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Avoiding a repeat of the South Sea Bubble? The FCA’s statement on ICOs

  • United Kingdom
  • Financial services - Digital Financial Services


Initial Coin Offerings (“ICOs”) are a digital way of raising funds from the public using a virtual currency, also known as cryptocurrency. They work through creating new electronic tokens, using blockchain technology, which have bespoke features, and then providing these tokens to investors in return for fiat currency (e.g. sterling or euros).

Currently, ICOs inhabit an uncertain regulatory sphere, with regulators having to determine their approach, usually by trying to fit ICOs within the existing regulatory structure. This is shown by the approach taken by regulators in the US and Hong Kong, who determine the regulatory classification of cryptocurrencies by looking at their features, for example whether the relevant cryptocurrency has the characteristics of shares, debentures or interests in collective investment scheme (for more information on the Hong Kong position, please see here.

A regulatory split and the FCA’s approach

The regulatory uncertainty regarding ICOs has been underlined by the divergence of approach towards their regulation. Chinese regulators have moved to restrict the availability of ICOs, which has caused some commentary regarding whether there may be a global shift by regulators to prohibit, rather than regulate, the ICO market. This is in stark contrast to the approach taken by the Estonian government, which has tried to promote the concept of the ICO in support of an Estonian crypto-currency. Both of these movements can, at least in part, be attributed to wider factors beyond the initial question of whether ICOs are / are not inherently acceptable, however the resulting unusually wide differences of regulatory approaches had led to investors receiving mixed messages as to whether ICOs are a legitimate method for raising funds.

Within this context, the FCA has issued its consumer warning about the risks of ICOs (available here). The FCA’s warning stresses the risks of investing in ICOs, for example in terms of the volatility, fraud potential, inadequate documentation and a lack of regulation. Importantly, however, the FCA does not suggest that prohibiting ICOs is the way forwards, rather the emphasis is on taking a case-by-case approach in accessing the acceptability of each ICO.


Interestingly, much of the rationale provided against allowing ICOs, including that highlighted by the FCA, has a parallel with the wide criticism shares received after the collapse of the South Sea Company in 1720. At the time, the concept of investing shares was relatively new, and the general distrust towards this form of investment led to the Bubble Act 1720, which forbade the creation of joint-stock companies without royal charter. The problem with this approach is that, after it came into force, it was linked to a decline in the economy, and was seen as causing more detriment that good, leading to the repeal of the Act in 1825.

Given the increasing international competition between economies for growth in the current climate, and the advantages ICOs can bring as a new flexible form of financing, it would therefore seem excessive to simply ban ICOs because of the risks involved in dealing with this nascent industry. Rather, a better approach would be to deal specifically with the relevant risks. In this respect, there is a natural impetus on those launching an ICO to voluntarily self-police, and be seen to self-police, as this will give investors comfort and so, in turn, make them more likely to invest increasing the chances of a successful ICO.

How Eversheds Sutherland can help

We have a dedicated Digital Financial Services group, with first-hand experience of advising on crypto-currencies and ICOs. We take a holistic approach, understanding the broader digital financial services landscape at both the UK and European level. For further information, please contact us using the details below.