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UK regulators to scrutinise digital coin market

The UK’s Financial Conduct Authority has become the latest watchdog around the world to scrutinise initial coin offerings, which sell investors digital tokens in exchange for virtual currency such as bitcoin.

The FCA said on Wednesday it was keeping a close eye on ICOs, which have proliferated over the past 12 months. Rapid price rises of digital tokens issued in the past year have brought a surge of speculative interest.

In a discussion paper published in April, the FCA said rules that protect investors and stipulate what must be disclosed by an issuing company could apply to ICOs, depending on their structure.

It added that more analysis was merited. It is expected that the FCA will publish further work this year.

“Initial coin offerings [ . . .] have various parallels with Initial Public Offerings, private placement of securities, or crowd sales. Depending on how they are structured, they may, therefore, fall into the regulatory perimeter,” the FCA’s discussion paper reads.

A spokesman said on Wednesday that ICOs “are an issue that the FCA is aware of and has been looking at”.

Earlier this week, the Chinese central bank outlawed ICOs. The activity is “essentially a form of unapproved illegal public financing behaviour” that also “[raises] suspicions” of illegal securities issuance, financial fraud and other “criminal activity”, according to a statement on Sunday from a group of seven agencies led by the People’s Bank of China.

China has among the biggest demand for ICOs and virtual currencies. It is also trying to clamp down on capital flight.

The announcement from Beijing has pushed down the value of bitcoin, the world’s best known cryptocurrency. It fell as much as 12.6 per cent to $4,046 following the announcement but has since recovered to $4,309.

Regulators in Hong Kong and the US have taken a similar line to the FCA: rather than banning ICOs, they have warned some of them are likely to face regulatory scrutiny.

The US Securities and Exchange Commission warned in July that some ICO promoters had skirted securities laws by issuing digital tokens on behalf of “virtual” companies, rather than selling traditional securities. SEC scrutiny could force issuers to register their tokens with the regulator, while also drawing exchanges that trade them into the agency’s remit.

The UK authorities have generally welcomed innovation and financial technology in the wake of the financial crisis, as one way to encourage competition with the biggest banks. The FCA has started to approve businesses that use the blockchain software that underpins digital currencies like bitcoin.

The Bank of England, meanwhile, has recognised that the technology behind bitcoin might improve central banking services, and is at the early stages of examining a digital currency.

But Mark Carney — the BoE governor who is also chair of the Financial Stability Board, which proposes rules for the G20 nations — has put “fin-tech” companies on notice to expect more regulatory scrutiny.