Britain’s Financial Conducts Authority (FCA) is the latest regulator to slightly clarify their position on the booming Initial Coin Offerings (ICO) market. Their statement on the matter is quoted below at some length:
“Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.
Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.
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.”
This brief general guidance does not provide much assistance in specific cases, but appears to lay a general tone by FCA that not all ICOs fall within their jurisdiction, suggesting FCA may take a more nuanced approach.
The statement was made in the context of a consumer warning regarding ICOs. FCA says that the space is unregulated, without investors protections, experiencing considerable price volatility as well as offering opportunities for scams and fraud because most ICO projects are at an early stage. They further say:
“Instead 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.”
They’re generally right on all points. The question is how to address what can be addressed, specifically initial documentation of ICOs and subsequent quarterly reports.
The approach SEC has taken is to apply old laws to a very new field, unless you are very rich, in which case SEC’s oversight does now apply, so you are free to continue as ICOs do now.
SEC further claims to extend their jurisdiction even to Decentralized Autonomous Organizations, in effect, to code itself and the smart contract protocol itself.
The injustice of one law for the rich and another for the rest means most reasonable individuals can’t quite support SEC’s decision. ICOs, therefore, have shunned the jurisdiction completely, at least in appearance.
The extension of their jurisdiction to code itself is something no bureaucratic agency can do, but Congress or Parliament alone, after lengthy public debate, because it is an extension of state power, to which the people need to consent.
However, some oversight is needed and, of course, where there is outright fraudulent or scam behavior, regulatory and enforcement agencies would be fully supported in applying current criminal laws.
The question is licensing. That process takes many months and sometimes years as we have seen with the bitcoin ETF. It is an incredibly slow and cumbersome process, which for this space amounts to taking decades for a decision as technology is fast evolving. Innovators simply can’t wait in a hugely competitive cutting edge space where billions are to be made.
Regulators therefore need to become a bit smarter, more flexible, and more agile, and instead of themselves doing all things, they could in a way “contract” out the due diligence to a non-governing body with representatives and coding experts from this space, as well as lawyers and experts from the regulatory agency.
That would require a bit more resources (some of which could perhaps be provided by the private sector), and perhaps a new approach of public private partnership.
Such approach would give the country an incredible competitive advantage because the world’s entrepreneurs would probably choose it as the first stop if they can balance the necessary need to prevent cheating while not quite hampering good standing, law abiding, bright young men and women, who dream of doing great things.