “few and far between” and that the market will soon stabilise.

“ICOs are here to stay and they provide an excellent funding mechanism for startups in line with the crypto community philosophy which in essence aims at rewarding projects and startup teams in according with their talent and the quality of the project as such rather than what happens with traditional funding mechanisms that favour big players and established enterprises,” he says.

There is certainly an element of cross-current between the concept of coin offerings and crowdfunding and it helps explain much of the sense of excitement that surrounds the more publicised offerings, both in the wider world and in the gambling space.

“There has clearly been a pent-up demand to take crowdfunding to the next level and this is part of that too,” says Jarvis. “More and more people want a direct say in what gets funded and to participate in what the world looks like next. That needs to be respected, even while we try to encourage high standards in how that is done.”

As he adds, it would be a bad outcome if the attractive elements of token offerings were lost in a blaze of ICO flare-out.

“It would be a shame to see a total retreat to traditional funding models only, as that would mean losing out on some of the democratisation of access to investment and technology development that is happening here,” he says.