ICOs – Is Jersey’s new regulatory regime the right one?

In July 2018, the Jersey Financial Services Commission became the first regulator in a highly regarded legal jurisdiction to issue detailed guidance on the launch of Initial Coin Offerings (ICOs). The move has been celebrated by local legal commentators as balancing the interests of emerging fintech and cryptocurrency businesses with the requirements of good governance and regulation.

Jersey’s new ICO regulatory regime

Jersey’s new ICO process requires the ICO issuer to be a Jersey based company which has received consent from the JFSC prior to undertaking any ICO activity. This is known as the ‘COBO’ consent as it is granted through statutory powers under the Control of Borrowing (Jersey) Order 1958.

A legal adviser must handle COBO consent application on behalf of the ICO issuer and the application must include full information about the ICO, its rationale, features of the tokens (e.g. are they security or non-security tokens) and how underlying assets are connected to the tokens as well as a full legal analysis of all relevant legislation and regulatory laws in Jersey.

The guidance note includes a useful list of characteristics where the JFSC would consider a token to be a ‘security token’. The note also confirms that ‘utility tokens’ would not count as a security token (utility tokens generally provide a right to use or test software and do not have any economic rights). The distinction between security and non-security tokens does not actually impact the requirements imposed on the ICO issuer by the JFSC which remain consistent for both types of ICO.

Once the COBO consent is obtained from the JFSC, the ICO issuer must comply with a number of requirements and restrictions. These include compliance with the JFSC’s Sound Business Practice Policy, the appointment of a Jersey licenced administrator, the presence of a Jersey resident director on the company board, audit requirements, minimum requirements for the information memorandum or white paper and the inclusion of prescribed consumer warnings in all marketing materials.

A full copy of the JFSC ICO guidance note can be found here.

What are the alternative approaches in other jurisdictions?

In the UK, the Financial Conduct Authority (FCA) has issued consumer warnings about the risks of cryptocurrency and ICO investments. Further guidance is anticipated but it is unclear at present what the FCA (under the direction of the Treasury) will decide to do.

The Security Exchange Commission (SEC) in the United States has issued guidance that many ICOs may be classified as ‘securities’ meaning federal security laws would apply.

The German Federal Financial Supervisory Authority has taken a similar approach to the SEC, stating in February 2018 that ICOs may fall within the scope of existing regulation, depending on their design.

China has sought to issue an outright ban on ICOs and Chinese media has reported the country is poised to increase regulations banning the practice.

The British Virgin Islands on the other hand has effectively implemented a ‘wait and see’ approach to regulation, allowing ICO activity to take place with reliance upon existing company and anti-money laundering legislation.

Conclusions

The early indications are that Jersey’s new ICO guidance represents a progressive, clear and balanced approach to the regulation of ICOs, encouraging innovation whilst maintaining a degree of regulatory control and good governance. Only time will tell whether or not Jersey is destined to become a world leading ‘hub’ of ICO activity as a result of this new approach.