Bitcoin, Crypto and Financial Promotions — the 'Duck' Principle

The recent proliferation of ‘crypto-opportunities’ - such as the promotion of Bitcoin and other crypto-currencies - the issue of crypto-bonds, and schemes to fund Bitcoin mining operations, all beg the question of the extent to which such creditably imaginative schemes are regulated by the FSMA financial promotion restrictions.


For instance, is inviting an investment of conventional fiat currency, in return for the issue of a token or coin, the value of which is directly related to the value of an underlying investment, regulated under section 21 of the Financial Services and Markets Act 2000?

If so, it will be an offence to promote the investment unless you are an FCA-regulated individual, or the investment has obtained FCA sign-off or it is otherwise exempt, such as an investment offer made to a self-certified sophisticated investor under Article 50A of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

It depends on the exact nature of the scheme. It may not be regulated by s 21 FSMA 2000 if it is not a controlled investment and the sophisticated investor exemption, itself in  Article 50A, applies to investments in shares or debt instruments in an unlisted company, rather than to the issue of a token of value that gives a right to some kind of investment return.

However, that is not the end of the story since such crypto-investment opportunities could well amount to a Collective Investment Scheme (“CIS”) within the meaning of section 235 of the FSMA 2000. A CIS is any arrangement with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in, or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

Establishing or operating a CIS is a regulated activity requiring authorisation from the Financial Conduct Authority and, subject to certain very limited exemptions, a CIS cannot be promoted to the general public by an authorised person unless the scheme is authorised or recognised under FSMA.

So, for instance, a scheme to fund a Bitcoin mining operation that pools fiat investment and apportions the value of any new Bitcoin found by the scheme amongst the investors whether in Bitcoin or fiat currency, is likely to fall squarely within the CIS rules, making general promotion of the scheme illegal.

Much will turn on the exact structure of the investment opportunity, but the ‘Duck’ principle is likely to apply.

This principle is enshrined in common sense rather than in any statute: “If it walks like a duck, and quacks like a duck, it is probably a duck”.

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