The FMA’s views on ICOs and cryptocurrencies

Five takeaways

The FMA’s views on ICOs and cryptocurrencies
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The benefits and potential that can come from a properly organized and regulated Initial Coin Offering (ICO) or Token Generation Event (TGE) are obvious in terms of both efficiencies and scale in capital raising for issuers, and opportunities for investors.

Certainty around regulation will be welcomed by most responsible players in the cryptocurrency space and after a period of "wild west" ICO and cryptocurrency explosion during 2016 and the first half of 2017, there has been a recent flurry of activity among the world’s financial regulators. All of them are keen to make it clear that regulations do apply and that there is nothing new under the regulatory sun.

Towards the end of last week, the New Zealand Financial Markets Authority issued its commentary on ICOs and cryptocurrencies.

For New Zealand businesses considering launching an ICO or providing financial services related to cryptocurrencies, these are our five key takeaways from the FMA’s statements:

  • New Zealand is open for cryptocurrency business! An express purpose of the Financial Markets Conduct Act 2013 (FMCA) is to promote innovation and flexibility in NZ’s financial markets and a theme across the FMA’s commentary is that it wants to facilitate responsible innovation and ensure that NZ’s regulatory regime is relevant and agile

  • Get advice and talk to the FMA early. Another common theme is the FMA’s desire for issuers, cryptocurrency service providers and their advisers to approach and engage with the FMA early. With cryptocurrencies (and any novel business structure) it is always better to be a willing complier when it comes to regulation

  • The regulatory treatment of a token will hinge on its specific characteristics and economic substance. This accords with our New Zealand analysis of ICOs. It also accords with recent statements from the FMA’s peers around the world. All tokens may be securities but not all tokens will be financial products (equity securities, debt securities, managed investment products or derivatives). However, if a token is a financial product and is offered to retail investors in New Zealand, then the FMA will quite rightly regulate it as such under the FMCA

  • Crypto-exchanges, wallet providers and crypto-brokers are on notice. The FMA has made it crystal clear that providing any of these cryptocurrency services will likely be a financial service and will require registration under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and compliance with New Zealand’s AML/CFT regime. Depending on the nature of the service and the nature of the tokens that the service is provided for, regulations relating to the operation of financial product markets (ie stock exchanges) and broking/custody obligations may also apply. These service providers are on the FMA’s regulatory radar
  • Investors should take care and be aware of the risks. Investing in an ICO is a high-risk and often early stage investment. Investors should carry out technical and legal due diligence and understand what they are investing in

An ICO can be a legitimate way to raise funds and, like any fundraising, it must comply with the applicable laws not only in New Zealand but in every jurisdiction where the issuer makes offers or sales of its tokens. Issuers, sponsors and service providers to cryptocurrencies in New Zealand should be aware of their legal obligations and the potential exemptions that may be available.

How can DLA Piper help?

DLA Piper is a leading global law firm with over 90 offices in more than 40 countries. We are the only global law firm in New Zealand, which positions us to assist with your ICO, TGE, cryptocurrency fund or exchange. We have acted on a number of ICOs and TGEs and we are actively assisting clients around the world with all legal aspects of the global cryptocurrency market, including: financial regulations, securities law, tax structuring, intellectual property, AML/CFT compliance and consumer protection laws.

If you would like to discuss your cryptocurrency project in the New Zealand or global context, please contact one of the authors.