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23 February 2018

Initial Coin Offerings - an unregulated minefield

Initial Coin Offerings (or ICOs) have become more common in the last couple of years thanks to the increased interest in cryptocurrencies. Bitcoin is the most common of those currencies and since its announcement in early 2009, has been a constant source of interest. However, despite the rise in popularity of cryptocurrencies, they are still largely unregulated in the UK.

Given the recent surge in interest following Bitcoin’s peak in value in December 2017, perhaps unsurprisingly the Treasury Committee announced yesterday that it is launching a new inquiry into digital currencies and distributed ledger technology.

As you might expect, Bitcoin and other cryptocurrencies (such as Ethereum and Litecoin) do not exist in physical form and utilise Blockchain technology for their transactions. Broadly, the Blockchain is a form of decentralised peer-to-peer system where transactions are not reliant on any third party record or action, for example a bank in financial transactions, and instead is recorded for all those connected to the relevant network to see through ‘blocks’ in the chain. The emergence of Blockchain and cryptocurrencies has paved the way for fundamental re-thinking of how businesses can operate, including the concept of an ICO.

There are many different types of ICO, but the most common type involves the issue of a token in exchange for ‘payment’ using an existing cryptocurrency (such as Bitcoin). In theory, the new token could have a secondary market and later be traded on exchanges, for example, or be used to purchase the use of goods and services from the issuer. Each ICO will be different but they have become increasingly common through 2017.

By way of process, the person or business offering the ICO will usually draft a ‘white paper’ which outlines the technical details of the project the ICO will fund for ‘investors’ to consider. ICOs tend to fix the number of coins or tokens on offer prior to their sale and may offer early ‘investors’ preferential rates or more coins for their money. Though a number of ICOs have been successful, it is not difficult to find examples of ICOs which have not generated any return at all for investors and seen them lose their original investment.

Recently the FCA has offered stern warnings to investors considering investing in ICOs, labelling them “very high-risk, speculative investments” and has highlighted the lack of regulation or investor protection and potential for fraud. In particular, they point out white papers can be “unbalanced, incomplete or misleading”. In addition to fraud, investors may be at risk due to misleading or false statements made in a white paper. The most obvious of these might be a promise of a certain level of return on an investment within a certain period of time. Where representations are made and relied on by investors, if they are later shown to be false, that investor may have a claim in misrepresentation and/or breach of contract.

Litigation is beginning to appear in respect of ICOs in the US and, given their surge in popularity, can be expected in other jurisdictions as ICOs continue to be a popular method of raising capital.

For any questions regarding disputes arising from an ICO, please do not hesitate to contact our Litigation team. Alternatively, for queries relating to the regulatory aspects of ICOs, our FinTech team has a wealth of experience advising businesses and investors and would be happy to assist, please contact William Garner.

This article was written by Jamie Cartwright and Thomas Plowman. For more information, please contact Jamie on +44 (0)1483 252618 or at or Thomas on +44 (0)1483 252 618 or at