Fintech quarterly round-up: April – June 2018

Author: Charles Proctor

Charles Proctor, Partner, Fladgate LLP (


This quarterly round-up looks into some of the main regulatory developments and trends in fintech regulation during the second quarter of 2018.

The previous edition of this briefing for January to March 2018 can be found here.

Evolution of ICOs

 The market for initial coin offerings (ICOs) continues to develop despite increased regulatory scrutiny.

As discussed in the previous briefing, ICOs are starting to adopt new structures such as simple agreements for future tokens (or SAFTs) where the investor makes its investment with the company promising to issue tokens at a date in the future. More recently there has been a trend towards start-ups giving away free coins through “airdrops”. However, due to the relatively recent development of these types of arrangements, it is not entirely clear how these would be viewed from a regulatory perspective.

A further interesting development that we are starting to notice is for offerings into the US to comply with US securities offering requirements even where there is doubt that the token would be considered a security. This illustrates how the tough approach taken by the US authorities, and more particularly the Securities and Exchange Commission, is starting to bite.

Finally, although no official UK position has been established, the FCA has indicated (in its evidence to the HM Treasury Committee digital currencies inquiry) that it considers that security tokens, but not utility tokens, are subject to regulation. This reflects the position taken by other regulators and suggests that a broad consensus around ICO regulation is starting to emerge.

Banking bother

We previously highlighted the general reluctance by banks, particularly in the UK, to accept money originating from cryptocurrencies. The adoption of the 5th Money Laundering Directive by the European Parliament could be a welcome development for many people struggling to find banking arrangements in the UK and EU. This Directive would require crypto-exchanges and crypto-wallet providers to apply anti-money laundering and know your customer measures.

Currently banks are reluctant to accept funds derived from cryptocurrencies due to concerns about the ability to verify the source of those funds. However, it is hoped that this will be less of a concern if customers’ funds are being transferred from a crypto-wallet or crypto-exchange which itself is subject similar anti-money laundering and know your customer requirements. However, these measures are not expected to come into force until late 2019, so for the moment the problem of accessing banking remains.

Banking customers are also starting to take more direct approaches in addressing the problems with accessing banking facilities. In Chile, one exchange, which found its accounts with two banks closed due to its crypto activity, took legal action against the banks on the basis of breach of competition law.  Pending a decision, the banks have been ordered to reopen the accounts.

The Reserve Bank of India has also found itself the subject of a number of petitions challenging its ruling preventing Indian banks from providing services to people dealing in cryptocurrencies.

Interestingly, the FCA, in its evidence to the HM Treasury Committee digital currencies inquiry, has said that “deploying crypto-assets … should not result in a wholesale denial of access to traditional banking services for firms” which also suggests that, in the UK, the FCA is not advocating a blanket ban on bank accounts for crypto-businesses.

Regulatory balancing act

Regulators are still, to a large extent, feeling their way through this new technology.

The Securities and Exchange Commission has been continuing its investigations and enforcement action, as have regulators in Japan and Canada.  The Deputy CEO of the Hong Kong Securities and Futures Commission has called many ICOs “downright frauds”.

As discussed in the previous briefing, the FCA issued in April a statement that crypto-currency derivatives are capable of being financial instruments and therefore subject to FCA requirements including, in certain cases, the requirement to be FCA authorised. The FCA has also reportedly launched enquiries into 24 crypto-businesses and whether they are carrying on regulated activities for which they should have sought authorisation.

Also in the UK, the Prudential Regulation Authority has issued a letter to firms reminding them of the high-risk nature of crypto-assets and the need for effective risk management procedures, including extensive due diligence and consideration of the associated risks by senior management. Firms are also expected to notify the PRA of any proposed exposure to crypto-assets.

More positively, however, regulatory and governmental authorities are also considering how to make use of, and benefit from, the development of fintech. For example, Malta is following the approach of other jurisdictions, such as Switzerland, and is proposing a test for classification of virtual assets which will include ICO tokens.  Bermuda is also considering cryptocurrency legislation regulating certain cryptocurrency related activities, such as crypto-exchanges, crypto-wallets and crypto-transfers.

It therefore appears that regulators have become increasingly confident in clamping down when they perceive risks to consumers or the market generally but are also being careful not to inhibit fintech activity completely.

Fladgate has already been advising on a wide variety of fintech matters including ICOs and cryptocurrency related issues such as cryptocurrency exchanges and the regulation of crypto-assets. Fladgate’s regulatory team, therefore, has specific regulatory expertise in and market insight into this fast-moving area.


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