Jersey regulator warns (again) on initial coin offerings

The Jersey Financial Services Commission today issued a formal warning that statements in the market which suggest it regulates “certain initial coin offerings (ICOs) are “misleading”, and further clarified the way it regards and regulatorily treats such entities.

Noting that “most jurisdictions do not regulate ICOs”, the JFSC pointed out that in Jersey, a company which issues digital coins or tokens to raise money, in the same way another company might seek to raise capital through the issuance of shares,
“would need to obtain a consent (Control of Borrowing (Jersey) Order 1958”, or COBO, from the JFSC, in order to set up the
company.

“The grounds on which the JFSC would determine whether or not to grant a consent under these circumstances is limited
by statute, and the focus is primarily on whether potential investors have been provided sufficient information about the company and the risks of investing in it,” the JFSC added, in its statement.

“The JFSC does not consider the financial standing of, or conduct risks associated with, the unregulated company selling such ICOs or the digital coins/tokens.”

As reported, the JFSC issued an earlier “risk warning” on ICOs towards the end of last year, in which it explained that ICOs, wherever they are issued from, tend to be unregulated, and warned the public about the risks of “investing” in them.

Today it repeated this warning, noting that as with other investments, “the price of the coins or tokens issued can go down as well as up”.

“When asked to give an Article 2 consent under COBO with the aim of enhancing transparency for  investors who are making a decision whether or not to invest in an ICO offering, the JFSC would consider attaching the following conditions to any consent granted,” it went on.

“Other conditions may be applied, and every application is  considered on a case-by-case basis.

“Marketing material produced by the Jersey company must contain clear consumer warnings highlighting that the initial coin offering is unregulated, and may result in substantial risks for investors.

“In particular, the consumer warnings must clearly state that ICOs are a highly speculative form of investment; investors should be prepared for the possibility of losing their investment completely; and this highly-speculative form of investment is not subject to existing capital market regulations.”

In its statement, the JFSC pointed out that its concerns about ICOs don’t mean that it doesn’t recognise “the innovative potential of distributed ledger/blockchain technology and fintech more generally, and supports efforts to responsibly innovate in fintech in Jersey”, and stressed that it was focusing its warning on ICOs specifically, and the idea of “retail investors participating in [them]”, given their “typically highly speculative and risky” nature and “high price volatility”.

The JFSC concluded its statement by pointing out that it is protected under law against any liability that might arise from “from the discharge of its functions” in regulating the Control of Borrowing legislation.

Initial coin offerings are a digital way of raising funds from the public, in a way sometimes likened to crowdfunding. The first ICO is said to have taken place in 2013. Although the way ICOs are structured can vary signficantly from technical, functional and business standpoints, the idea of an ICO is that a pre-determined quantity of the new, crowdfunded cryptocurrency is pre-allocated to investors in the form of “tokens,” in exchange for legal tender or other cryptocurrencies, such as Bitcoin.

If all goes according to plan, these tokens then become functional units of crypto-currency.

 

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