Laws related to token sales

In April 2015 the Proceeds of Crime (Business in the Regulated Sector) Order 2015 amended Schedule 4 to the Proceeds of Crime Act 2008 which lists all of those businesses considered by that Act to be “Business in the Regulated Sector”.

Schedule 4(11) (mm) states:

‘the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto - currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity’

The nature of an ICO undertaken in or from the Island falls under the business of issuing, transmitting, transferring, administering or managing a convertible virtual currency and so is classed as “business in the regulated sector”.

“Business in the regulated sector” does not necessarily mean that the business is regulated in the contemporary sense of the word. “Business in the regulated sector” for the purposes of the Proceeds of Crime Act 2008 means that additional legislation applies to those businesses (namely the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 or “the Code”).

Many of the business sectors in Schedule 4 are fully regulated by the FSA, for example, under the Financial Services Act 2008 or the Insurance Act 2008. These businesses are subject to a wide array of regulatory controls and are subject to detailed scrutiny as required by the terms of the legislation they are regulated under.

Some businesses listed under Schedule 4 are only overseen for compliance with the Code. These businesses are called Designated Businesses. Their oversight does not extend to conduct of business, prudential and solvency regulation or protection of client assets. For the avoidance of doubt, businesses operating as virtual currency providers (including ICOs) fall under this category.

The FSA has published a registration policy which outlines what it expects of an applicant in terms of fitness and propriety. In addition to this general registration policy, it is the FSA’s policy to refuse to register an applicant which engages in an ICO under which the token provides no benefit to the purchaser other than the token itself. Examples of this include:

• ICOs where the likely reward of purchasing a token is not reasonably proportionate to the risk to the capital spent on purchasing that token;
• ICOs which convey
  • limited or no rights to the income generated from the project;
  • limited or no rights to use the assets developed, purchased or acquired from the funds raised by the ICO;
  • ICOs where there is no reasonable basis for any expected capital growth of the value of the token.

Such characteristics are generally considered by the FSA to pose an unacceptably high risk that the money raised from the ICO could be used for unanticipated and illegal purposes, as well as posing a risk to consumers. It is because of these risks that it is the policy of the FSA to refuse to register this type of business.

For further information, please see:

• Anti-Money Laundering and Countering the Financing of Terrorism Handbook
• Proceeds of Crime Act 2008
• Financial Services Act 2008
• Virtual Currency Business, Sector Specific AML/CFT Guidance Notes, October 2016

Sources

• Q&A in respect of persons seeking to launch an ICO in and from the island