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It's entirely possible to run an ICO for a Utility token in the UK

In a surprising clear and illuminating interview with an ex FCA member and regulation lawyer we clear away the fog of war created by the SEC around the different types of tokens.

This week’s fascinating interviewee is regulation lawyer Sam Robinson, who brings eighteen years’ experience starting with the FSA, and now specialising in FinTech, for the world’s 6th largest law firm (by lawyer headcount, and 6th largest in the UK, by revenue).

Just the person, then, to clarify the difference between Utility, Payment and Security Tokens, how that definition is made, whether each needs to be regulated, and why.

He explains how there are some genuine Utility Tokens in the UK - even though the SEC states there’s no such thing; but that the excitement about issuing Security Tokens is growing by the month, bringing as it does a way to stand out among ICOs - even if the rules are more burdensome.

So, Sam brings clarity; both to the definitions and need for regulation, especially as Security Tokens are basically the same as any other share offering; and to his own clients’ ICOs through his work their Whitepapers and defining their offerings.

And he explains why many secondary exchanges are wary of getting involved with listing Tokens, which might bring them inadvertently under regulatory requirements themselves, if they list Utility Tokens that turn out to be Securities.

His closing thoughts?

Participants need to keep up-to-date on the latest regulation in different jurisdictions, especially in the UK where Utility and Payment Tokens are not regulated, but Security Tokens will be.

And those looking to get involved need to do the same research as any investor in any type of business, reading business plans and looking at teams and advisors carefully. Many ICOs are at the proof-of-concept stage, and you must be your own judge.

And, finally, that the industry is interesting, changing and developing – fast!

Key take-aways

· Swiss Regulators have defined three levels of Tokens; Utility Tokens are unregulated, and can be exchanged for goods or services; Payment Tokens are used to pay for goods and services, and unregulated other than having AML checks at least requested of them; and Security Tokens, which are regulated, as they are in most jurisdictions globally.

· The instrument test to define a Security Token in the UK includes its similarity to regular investment, eg shares, futures or options. This is different from the USA features test – if people recognise the features they’d expect in a regular investment, it’s automatically a Security.

· There are undoubted similarities between the types of Token and the crowdfunding world, in terms of difference between reward-based and equity crowdfunding projects.

· Utility and Payment Tokens allow holders to access goods and services, or to trade them on secondary exchanges, but they won’t benefit if the company turns out to be a unicorn.

· Raising a regulated Security Token does bring extra hoops to jump through and regulation to be met around prospectuses and financial promotion, but does allow an ICO to stand out, as they can attach extra rights to their token – dividends or shares in future profits.

· CMS currently sees more people looking to raise Security Tokens for that reason, rather than previously looking to avoid regulation by doing everything possible to be considered a Utility Token.

Useful Links

https://cms.law/en/GBR/

https://cms.law/en/GBR/People/Samuel-Robinson

https://www.linkedin.com/company/cms-cameron-mckenna/

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