1 00118601 Emerging themes 2019 A4 AW v31 combined - Page 41



EMERGING THEMES 2019
Regulating ICOs: More than a token effort
Another prominent use of blockchain technology is the
process of tokenisation, by which rights to an asset are
converted into a digital token. Tokenisation underpins
the form of alternative corporate fundraising known as
an Initial Coin Offering (ICO), which involves the issuance
of digital tokens to investors. All manner of assets can be
tokenised, including securities (which already fall within
the scope of regulation), proprietary interests in future
returns, prepayment vouchers for future services, and
physical assets such as gold. Depending on the nature
of the tokenised asset, ICOs may already be subject
to stringent regulatory requirements, including the need
to publish a prospectus if issuing transferable securities.
Equally, they may not involve any regulated activity at
all. The FCA has promised to issue further guidance on
the regulatory status of different types of tokens to help
the industry understand its current obligations.
In summary
The crypto space presents a thorny problem for
regulators, who must grapple with an ever-evolving
multitude of uses for blockchain technology. As with any
form of regulation, the key issue is striking the right
balance between encouraging innovation and
protecting consumers. The wide range of applications
of the technology within the financial services sphere
means that a “one size fits all” approach is unlikely to be
effective. As different use cases occupy different places
in the existing regulatory architecture, they are subject
to varying requirements for regulatory change. It is
critical that the industry gets involved in shaping any
future regulation.
The government plans to consult early this year on
whether an extension of the regulatory perimeter is
necessary for ICOs. In adopting a regulatory approach
to ICOs, it will be important to differentiate between the
various species of tokenisation. A blunt approach risks
catching the wrong kinds in the regulatory net, with the
potential that tokenised versions of assets will be
regulated differently to non-tokenised versions of the
same assets. This would cut across the FCA’s selfdeclared technology-neutral approach to regulation.
A “one size fits all” approach
is unlikely to be effective.
DANIEL CSEFALVAY
Partner, London
ANTHONY WILLIAMS
Associate, London
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