CSSF Warnings On ICOs, Tokens And Cryptocurrencies

CSSF Warnings on ICOs, Tokens and Cryptocurrencies

FinTech leads the way in the rapidly changing world of financial services, and the industry is keen to position Luxembourg as an innovation hub. Among the cognoscenti, buzzwords such as blockchain, initial coin offerings, tokens and cryptocurrencies are being used to encapsulate new ways of doing business and demonstrate market leadership, but such enthusiasm should not obfuscate the risks. Against this background, the two warnings that the Luxembourg regulator (Commission de Surveillance du Secteur Financier (CSSF)) has issued on (i) initial coin offerings (ICOs) and tokens and (ii) cryptocurrencies respectively are useful in these intense times of innovation and strong investors' appetite. In these warnings, the CSSF, while it acknowledges the advantages that the so-called underlying "blockchain technology" can bring when used in financial sector activities and innovative projects, also cautions the public on the risks of investing and reminds industry actors that certain existing regulatory parameters will apply.

Warning on ICOs and tokens

ICOs are used to raise funds to finance the launch of new virtual currencies or other projects. Digital coins or tokens are issued by the initiator in place of (more traditional) securities, which carry certain electronic rights.

The CSSF warning highlights familiar risks concerning fraud, money-laundering, volatility, complete loss, embezzlement, lack of regulation and false or unverified information attaching to such type of fundraising and also emphasises new risks such as technological failure. Investors are also encouraged to 'very carefully consider' the white paper that should accompany any ICO. "Investor beware" is key here, maybe more than anywhere else given the novelty of this technology.

The CSSF further makes clear two points:

UCITS and other regulated funds targeting retail clients and pension funds will not be permitted to invest directly or indirectly in such assets; and given that certain Luxembourg regulatory provisions may apply to the otherwise as yet unregulated ICOs, the CSSF will consider existing rules in full to protect the integrity of the market place, and not surprisingly will not hesitate to assess fundraisings made through Luxembourg-based ICOs for potential violations of (for instance) the 2005 prospectus law, the 1993 financial sector law or the anti-money-laundering regulations. All Luxembourg ICOs are therefore not...