Initial coin offerings – the regulatory response

The Financial Times ran a story last month analysing demand from investors for Initial Coin Offerings (ICOs). Under the headline ‘No one is killing it in crypto (not even Woz)’ (a reference to Apple co-founder Steve Wozniak, who has teamed up with Lady Mone of Mayfair to source ‘sophisticated investors’ for a new crypto-driven VC fund called EQUI) the article focused on numbers from Token Data showing the sums raised by ICOs since the start of 2017. From a peak in February 2018 of $2.6tn, the amount channelled into ICOs had fallen to just $181bn by September. ‘After a massive boom in ICOs at the … start of this [year],’ the FT wrote, ‘there has been an even more massive bust’.

Increased scrutiny from the US Securities and Exchange Commission – which argues that ICOs must be subject to the same rules as other types of security – was cited as one of the reasons behind the slump. But the US financial watchdog is not alone in taking a closer look at how to treat this nascent form of financial instrument.

Regulators are concerned about the vulnerability of ICOs to fraud and money laundering and the simple fact that backers could lose their investment. In response, many are considering whether to:  

1. apply existing regulations to coin offerings; 

2. establish bespoke regimes; or

3. simply take a watching brief for the time being. 

We have mapped these different approaches across the world and have found that most authorities fall into the first and third categories. Our research shows that the legal treatment of coins or tokens depends on their individual characteristics; those that look more like traditional securities are generally regulated as such, but those that are more like a utility token (which simply give investors a right to participate in the venture that the capital is collected for, or use its benefits) are often left alone. Authorities have been swift to issue warnings about the risks of ICOs but in the main have not stepped in to develop specific rules. The UK government recently published a report suggesting it was thinking along these lines, and if it did it would join Switzerland, Gibraltar and Malta as the only jurisdictions with ICO-specific frameworks in place. 

In a world where many ICOs remain outside the boundaries of financial regulation, buyers participate at their own risk. Issuers have no obligation to involve authorised underwriters or produce an approved prospectus, and until they are, trust in names like Steve Wozniak may be all that investors have to go on.