FCA on regulation of ICOs

Yesterday, the UK’s Financial Conduct Authority (FCA) issued a consumer warning about the risks of Initial Coin Offerings, in which it also briefly touched upon the regulatory treatment of ICOs. Some highlights are discussed below.


Although stating the obvious, the FCA’s description of the risks of ICOs is a good reminder of why one should not tender one’s life savings in yet another $200M+ token sale:

  • Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
  • No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
  • Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
  • Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
  • Inadequate documentationInstead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
  • Early stage projectsTypically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

The FCA goes on to say that “a digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all.” (emphasis added)


On the question whether ICOs are regulated by the FCA, the FCA makes three caveats:

  1. Some ICOs may involve regulated investments.
  2. Firms involved in an ICO may be conducting regulated activities.
  3. ICOs may fall within the ambit of the prospectus regime.

In the FCA’s words:

Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.

Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.

Yours truly is not an English lawyer, so I gladly leave the analysis of what these caveats mean to my English colleagues. One of such English colleagues is Preston Byrne.  In his blog post, Byrne points out that “the key here is that the definition of what a security is, for the purposes of issuing prospectuses is defined in statute, is highly prescriptive, and at least on my reading does not create a broad, flexible, common law-style definition of what a “security” is like the Howey Test does in the US.

As a reminder, the US Securities and Exchange Commission (SEC) recently unleashed the Howey Test on the ICO of The DAO in its Report of Investigation on The DAO.

Although continental token sellers may for the time being find textual arguments in the existing regulatory framework to argue that they are not conducting regulated activities and are not subject to the requirement to draw up a prospectus (that is, until that framework changes to include ICOs…), it will be interesting to see how a US-style functional approach may influence EU financial regulators in assessing token sales. It also remains to be seen to what extent the set-up of the platform and in particular the utility value of the token in question might prevent the token seller from running afoul of securities legislation.