ICOs

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Gary Gensler asserts the SEC’s broad powers over digital assets, and puts consumer protection at the forefront.

By Stephen P. Wink, Adam Zuckerman, and Deric Behar

On August 3, 2021, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), gave a speech on the digital asset industry. The speech offered some indication of what he expects the SEC to focus on in this area but did not provide concrete guidance for industry participants looking for clarity on regulatory uncertainties. He did, however, make clear that he believes “we just don’t have enough investor protection in crypto” and that the SEC will play a more active role in regulating the industry.

As the agency pursues and prevents offerings of tokens it deems unregistered securities, further issues emerge.

By John J. Sikora Jr., Stephen P. Wink, Douglas K. Yatter, Cameron R. Kates, Shaun Musuka, and Deric Behar

The recent wave of US Securities and Exchange Commission (SEC) enforcement actions relating to initial coin offerings (ICOs) continues with two orders and a judicial complaint issued against digital asset firms for conducting unregistered securities offerings. The actions against Block.one, Nebulous, and Telegram are each notable for the facts and circumstances under which they were issued, but also as counterpoints to each other and previous ICO-related enforcement actions. This blog post offers a brief synopsis of these actions and discusses their impact on the evolving regulatory and enforcement landscape.

New EU anti-money laundering measures have been approved by European legislators.

By Stuart Davis and Charlotte Collins

The European Parliament and Council have finally signed off on the text of the fifth Anti-Money Laundering Directive (known as MLD5).

Overview

The new directive is of particular interest to the FinTech sector as, amongst other things, MLD5 includes measures to increase transparency around more recently developed instruments of payment — namely cryptocurrencies and prepaid cards. Both these instruments lend themselves to anonymity and raise concerns that they could be used to help fund terrorist activities.

MLD5 will lower the threshold for identifying the holders of anonymous prepaid cards from €250 to €150. It will also require know-your-customer (KYC) checks to be performed for remote payment transactions exceeding €50, or if a withdrawal of more than €50 is made.

FCA warns providers of cryptocurrency derivatives of their regulatory obligations.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The UK Financial Conduct Authority (FCA) has issued a statement reminding businesses offering cryptocurrency derivatives of the requirement to be authorised.

The FCA explains that, although cryptocurrencies are not themselves regulated in the UK, derivatives that reference cryptocurrencies (such as cryptocurrency futures, cryptocurrency contracts for differences, and cryptocurrency options) are capable of being financial instruments under the Markets in Financial Instruments Directive II (MiFID II) and therefore within scope of regulation. The FCA clarifies that it does not consider cryptocurrencies to be currencies or commodities under MiFID II.

Swiss regulator offers assistance in navigating the regulatory framework.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The Swiss Financial Market Supervisory Authority (FINMA) has published a set of guidelines, setting out how it intends to apply its financial markets legislation in the context of initial coin offerings (ICOs).

Despite the growing trend for ICOs globally, FINMA is the first national regulator to provide such helpful clarity for ICO participants, who are typically left to work out for themselves whether and how their structure fits into existing regulatory frameworks. ICOs, in which investors receive blockchain-based coins or tokens in exchange for funds, were not envisaged when many existing frameworks were developed.

By Stuart Davis and Charlotte Collins

Following on from the Financial Conduct Authority’s (FCA’s) consumer warning on Initial Coin Offerings (ICOs) in September, the FCA has announced a deeper examination of this area in its Feedback Statement on Distributed Ledger Technology (DLT) and related press release. The FCA stated that it will consider whether regulatory action beyond the consumer warning is required.

The earlier Discussion Paper on DLT had asked for feedback on the legal and regulatory risks associated with ICOs (see Latham’s related Client Alert). According to the FCA, many respondents considered ICOs as having the potential to “dynamise innovation”, although others raised concerns about potential risks and possible investor harm.

By James Inness and Stuart Davis

Following our 7 November 2017 blog “Europe as a Hub for Initial Coin Offerings”, the European Securities and Markets Authority (ESMA) has published two statements on Initial Coin Offerings (ICOs). The statements underline ESMA’s interest in ICOs as a means to raise capital for enterprises, particularly given their rapid growth in recent months, as well as highlighting ESMA’s concerns for investor protection given the potentially high risks to investors.

Interestingly, one of the issues ESMA has focussed on is the requirement for ICO issuers intending to raise capital in the EU to comply with the EU Prospectus Directive in circumstances in which the ICO is structured as a security offering (as opposed to a non-security utility offering). ESMA acknowledges that the exemptions from the requirement to publish an approved prospectus under the EU Prospectus Directive would potentially be available to ICO issuers in the same manner as for issuers in relation to other types of securities offering, as noted in Latham’s earlier blog.

By James Inness and Stuart Davis

Initial coin offerings (ICOs) involve issuers offering virtual coins or tokens that are created and disseminated using blockchain or distributed ledger technology. Virtual coins resemble cash in a number of ways but may also afford holders additional rights, such as the ability to access the platform or software, or participate in the profits, of the issuer of the virtual coins or tokens. Post-issuance, virtual coins or tokens are tradeable on a secondary market.

Tokens as securities

The popularity of ICOs as a funding mechanism has mushroomed in 2017. In response, regulators in key financial centres around the globe have warned issuers that existing regulatory regimes for securities offerings may apply to the person(s) making or marketing ICOs. Some regulators have gone further, adopting a blanket ban on fundraising though ICOs.

By Andrew Moyle, Wenchi Hu, Simon Hawkins and Stuart Davis

Initial Coin Offerings (ICOs) involve issuers offering virtual coins or tokens that are created and disseminated using distributed ledger or blockchain technology. The capital raised from the offer will fund the development of a digital platform, software, or any other project. Holders of virtual coins or tokens may have additional rights over and above those of a cryptocurrency, such as rights to access the platform, use the software, or otherwise participate in the project. In some cases, holders may also have rights to a return on their investment, or rights to participate in a share of the returns provided by the project or by the company backing the project. Post-issuance, holders may resell virtual coins or tokens in a secondary market on virtual currency exchanges or other platforms. ICOs are typically announced on cryptocurrency forums and websites through a white paper describing the project and key terms of the ICO, subscription details, timeline, etc.