International Review of Law, Computers & Technology

ISSN: 1360-0869 (Print) 1364-6885 (Online) Journal homepage: https://www.tandfonline.com/loi/cirl20

Fintech and the city: Sandbox 2.0 policy and

regulatory reform proposals

Jon Truby

To cite this article: Jon Truby (2018): Fintech and the city: Sandbox 2.0 policy and
regulatory reform proposals, International Review of Law, Computers & Technology, DOI:
10.1080/13600869.2018.1546542

To link to this article: https://doi.org/10.1080/13600869.2018.1546542

Published online: 28 Nov 2018.

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INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY
https://doi.org/10.1080/13600869.2018.1546542

Fintech and the city: Sandbox 2.0 policy and regulatory reform
proposals
Jon Truby
Centre for Law & Development, College of Law, Qatar University, Doha, Qatar

ABSTRACT ARTICLE HISTORY

Recognising the economic value of London hosting 17 of the Received 8 March 2018
world’s top 50 FinTech firms, HM Treasury’s strategy is determined Accepted 7 November 2018
‘to ensure Britain remains the best place in the world to set up
KEYWORDS
and grow a FinTech business.’ The Financial Conduct Authority’s Sandbox; financial
‘Sandbox’ regime has attracted FinTech start-ups from around the technology; initial coin
world to test their technology and business with supervision and offerings
regulatory protections, providing an opportunity to grow into
major businesses. JEL
The success of the intuitive Sandbox has however led to it being K240; K220; G32; G38; O32;
replicated in jurisdictions worldwide, eager to benefit from the O38
growth of FinTech. Competition for high-calibre start-ups means
the UK’s post-Brexit Sandbox may need to go further than its
existing FinTech Sector Strategy to continuing attracting and
developing firms helping the City of London to remain the global
centre of finance as perceived in the UK’s Industrial Strategy.
The article examines existing regulations and analyses how the
UK can develop an enhanced structure to both further attract and
accommodate legitimate high-calibre FinTech entrepreneurs,
whilst offering strong client and investor protections to ensure
financial stability. It proposes unprecedented legal and policy
reforms for the Sandbox structure, including a permissible
model to capitalise on funding from amateur private investors
worldwide.

1. International competition to lead in FinTech

1.1. Introduction
A well-managed approach to financial technology (FinTech)1 in an economy both
endorses the considerable financial opportunities offered while providing sufficient pro-
tection for investors, clients and financial stability in the economy. Multiple jurisdictions
provide a form of ‘beta testing’ for financial technology start-ups, where firms may test
their financial services technology and other financial products under supervision of the
financial services authorities. Such ‘Sandbox’ regimes provide controlled access to
finance and the economy within a structure of managed risk, and in return the start-ups
shield the start-ups from full exposure to regulatory requirements.

CONTACT Jon Truby [email protected] Centre for Law & Development, College of Law, Qatar University, PO
BOX 2713, Doha, Qatar
© 2018 Informa UK Limited, trading as Taylor & Francis Group
2 J. TRUBY

Jurisdictions offering regulatory Sandbox regimes are working together strategically

with a mutual interest to enable firms to access one another’s markets, such as through
licencing. The UK and Australia have developed a ‘FinTech Bridge agreement’
(Hammond 2018), while financial regulators from around the world are working on a
‘global Sandbox’ with international cooperation named the ‘Global Financial Innovation
Network’ (Financial Conduct Authority 2018a).
At the same time, the jurisdictions are competing to attract high quality start-ups for
their own economies. Britain’s Chancellor of the Exchequer recognised the 61,000
people employed in FinTech in the UK and the $7 billion contribution (EY 2016). made
by FinTech to Britain’s economy, and set out a strategy to ‘to ensure Britain remains the
best place in the world to set up and grow a FinTech business’ (Hammond 2018). As
the UK seeks to promote growth following Brexit, retain the City of London’s place as
the global centre of finance, and continue being Europe’s top destination for
foreign direct investment (see the Department of International Trade’s ‘Guidance for over-
seas businesses’ at https://www.gov.uk/government/collections/investment-in-the-uk-
guidance-for-overseas-businesses). Government strategy increasingly focuses on ensuring
the UK continues to attract high calibre FinTech firms. As well as having the potential to
evolve into major firms (London hosts 17 of the world’s top 50 FinTech firms), the technol-
ogy developed makes new and existing means of financial transactions much more
efficient, lower cost, safe and accessible, bringing new clients and business to City firms.
Financial institutions not endorsing the most efficient technology ‘are at risk of falling
behind’ and missing out on the benefits (Deloitte 2018, 3).

1.2. Proposals
This article critiques the UK’s FinTech Strategy and current regime and proposes further
regulatory reforms to ensure the strategy can be met. Recognising the value to the
economy and strategic imperative of promoting FinTech start-ups, the article proposes
ambitious and unprecedented regulatory reform proposals to enable the UK’s Sandbox
remains the most innovative and competitive whilst maintaining sufficient protections.
It does this by evaluating the regulatory qualities start-up entrepreneurs are seeking
balanced against suitable investor and client protections as well as ensuring financial stab-
ility. Such proposals to distinguish the UK’s Sandbox regime from competitor Sandboxes
require regulatory interaction with, and adoption of, innovative technological solutions.
The proposals seek for the Sandbox to offer pre-approved rights for risk-assessed start-
ups to gain access to the funding required to evolve. Furthermore, the proposals seek
to provide a permissible structure to capitalise on the opportunity for enabling secure
access to funding from amateur private investors around the globe, whose combined
investments have proven to be capable of providing sufficient funding for FinTech
start-ups.2
Recognising that many investments in such start-ups have been immature, risky or frau-
dulent, the proposals seek to legitimise certain forms of ICO (‘Initial Coin Offering’) finance
method (some of which are already permitted) by providing adequate protections.
Amongst its proposals are an authorised ‘off the shelf’ method of Initial Coin Offering
funding, real-time ‘view only’ access to Sandbox firm’s banking transactions to provide
maximum transparency and confidence for investors and clients, and a centralised body
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 3

undertaking AML/CFT and KYC checks for all investors to facilitate access to finance global
investors. As such, the article invokes various fields of policy, financial law, AML/CTF and
applicable English and EU law.
Further it proposes radical initiatives including both an exchangeable Sandbox digital
currency and official coin market exchange for Sandbox digital currencies. It also proposes
a form of e-registration enabling innovators worldwide to start-up and gain access to
finance with appropriate protections for investors. Finally, it compares tax incentives
with competitor jurisdictions, and proposes further reforms outside of the Sandbox.

1.3. Structure and research design

The article commences by highlighting the theoretical basis of the article’s thesis. It both
details the strong position the UK has gained in the field of financial technology while
exploring the economic rationale for further reforms. This section examines the policy
background of the sector and strategy developed by the UK to increase its dominance
as a FinTech hub, as well as EU central policy to develop a digital economy. It identifies
the assessment of structural risk levels towards digital currencies, demonstrating that
they are not considered to be a high risk for criminal misuse. Further it highlights (at Sec-
toral policy) the FCA’s flexible and customised regulatory approach that works to attract
business whilst ensuring sufficient safeguards. Following this it discusses (at Regulatory
inertia and barriers) the imperative to overcome regulatory inertia in order to facilitate
growth of high-potential FinTech start-ups and reap the rewards of their technology.
This follows with an explanation of the UK’s regulatory Sandbox regime (at Sandbox
1.0) and potential reforms planned.
Evaluating the demands of FinTech entrepreneurs balanced against the need for
client protection as well as financial stability, the focus of the article is on legitimising
access to the innovative types of finance that help FinTech start-ups develop rapidly.
Specifically, there is an examination of the legal risks associated with ICOs and the
need to ensure legitimacy of such finance. This section (3 Regulatory problems with
ICOs) studies both policy and existing law relevant to ICOs, as well as case law and
jurisdictional limits. It provides comparative analysis with alternative jurisdictions.
Section 3.2.1 details existing applicable law to ICOs invoking both UK and EU
legislation.
The final section then proposes and evaluates a range of reforms to the Sandbox envi-
sioned to provide both the necessary protections whilst providing the greatest attractions
to start-ups and investors. Commentary is provided on the relevant rules with reference to
the article’s thesis. It is not proposed to amend the rules at this stage, only to overview
applicable requirements and proposals. This helps determine how the Sandbox can
best support start-ups by offering both legal support and waivers from certain require-
ments, whilst maintaining a high degree of financial protections and supervisory
control. It also demonstrates the difficulties entrepreneurs face in securing finance from
established investors and proposes facilitative solutions.
Its proposals seek to promote access to both national and international finance, as well
as to produce affiliated business opportunities. This section is intended to deliver initial
innovative options requiring detailed further research and analysis: the exact legalities
of the Sandbox 2.0 policy proposals require additional study.
4 J. TRUBY

1.4. Limitations
A key limitation of the author as a lawyer and social scientist means that whilst the law and
policy can be explored, lacking the expertise of an economist means the precise economic
implications of different models to be subject to further examination. The theoretical
premise of the article is found in the ‘The Competitive Advantage of Nations,’ in which
the economist Porter (1990, 73) determined that a ‘nation’s competitiveness depends
upon the capacity of its industry to upgrade and innovate.’ It is acknowledged however
that reliance on this theoretical basis has been criticised, with research suggesting that
finance is only useful for an economy up to a point, after which it can be detrimental to
an economy (Baker, Epstein, and Montecino 2018; Christensen, Shaxson, and Wigan
2016; Cournède and Denk 2015).
A further limitation is that it accepts official information on the advantages of
business incubators (see Mian, Lamine, and Fayolle 2016) and there is no space
to evaluate the business case against the Sandbox (see Lukeš, Longo, and Zouhar
2018).

2. Policy background
2018 saw three FinTech start-ups grow into unicorns in London, including disruptive banks
Monzo and Revolut as well as cybersecurity firm Darktrace, all reaching the billion-pound
valuation mark (Heathman 2018). Indeed the UK has been vastly successful compared to
European neighbours in the number of FinTech unicorns, but faces stiff global compe-
tition. Encouragement of the fast-growing disruptive technology industry has vast oppor-
tunities for a country to develop a high-tech digital market sector that can drive up foreign
direct investment, enhance cross-border trade, increase the competitiveness of and access
to the financial services sector (Trautman 2016), and enable small investors access to
investments in start-ups that would historically have only be available to professional
investment companies (Tapscott and Tapscott 2016). Seeking to capitalise on the
rapidly growing financial technology market, HM Treasury has sought for the UK to con-
tinue in this trajectory.

2.1. Competitive advantages and disadvantages

In terms of competitive advantage, the UK has a history of gaining the advantage in a
sector and subsequently losing it. It was an early pioneer in encouraging solar energy
with subsidies and fiscal advantages that should have led to it being a net exporter of
solar expertise and manufacturing, but future policy restricted its growth and led to it
being a client state of solar panel imports – a multi-billion-dollar industry. It has a
remarkable history of producing revolutionary scientific innovations only for the intel-
lectual property rights and production to take place overseas (Committee on Develop-
ment and Intellectual Property 2013). It suffers from both inventor brain drain and sees
its most valuable tech companies often bought up and relocated overseas; Apple
acquired music-recognition app Shazam, flight comparison site Skyscanner was
bought by a Chinese company and profitable chip designer ARM was acquired by
Japan’s SoftBank (Hern 2017).
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 5

2.2. FinTech successes and challenges

The UK has however been visionary in encouraging start-ups in a manner that has enabled
it to remain an economic power. Its simplified company law and taxation law makes it
extremely simple for any entrepreneur worldwide to register and trade within minutes.
Supported by an internationally well-regarded independent judiciary providing fair, impar-
tial and effective dispute resolution, these factors make it hugely successful against more
restrictive regimes. This has led to it being one of the top three OECD nations at starting
businesses (HM Government 2017) and top seven globally in the World Bank’s Ease of
Doing Business Index (2017). Due to its success, London has a privileged position of
being a world leading destination to access finance and grow a business (Coalition for a
Digital Economy 2017). It is rated as the financial capital of the world, over New York (2)
and Hong Kong (3) (Finch 2017).
With financial technology, the FCA (Financial Conduct Authority) was an early-days
innovator in developing a regulatory Sandbox3 regime4 to the envy of the world, enabling
its success as the European capital for FinTech start-up investment.5 It has been such a
success that it has been replicated numerous times, with other jurisdictions offering
very similar incentives and regulatory flexibility to start-ups. The concept that vigorous
economic competition promotes sound economic growth is advanced by economists
such as Lindsey of the Niskanen Centre (Lindsey and Teles 2017).

2.2.1. UK strategy and risk

With financial innovation changing the global financial market, HM Treasury determine
that the UK must take measures for London to continue to be the global centre of
finance with the supplementary advantages of associated businesses, investment,
growth and job creation connected with the FinTech sector. The risk of providing
similar advantages to other jurisdictions is it may lose opportunities to another jurisdiction.
The perceived risk if that missing out on the growth of the financial technology sector
could lead to a diminished role of the City of London’s financial services industry, which
the UK cannot afford given its high dependency on the City,6 with financial and pro-
fessional services are worth £190 billion to the British economy, employing 2.2 million
workers (HM Government 2018).
Indeed the UK’s industrial strategy identifies the data economy7 as one of its four
‘Grand Challenges’ ‘to put the United Kingdom at the forefront of the industries of the
future’ (HM Government 2017). The strategy seeks to ‘support businesses with regulation
that stimulates and facilitates innovation’ (39). Its FinTech Strategy recognises existing
policy has been to give the FCA ‘a strong competition objective, resulting in the FCA estab-
lishing the Innovation Hub and Regulatory Sandbox to support FinTech firms, both of
which are held up as global examples of best practice’ (HM Treasury 2018, 5). This is
true, although once again the UK is a victim of its own success with its regulatory
FinTech sandbox regime being replicated in 13 other countries worldwide,8 as identified
by Zetzsche et al. (2017, 27–29), creating a range of competitor Sandboxes all offering
similar features. The Institute for Public Policy Research recognise that London currently
attracts the most investment for FinTech start-ups in Europe, but cautions that
‘London’s strengths in tech start-up must be maintained to safeguard the UK’s economic
competitiveness’ and that ‘London can’t take continued dominance for granted’
6 J. TRUBY

(Longlands, Round, and Kibasi 2018, 7). It warns that Germany recently overtook the UK in
numbers of professional developers, and pointed to ‘ … significant growth in the value of
the tech start-up ecosystem in Paris, Berlin, Amsterdam, and Madrid’ (13).

2.2.2. FCA and the law commission

Evidently the will of policy-makers exists to facilitate regulatory innovation to drive the
economy towards this path. The FCA has frequently demonstrated its flexibility in reform-
ing rules to attract business. For example it amended restrictions on sovereign owned
companies listing on the London Stock Exchange, in order to attract Saudi Aramco to
list given its potential market capitalisation of an estimated $2 trillion, which if accurate
would make it the world’s most valuable company and the world’s most valuable IPO
(initial public offering) (Financial Times 2018f). The proposed rule changes nonetheless
still provided sufficient protections for shareholders against market abuse through both
adequate disclosure rules covering transactions, and by ensuring shareholders approve
independent directors. With FinTech, the FCA has also been proactive in its flexible
approach through the Sandbox regime to encourage FinTech start-ups, recognising
their potential to mature into larger companies adding value to the British economy.
The Law Commission also intends to review the legal framework governing smart con-
tracts, in order to ensure the continued competitiveness of British courts as an attractive
choice for dispute resolution (Law Commission 2018).
However the FCA needs persistent self-reflection to ensure the continuity of its enviable
position. London is ranked number 3 in the world for its tech startup ecosystem, behind
Silicon Valley and New York but closely followed by Beijing (Tech Nation 2018). The com-
petition is fierce and the IPPR rightly ask ‘Is the London startup ecosystem producing
enough startups?’ (Longlands, Round, and Kibasi 2018, 26). So how can the FCA further
adapt to cement London as the capital of FinTech, and how can it balance the attractions
to start-ups with the attractions and protections for investors, clients and ensure financial
stability – a feat the Monetary Authority of Singapore is also attempting (Fan 2018).

2.2.3. EU policy
EU policy also continues to apply to the UK in advance of ‘Brexit’ (Britain’s departure from
the European Union). The EU’s Entrepreneurship 2020 Action Plan envisions the advan-
tages of the digital economy in Europe and seeks to establish ‘ … alternative forms of
financing for start-ups and SMEs in general’ (European Commission 2013, 3.2). It advocates
means of easing access to finance in order to encourage entrepreneurialism, while its
Digital Single Market Strategy seeks to eliminate trade barriers through information tech-
nology advances, claiming it could add €415 billion to Europe’s gross domestic product
(European Commission 2015).
Both strategies are silent on financial technology, but a European Securities and
Markets Authority paper (Armstrong 2016) clarifies that regulations in the EU are not
hostile to financial innovation, while the European Banking Authority launched in
August 2017 a discussion paper on the opportunities, risks and means of regulating the
sector. Given the rapid advancements in the financial technology market, the belated
timing of the EU strategy papers and consultations may indicate why the UK has attracted
over half of the start-ups with its early vision of, and reaction to, this market. Nevertheless
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 7

the encouragement of alternative financing and technological innovation aligns with the
article’s proposals.

2.3. Sectoral policy: risk assessment

UK policy of promoting this disruptive innovatory industry is tempered by a cautionary
approach in its commitment to protect the integrity of the financial services sector. The
FCA recognise the importance of encouraging such enterprise, acknowledging that in
Europe, 50% of financial technology start-ups begin in the UK, bringing in annual revenues
worth £20bn in 2015 (2015b, 5).
HM Treasury conducted a public consultation on digital currencies in 2014–2015,
leading to a report which highlighted the benefits of encouraging the technology
against the risks highlighted by the National Crime Agency, and formulated a strategy
establishing how to ensure safe growth in the sector (HM Treasury 2015a). Risks high-
lighted by the National Crime Agency largely related to online fraud, and a subsequent
money laundering risk assessment by HM Treasury found that for terror finance, the struc-
tural risk level associated with digital currency misuse was low (HM Treasury 2015b; see
also Truby 2016a, 2016b). The consultation report also found only a low risk to UK monet-
ary and financial stability (HM Treasury 2015a). As such it determined that the best inter-
ventionist approach would be to develop a ‘framework for best practice standards for
consumer protection … . in order to address the risks identified but without imposing a
disproportionate regulatory burden on the industry’ (19). This framework would entail a
voluntary code for the industry.
The FCA later opened a discussion paper in 2017, to consult to determine an appropri-
ate balance between regulating distributed ledger technologies in a means that does not
hinder its expansion within the UK (FCA 2017a). It recognised the functional advantages of
technologies to benefit consumers and the financial services sector, and sought to
promote such innovation. However the FCA’s duty to protect consumers and the stability
of the financial services industry required it to caution against risks.

2.4. UK Sandbox policy

The United Kingdom was intuitive and forward-thinking in taking the initiative earlier than
other nations9 to promote itself as a global hub for financial technology (FinTech) start-
ups10 through its regulatory ‘Sandbox’ regime, providing an incubator for financial tech-
nology firms to test their products under supervision (Michaels and Homer 2018) and
gain access to finance without the costs and restrictions of the usual regulatory require-
ments. Within a controlled platform for digital financial services to test innovative
financial technology (Trautman 2016), such firms developing have an opportunity to
both grow into large profitable corporations and provide direct and ancillary benefits to
other firms (Mackenzie 2015). The Chairman of the U.S. Commodity Futures Trading Com-
mission, Christopher Giancarlo, lamented that its limited powers meant it was four years
behind the Bank of England in Blockchain beta testing, and that regulators needed to
be able to understand the technology they regulate.11
In doing so the UK became a global leader for financial technology start-ups, but sub-
sequently jurisdictions worldwide have produced their own similar sandbox regimes12
8 J. TRUBY

offering comparable advantages for tech start-ups. Amongst others, Switzerland and Sin-
gapore (see FCA 2017a) are rapidly undertaking reforms and regulatory innovations to
establish themselves as reputable hubs for financial technology and other nations are
offering similar advantages (Fan 2018). The competition for this market is now intense
with forward-looking nations acknowledging the vast potential for economic and techno-
logical advantages derived from financial technology firms.13

2.5. Regulatory inertia and barriers

The law has a history of struggling to keep up with technological advances and conse-
quent consumer demand. Regulatory inertia delays inevitable market advancements
and causes users to turn to illegal sources for convenience. Huge demand for download-
able and streaming music was prevented to met by legal supply, largely because of the
inability of tech firms providing the services required to legitimise their activities due to
inflexible intellectual property rules and agreements. The situation caused a spike in
illegal downloads and piracy until a business model could be legitimised, and cost years
of potential technological progress (Palmås, Schwarz, and Larsson 2014). ICOs have
gone ahead successfully despite operating in a perceived legal grey area, leading to
difficulties for firms and investors alike.
Financial technology has the potential to vastly improve the way businesses operate,
providing cost, time and security efficiencies that facilitate economic benefits. The tech-
nology is already being adopted by various industries. British bank HSBC undertook the
first trade-finance deal utilising Blockchain technology (Financial Times 2018b). It was
able to issue a letter of credit within 24 h, saving days and the need for laborious
human reconciliation of bulks of paper documentation, providing significant advantages
to the parties involved in enabling the unlocking of the required finance efficiently. Simi-
larly MoneyGram was able to reduce money transfer times from hours to seconds using
Ripple’s Blockchain technology (MoneyGram 2018). Such technology offers endless possi-
bilities for industry such as in insurance claims, banking transactions, real estate regis-
trations, and other types of contract negotiations or record-keeping for the public and
private sector (Financial Times 2018d). Those not adopting such technology will be oper-
ating a more costly and antiquated business model.
Rather than only regulating financial technology to keep it in line with other types of
financial activities, legitimising sound and legally compatible business and financing struc-
tures and activities involved to facilitate their growth, may offer substantial opportunities
for economic development. This can be done whilst retaining both supervisory control,
and investor and client protections. For example, the ICO model used by many start-
ups to raise finance is currently problematic, but such problems are not unsolvable. Regu-
latory uncertainty can ‘disproportionately affect first-movers and discourage innovators’
according to the FCA. Ensuring the legality of ICOs has been a key concern of FinTech
start-ups and their attorneys over the last few years as highlighted by the US Chamber
of Commerce (2018). By creating a legitimate means of ICOs for investment in start-ups,
entrepreneurs would invariably opt for the legitimate and risk-controlled model over
the illegitimate. For the UK to develop a method to provide start-ups with access to the
finance and regulatory certainty needed to develop their technology, it can attract
further start-ups.14 The news of one jurisdiction offering a legitimate ICO model would
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 9

also attract significant publicity. As well as increasing the number of start-ups in a jurisdic-
tion interested in ICOs, the UK would also show the world it is a progressive and attractive
destination for financial technology start-ups generally, not just those interested in doing
ICOs. Widespread ignorance and misunderstanding of the subject has caused minor leg-
islative acts or announcements in some countries to subsequently crash the value of
digital currencies and drive away investors and innovators (Dastgir et al. 2018). This
demonstrates the sensitive of the immature market but also its interest in innovation-
friendly regimes.

2.6. Sandbox 1.0, FCA legislative proposals and Brexit implications

The FCA has developed a regulatory ‘sandbox,’ a ‘safe space’ for technology innovators
and software developers to ‘test innovative products, services, business models and deliv-
ery mechanisms without immediately incurring all the normal regulatory consequences of
engaging in the activity in question’ (FCA 2015b, 1). Bromberg et al. explain the FCA’s
approach:
By engaging constructively with the FinTech industry through regulatory innovation hubs and
sandboxes, regulators and governments can become more adaptive, support the emergence
of competition and development of new technologies, and avoid regulatory inertia by learn-
ing about emerging financial technologies and adapting their future regulatory processes.
(Bromberg 2017, 15)

With appropriate safeguards, such regulatory support can draw considerable benefits as
highlighted in the FCA’s report. The report proposes for example the formation of non-
profit companies which can be authorised by the FCA. The company would be rep-
resented by businesses during the sandbox trial, to provide legitimacy and advise the
company. The FCA can also provide waivers and no enforcement action letters (where per-
mitted by law) to assure firms that they are legally protected (see FCA website: https://
www.fca.org.uk/firms/regulatory-sandbox). This is a highly innovative public-private sol-
ution to the problems faced by technology entrepreneurs and those wishing to legiti-
mately exploit ICOs. HM Treasury (2017b) reported its success in November 2017.
Indeed, the UK is considered to be the third most innovative nation in the Global Inno-
vation Index (Cornell University, INSEAD, and World Intellectual Property Organization
2016).
The report also proposes legislative amendments to continue being a hub for financial
technology start-ups. It suggests introducing ‘sandboxing’ testing activities as regulated
activities,15 or deregulating sandbox activities by preventing them from being classified
as being conducted by way of business.16 The other amendments it considered were
largely restricted by EU legislation particularly MiFID, but this may not apply should
Brexit go ahead.17
The FSMA permits the FCA to waive the applicability of certain rules in cases where it
would be ‘burdensome or would not achieve the purpose for which the rules were made’
and would not cause ‘ … undue risk to persons whose interests the rules are intended to
protect’ (Section 148, as amended). The FCA report suggests waiving the rules for sandbox
firms where this would not contravene EU legislation. Following Brexit, the FCA could
potentially acquire further waiver powers. The option to exempt sandbox firms from the
10 J. TRUBY

need for authorisation was also dismissed since it would contravene EU law.18 Neverthe-
less, if Brexit happens the likelihood is that the UK will continue to follow such rules to
ensure equivalency in order to continue trading in financial services with EU member
states. As such it is unlikely such rules could be lifted post-Brexit, though the possibility
remains.
Going further, the FCA (2015b) has recommended a distinction or partial exclusion from
the burdens of the framework designed for banks and investment houses. Expensive and
complex procedures necessary for the mature banking sector may prove too much of a
barrier to entry of start-ups. However basic protections for investors, such as financial
transparency, disclosure and the knowledge that authorised financial professionals are
managing the process and their money, are not considered disposable requirements.
The UK’s Sandbox regime is evidently advantageous and successful in attracting start-
ups, but only scores of the thousands in existence have utilised it. The eligibility require-
ments restricting access to the scheme are only one barrier to entry. Further enhancement
to its Sandbox could increase the number of high calibre start-ups.

3. Legitimising access to innovative finance

Growth in the UK’s digital tech economy is 50% faster than the wider economy (Longlands,
Round, and Kibasi 2018). Such development is part of the ‘fourth industrial revolution’
(Schwab 2016). As such investors are willing to risk capital in this high value, high
growth enterprise but need protections, as do clients. The regulator is willing to offer flexi-
bility to support parties involved but needs to ensure the soundness of the financial
system and to be able to monitor the source of the funding. Enabling access to finance
and ensuring regulatory compliance are both consequently essential to the development
of start-ups.
The UK can offer further innovations to make itself a safe and attractive start-up desti-
nation for FinTech entrepreneurs. This section proposes various reforms to ensure the
most attractive and supportive FinTech start-up ecosystem is available in the Sandbox.
The below proposals are consequently bold and innovative, providing options to the
FCA for further study to maximise the UK’s competitive edge.

3.1. Removing barriers to financial access, with controls

Barriers in access to finance have restricted the ability of technology start-ups to develop
worldwide (Fairchild 2011). Traditionally technology entrepreneurs have been dependent
for funding on private investment from venture capitalists, angel financers (Jolly, Alahuhta,
and Jeannet 1992; Kim and Wagman 2016), private equity, banks, and existing technology
firms in Silicon Valley and elsewhere, as well as IPOs. Entrepreneurs have frequently found
it extremely difficult to even secure a meeting to pitch to such investors (Tian 2011). This
has limited the potential development of a range of technological innovations that could
benefit financial organisations and the wider economy.
Developers of Blockchain technology and financial technology have developed their
own innovative financial models and utilised technological advancements to attract
finance from alternative sources such as individual non-professional private investors,
making it easy for such investors to invest capital in start-ups through online platforms.
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 11

Start-ups have been able to be funded through platforms such as peer-to-peer lending
(Stern, Makinen, and Qian 2017), crowdfunding and recently through ICOs (Walker
2018). They have also been able to protect themselves from diluted equity stakes
(Walker 2018). Such financing has brought significant advantages in providing funding
for thousands of new start-ups, but commonly these have begun without adequate due
diligence or monitoring and have severe risks to investors such as of fraud (see Fraudulent
ICOs and immature model).
While choosing these models which have saved compliance costs and enabled access
to significant streams of finance from global private investors, financial technology start-
ups have put themselves at undesired legal risk. Many legitimate businesses turn to the
ICO structure because of the potential for capital access leading to growth of their business
and simply wish to avoid violating securities laws (Adhami, Giudici, and Martinazzi 2018).
They certainly do not wish to be at legal risk and in its infancy the law was frequently
regarded as a grey area, though regulators have since caught up (Truby 2018). However
complying with the complexity and burdens of financial regulations more often designed
for the banking industry has proven a challenge. HM Treasury’ FinTech Census reported
that a quarter of firms cited regulatory compliance as a main obstacle, while 34% reported
raising equity as another major challenge (HM Treasury 2018, 11). The National Audit
Office (2017) reported that regulatory costs disproportionately fall upon new and small
firms. These obstacles are the same globally.19 By providing a solution of simplified
access to finance within a controllable situation, the regulator can attract considerably
more eligible start-ups to test their product and business model. A simplified means of
securing finance also means the start-up can work on its core business without devoting
significant resources to proving its compliance.

3.2. ICOs
The focus here is to ensure investors follow a legal path to raise capital using ICOs.
The nature of ICOs is that they do not offer a stake in the company as would happen
with an IPO. ICOs normally offer investors a new form of digital currency or digital coin
at a discounted rate, based on its future valuation. The future value derives from the
utility of the new coin. The firm requires that those utilising its services pay for such ser-
vices using its digital currency. When consumers of its service buy the coin to use the ser-
vices, the value of the coin rises. Initial purchasers can then sell the digital currency they
bought in the ICO at a higher price once it becomes more valuable. Distributed ledger
technologies’ or ‘Blockchain technology’ is utilised to form and disseminate the digital cur-
rencies. Start-ups have thus been able to raise capital by selling a currently worthless
digital currency based on its future utility. By doing so they have been able to avoid
losing any equity in their firm or needing to go through the complexities and cost of
alternative forms of funding such as IPOs.
ICOs have been discredited by governments, but managed properly they can be hugely
beneficial for both the investor and the start-up. A software development tech start-up
recently raised over $4 billion using an ICO, showing the willingness of investors to
fund promising business models, but US citizens were excluded based on financial regu-
lations (Financial Times 2018a). Legal uncertainties and the often informal means of con-
ducting ICOs to date have meant that investors have taken on increased risk to secure
12 J. TRUBY

finance (Wöckener et al. 2018). Frequently they have not been provided with sufficient
information on the investments, given the tendency of start-ups to utilise White Papers
over regulated prospectuses. At worst the investment offered has been fraudulent
(see 3.2.1’). A further problem is the legal nature of a digital coin or currency; different
jurisdictions have used different labels with varying degrees of consequences (see
Truby 2018).

3.2.1. Regulatory problems with ICOs

A key risk for many investors is that, unlike fiat money, digital currencies are not guaran-
teed by any central bank or organisation, and requires trust in the technology it depends
upon from users and investors who may not understand the technology (Bloomberg
2017). Once such technology is understood, users conversely would draw confidence in
the design of the technology such as Blockchain that removes the need to depend
upon trust in third party verification processes, and instead provides trustless open-
access verification processes that cannot be manipulated.
Defining ICOs as a ‘digital way of raising funds from the public using a virtual currency,’
the FCA (2017b) cautions investors that ICOs are ‘very high-risk, speculative investments’
(FCA 2017b). It explains that ICOs have operated in regulated areas but also unregulated
areas, sometimes without professionally regulated advice and investor protection guaran-
tees which can lead to fraud or losses.
For example the UK’s Financial Services Compensation Scheme enables investors to
seek compensation (within limits) for financial loss when a firm becomes insolvent or
otherwise defaults on amounts due (see https://www.fscs.org.uk and https://www.fscs.
org.uk/what-we-cover/compensation-limits/). However this applies only to firms author-
ised by the FCA or the Prudential Regulation Authority.20 Investors from the UK will be
unable to seek access to such compensation if the firm is either based outside the UK
or is otherwise unregulated, leading to potential losses. Similarly, the Financial Ombuds-
man Service is open to UK investors as an independent adjudicator to resolve financial ser-
vices disputes, authorised by the British Parliament (see http://www.financial-ombudsman.
org.uk/about/index.html). This service would be unavailable for complaints concerning
firms outside the UK’s jurisdiction, leaving no recourse for wronged investors.

3.2.1.1. Fraudulent ICOs and immature model. The FCA’s identified risk of potentially
fraudulent ICOs is therefore rational and similar warnings were made by the US Securities
and Exchange Commission (SEC) (2017a), as well as the European Securities and Markets
Authority (2017), German (Federal Financial Supervisory Authority 2017), Singaporean
(Monetary Authority of Singapore 2017), Canadian (Financial Consumer Agency of
Canada 2018) and Japanese (Financial Services Agency 2017) authorities. The caveat
emptor approach of these countries compares with the more severe approach of the
People’s Bank of China’s (the Central Bank of China) (see http://www.boc.cn/en/) which
prohibited ICOs as illegal fundraising, causing a significant crash in the value of Bitcoin
– even though it was unrelated (Reuters 2017). This does not completely prevent investors
from investing in ICOs or using digital currencies, but rather it prevents banks and regu-
lated financial services firms from engaging with ICOs, as well as making it more
difficult to invest in ICOs using renminbi.
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 13

The suspicion that ICOs attempt to represent themselves as a legitimate means of

raising capital are most clearly visible in its name. The abbreviation ‘ICO’s itself deliberately
seeks to create legitimacy in its similarity to ‘IPO’: a new stock is an accepted and highly
regulated term used by investors and stock markets where a limited company is
‘floated’ and made available to the public for the first time. The name may disguise the
risk that the offering may be fraudulent or unregulated, and many investors ICOs may
not realise they are not investing in a company, only a currently worthless digital currency
based on its future utility leading to its increased value. Even if not fraudulent, the imma-
ture and ‘experimental’ nature of the business being offered to the public also, as the FCA
identifies, means ‘[t]here is a good chance of losing your whole stake.’ In order to prose-
cute fraudulent activity related to ICOs, which would improve the reputation of the
financial technology industry and increase confidence in it, regulators are increasingly
able to apply existing regulations to enforce compliance. This in turn has helped to end
grey areas and provide a higher degree of certainty. The Swiss Financial Market Supervi-
sory Authority, recently pursued enforcement proceedings against a possible violator of
banking law conducting an ICO, in order to protect its reputation as a place for serious
legitimate FinTech businesses to operate. Whilst indicating its commitment to protect
investors and the soundness of the Swiss financial system, it also highlighted that
‘serious innovators can launch their ICO projects lawfully … ’ (Swiss Financial Market
Supervisory Authority 2018).

3.2.1.2. Caselaw. Caselaw on ICOs in the UK is limited given its contemporary nature; it has
developed more rapidly in the US, demonstrated with its prudent approach, which has
both clarified and confused a legal grey area. In September 2017 the SEC filed charges
in the federal district court in Brooklyn, New York, against two companies (REcoin
Group Foundation and DRC World) and a businessman named Maksim Zaslavskiy of
breaching federal securities laws (US SEC 2017c). The SEC have considerable reach pur-
suant to SEC v. C.M. Joiner Leasing Corp.21 to regard novel types of offerings as securities.
The ‘Howey test’ in SEC v. Howey means the SEC look at the substance of an investment
over its form,22 which, pursuant to further case law interpretation, provides a broad remit
for the SEC over what constitutes a security (Malloy 1983).
This enabled the SEC to draft a Report in July 2017 pertaining that the Securities
Exchange Act of 1934 would be applicable to capital or investments raised through distrib-
uted ledger or blockchain technology, despite automated procedures such as smart con-
tracts.23 By regarding digital currency investments as securities, the SEC instantaneously
gave itself the legal purview to investigate under s.21 of the Securities Exchange and to
consequently take on this vast market that had previously considered itself outside the
realms of governmental jurisdiction. This does not give it complete jurisdiction over
every type of ICO, but the ability to investigate whether it falls under its jurisdiction
(Bitcoin Magazine 2017).
The SEC alleged that Zaslavskiy used his companies to incite investments in fake ICOs
selling unregistered securities including non-existent digital coins. The SEC’s Report
(2017b) means that the type of offering made by the companies would be considered
to be ‘securities’ under the Securities Exchange Act of 1934 (June 6, 1934, ch. 404, title I,
Sec. 1, 48 Stat. 881, as amended) as they were offered in the US. Therefore the securities
would be required to be registered with the SEC unless the exemption qualifications were
14 J. TRUBY

met. Zaslavskiy also purportedly made misrepresentations about the securities, that they
were backed by investments in real estate and diamonds which again were non-existent,
would be invested by professionals including accountants, lawyers and brokers who in
reality were apparently never consulted, and there was a significant overstatement of
the amount of capital that had been raised.
In this case the assets of Zaslavskiy and his companies were frozen immediately while
the investigation continues, with the SEC seeking a number of penalties including repay-
ment of the amounts with interest and penalties plus the prevention of Zaslavskiy from
ever serving as an officer or director of a company or ever being party to a digital securities
offering. Enforcement against this type of fraudulent behaviour may not be possible if the
perpetrator was located outside of the jurisdiction of a regulator; had the alleged violators
been located outside of the US, the SEC may not have been able to prosecute.
A similar fate may fall to the accused French national in a Japanese trial. Although unre-
lated to ICOs specifically, Japan, an advanced nation in blockchain technology, was one of
the first countries to take legal action in a cryptocurrency case, prosecuting the Chief
Executive Officer of Mt. Gox, for embezzlement of digital currencies worth $450 million
in an allegedly fraudulent bankruptcy (Fortune 2017; Yagami 2017). At the time of
writing all cases referred to are ongoing and the courts have not yet reached a verdict
(see Ishikawa 2017).

3.2.1.3. Extraterritoriality. The limits of enforceable regulation referred to justifies the

FCA’s warnings that ICOs are commonly unregulated or outside its jurisdiction when
they are located outside of the UK. The debate on extraterritorial application of existing
laws is not novel for many fields of law (see, e.g. Truby 2012). Pflaum and Hately (2013–
14) show that US law for example permits extraterritorial application in multiple areas
of crime, that enables prosecution for criminal activities related to cryptocurrencies and
possibly ICOs; amongst other areas these include ‘wire fraud, money laundering, aiding
and abetting, and conspiracy’ (1201–1205).
In terms of securities specifically which would apply to ICOs, Russell highlights the key
debates and case law on extraterritorial application of US securities law, arguing for a pre-
sumption for such application whenever conduct abroad causes ‘direct, substantial, and
reasonably foreseeable’ effects in the US (Weintraub 1992, 1825). The same ‘direct, sub-
stantial and foreseeable effect’ standard exists in the EU’s European Market Infrastructure
Regulations which applies to trades conducted by non-European parties when it is ‘necess-
ary and appropriate.’24 The guidelines give significant scope for application in numerous
trades (see further Chen 2017), especially given that Russell highlights the limits of the dis-
tinction between which acts cause harm in the US and overseas, citing the infamous
Robert Maxwell case of Leasco Data Processing Equipment Corp. v. Maxwell.25 US Depart-
ment of Justice Assistant Director Reuveni (2010) further shows how the US courts have
inconsistently applied US securities laws, causing a lack of clarity as to when there can
be extraterritoriality. He argues instead it is a question of standing that can be resolved.
Both Reuveni and Beyea show that the issue was further complicated in the case of Mor-
rison v. National Australia Bank and the Future of Extraterritorial Application of the U.S. Secu-
rities Laws (Beyea 2011). Given the cross border nature of digital currencies, Salami (2017)
instead promotes an international approach where regulators would work together across
borders to coordinate the policing of such transactions, which would seem a prudent
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 15

cooperative solution to the problem. This would take into account the reality of ICOs being
funded from investors in multiple states.

3.2.2. Regulating ICOs

A legitimate ‘ICO’ model enabling amateur private investors to invest in start-ups would
facilitate access to the substantial previously untapped private equity available from
such investors, and allow more start-ups to receive the necessary funding to grow. The
prospect of funding could attract investment from all corners of the planet. Currently
UK law does allow ICOs subject to various requirements as explained below. Established
larger firms seeking additional funding may be more capable of complying with the
requirements which are largely designed for banks. Smaller firms and start-ups in the
sandbox would primarily benefit but the notions proposed could provide the basis for
wider accommodation or legislative reform.

3.2.2.1. Authorisation. The UK’s powers to regulate financial activities broadly apply to
ICOs and crowdfunding, given that they occur within the UK and can also apply to EU
firms operating within the UK. The UK’s Financial Services and Markets Act 2000 (as
amended) (FSMA) regulates financial investments. An activity is regarded as a regulated
activity where it is ‘an activity of a specified kind which is carried on by way of business
and relates to an investment of a specified kind … .’ (Section 22(1)). Such investments
are defined in in Article 3 of the Business Order, including activities such as dealing in
investments as a principal or agent and advising on investments.26
Firms carrying out such activities must be approved by the FCA, and persons conduct-
ing ‘controlled functions’ for an authorised firm must also be approved. Once approved
they have legal obligations such as to behave appropriately, report problems and
comply with the FCA’s Statements of Principle and Code of Practice. Such ‘approved
persons’ must comply with their legal requirements and be recorded on the Financial Ser-
vices Register.27

3.2.2.2. Communicating on investments. Section 21 of the Act restricts financial pro-

motions, so that when there is a communication inviting or inducing an investment
activity,28 that communication must be approved by an authorised person. HM Treasury
may revoke such communications if necessary. Those violating these provisions can
face a sentence of up to two years in prison (Section 23). Section 24 of the FSMA specifi-
cally criminalises persons who either hold themselves out to be an authorised person
capable of promoting permitted investments, or behaving in a manner which would
reasonably lead somebody to understand that (s)he is an authorised person or exempt
from such rules. Those operating in the UK and promoting investments in ICOs or crowd-
funding may themselves be falling foul of the FSMA and running the risk of imprisonment
if they are not authorised persons or certain they are exempt from the legislation.
There are multiple further potential penalties to which promoters of ICOs may feasibly
risk becoming subject, such as in recklessly making misleading statements or impression
as to prices to investors, pursuant to sections 89 and 90 of the FSMA. Both are punishable
by up to 7 years incarceration under section 92. It will therefore be highly important for
those wishing to conduct ICOs in the UK to utilise regulated persons and firms open to
scrutiny on the Financial Services Register. These requirements ought not be considered
16 J. TRUBY

overly burdensome for an entrepreneur with a sound business plan who is confident in the
product; it will merely take some cost and planning which would be proportionate to the
investment the business would induce.

3.2.2.3. Advising on investments. Those advising on investing in ICOs or crowdfunding

must be certain whether they need authorisation to offer such advice. The Financial Ser-
vices and Markets Act 2000 (Regulated Activities) Order 2001 previously required author-
isation for regulated firms advising on such investments defined in Article 53 of the Order,
including securities and contractually based investments. This definition was broader and
considered less clear than that provided in EU law pursuant to the EU Markets in Financial
Instruments Directive (‘MiFID’).29
The definition of what is ‘financial advice’ was amended pursuant to the Financial Ser-
vices and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2017.30 This
means from 3 January 2018, regulated firms no longer need permission to advise on
investments under Article 53(1).31 The exception to this is if a firm gives a personal rec-
ommendation for the investment (FCA 2015a), so if the recommendation is publicly dis-
tributed then a regulated firm does not require approval.32 This definition of personal
recommendation aligns with the MiFID definition. HM Treasury (2017a) explain that the
difference is intended to distinguish between ‘whether a firm is providing factual infor-
mation on particular investments, or moving beyond that into more tailored guidance
on the merits and risks associated with buying or selling particular investments’ (6)
Unregulated firms however remain forbidden from providing advice on investments as
in Article 53. Therefore unregulated firms will only be able to provide factual information
about products, not advise on the merits and risks of regulations (HM Treasury 2017a, 6).

3.2.2.4. EU prospectus directive. A key risk to consumers highlighted by the FCA is the
lack of adequate documentation, specifically the provision of a regulated prospectus.
The FCA point out that ICOs tend only to use ‘white papers’ instead of a prospectus;
which can be ‘unbalanced, incomplete or misleading.’ The FCA states a ‘sophisticated tech-
nical understanding is needed to fully understand the tokens’ characteristics and risks’33
When a security is being publicly offered, subject to exceptions, the EU Prospectus
Regulation34 specifies the form and content that a prospectus should include, pursuant
to the 2010 EU Prospectus Directive.35 This must include for example a statement that
the person who prepared the prospectus will take responsibility for the prospectus’
content which would apply when there is any subsequent resale or final placement of
securities by any financial intermediary given consent to use the prospectus.36 There
are also disclosure requirements for rights issues and other offers.37
The disclosure must from 2018 include prescribed warnings to investors, and key
financial information on the securities, any guarantors, and the offer. This is pursuant to
the subsequent 2017 EU Prospectus Regulation which will also impact on small and
medium size business start ups for public securities offerings within the EU. Regulation
(EU) 2017/1129 applies from 21 July 201938 and exempts the need for a prospectus
when the offer of securities is worth under €1 million over 12 months, down from €5
million in the existing EU Prospectus Directive. EU Member States will however be able
to elect to exempt such public securities offerings when the consideration is between
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 17

€1 million to €8 million over 12 months. Depending on the size of the ICO – many exceed
€8 million – this may apply.
Promoters of ICOs wishing to legitimize their technology seem however in many cases
unprepared to undertake the required responsibilities required by EU and UK39 law in
putting together reliable information prior to their offering, and the FCA’s argument is
that they are putting consumers at risk. Rather than being anti-ICO, the FCA actually
has demonstrated it is prepared to work with cryptocurrency developers but that they
need to adapt their practices of offerings by employing professional financial services
firms regulated by the FCA to fulfil legal requirements. This would limit risks to consumers
and traders and the financial system.
Kaminska raises the issue of transparency and detail in the white papers, arguing many
of the white papers offer nothing more than the potential uses of a novel code. She argues
‘In the ICO market every man and his dog is currently capable of raising millions of cryp-
tocurrency for nothing more than the promise of some hypothetical future code’
(Kaminska 2017). Nonetheless as long as investors understand they are investing in the
future utility of a digital coin or token, and not shares in a start up itself, there is no
problem as such investments can be lucrative and the purchasers may gain benefits
from the utility of the coin or token itself.

3.2.2.5. AML/CFT. Firms involved are particularly eager to ensure compliance with anti-
money laundering regulations when accepting payments in sterling; the risks are high-
lighted in Maximilian and Teichmann (2017). EU rules require due diligence, record
keeping and administrative procedures, financial controls and reporting requirements in
the case of suspicious activity.40
The UK also imposes additional rules particularly through The Money Laundering, Ter-
rorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. These
require risk assessments41 against the potential for money laundering by criminals, pol-
icies and controls within the firm to be in place,42 customer due diligence43 and identity
checks, 44 record keeping,45 employee awareness and training,46 and checks of the ben-
eficial owners of companies and partnerships.47 A nominated officer must be appointed
for firms with employees, who is responsible for informing the National Crime Agency
of suspicious activity.
Both rules may apply depending on the type of firm and structure of the ICO, and firms
running ICOs will have to be particularly careful not to violate anti-money laundering rules
given their significant attachment to serious crime48 and terror finance in UK law under
which the penalties are severe.49 Reportedly FATF at the time of writing are developing
‘binding rules governing cryptocurrency exchanges.’50
Depending on whether a firm meets the criteria of an electronic money issuer, and the
size of the firm, The Electronic Money Regulations 2011 may apply to such firms in
addition, requiring further authorisations.51

3.2.2.6. EU rules and MiFID II. From 2018 MiFID II52 replaces MiFID, which, accompanied
by the Markets in Financial Instruments (MiFIR) Regulation53 seeks to protect investors in
financial instruments. One means of doing so is to increase reporting requirements and
tests to make more detailed information available to investors. It also requires business
to abide by conduct of business rules and organisational rules.
18 J. TRUBY

Section C of Annex 1 of Directive 2014/65/EU54 defines ‘financial instruments’55 for the

purposes of the MiFIR Regulation. The broad list of definitions includes for example trans-
ferable securities; money-market instruments, and types of contracts relating to securities
which may be settled physically or in cash. This could mean digital currencies are treated
as financial instruments and if so the MiFID regulations would apply during an ICO because
it would involve ‘placing, dealing in or advising on financial instruments’ when the coin or
token is ‘created, distributed or traded’ (ESMA 2017).
Since an ICO seeks capital from a range of investors and has an investment policy to
invest the capital, it may also be treated as an alternative investment fund (ESMA 2017).
This depends on the ICO’s structure, but if it does then the EU Alternative Investment
Fund Managers Directive (AIFMD) applies.56 The firm running the ICO would be required
to comply with a number of AIFMD rules such as reporting requirements, and require-
ments on its capital and organisation structure.
Evidently the Sandbox could support start-ups by guiding on the most appropriate
methods of funding tailored for their needs. Tailored guidance is already offered by the
UK’s Sandbox, with a dedicated case officer available to provide such support.

3.3. Alternative funding methods

Although the focus of the article is largely upon ICOs, developments in alternative funding
methods ought to be summarised. Alternative finance for small and medium size enter-
prises in the UK amounted to £3.3 billion in 2016, across a range of different funding
methods (Cambridge Centre for Financial Innovation 2017, 18).
Investment crowdfunding and loan-based crowdfunding are both activities regulated
by the FCA and requiring authorisation, though there are types of crowdfunding which
are unregulated. Crowdfunding is a relatively more established practice than ICOs
though concerns remain about the adequacy of advice given to investors (FCA 2015c).
The FCA is seeking to further regulate peer-to-peer lending (Patwardhan 2018) and crowd-
funding activities to ensure investors are protected and there is sound governance in place
(FCA 2018b). This would increase disclosure requirements and apply equivalent regu-
lations on peer-to-peer lenders as exist for its crowdfunding platforms. This protects inves-
tors from risks through a system of certification of the type of the investor. Investors are
unable to invest over 10% of their net assets unless they take advice from an authorised
person, or otherwise are certified to be a wealthy of sophisticated investor. Peer-to-peer
lending platforms are currently exempt from such rules and argue that since the sector
has seen minimal defaults and losses, risks to investors are low. They believe applying
similar rules as exist for crowdfunding platforms would damage the industry which pro-
vided £1.23 billion of loans to small businesses in 2016 (Financial Times 2018e).

3.4. Sandbox 2.0

3.4.1. Off-the-shelf ICO model
The current FCA Sandbox benefits and functions have been found to be amongst the
world’s most effective (Bromberg, Godwin, and Ramsay 2017, 16–18) and ought to be con-
tinued. The proposals here are designed to build on and enhance such provisions.
‘Sandbox 2.0’ would enable firms forming inside the Sandbox to have increased access
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 19

to innovative funding methods, including ICO funding and other sources such as crowd-
funding (Kourabas and Ramsay [2018] make recommendations on best practices in crowd-
funding regulation). This would be regulated and supervised through a centralised FCA-
approved body who conduct the required AML/CFT and KYC checks on all investors in
Sandbox companies (as an optional service for Sandbox firms).
Legal and regulatory support and advice would be available to firms to help ensure
compliance. This builds on the FCA’s proposal described above enabling the formation
of non-profit companies which can be authorised by the FCA to assist the Sandbox com-
panies. The Sandbox would offer a ‘one-stop-shop’ model for formation, finance and legal
guidance.
The focus here in upon removing the risks of ICO funding, while alternative funding
techniques can be considered for legitimisation and simplification in a similar fashion.
Sandbox 2.0 would offer a pre-approved ICO funding model available to start-ups that
automatically meets the regulatory requirements for Sandbox firms described above.
This legitimised ‘off the shelf’ ICO model would prove to be a significant attraction for
start-ups who would avoid legal uncertainty in their financing process. The FCA would
certify the types of funding method that are legitimate and offer guidance and support
as to how to develop a permissible ICO. Given the potential for domestic investment
and foreign direct investment leading to growth, the ICO model should be encouraged.

3.4.2. Digital identity

Investors would be able to register with the body responsible for authenticating their iden-
tity and the legitimacy of their funding, providing all necessary documentation. Such
investors would then be pre-approved to invest in any of the Sandbox firms’ ICOs or in
the alternative funding methods such as crowdfunding or share purchases in Sandbox
firms.
The attraction for investors having undertaken the required KYC and AML/CFT obli-
gations is that it would consequently be much easier for them to invest in any of the
other firms without repeating these requirements every time. For example, Messenger
app Telegram is similarly launching an end-to-end encrypted service providing ‘unified
authorization method for services that require personal identification.’ Users would only
upload their ‘documents once, then instantly share your data with services that require
real-world ID (finance, ICOs, etc.)’ (see https://telegram.org/blog/passport).
Removing the onerous and off-putting obligation to repeatedly provide the same docu-
ments and register details for every investment would mean it is much simpler for inves-
tors. Indeed Arner et al. (2018) examine the case for digital KYC and highlight that ‘banks
will fall short in their multi-billion digitization transformation programs if they do not
rethink KYC processes’ (10).

3.4.3. SandCoin
Having completed the approval requirements, such investors would then exchange their
fiat money for digital coins to be used in the Sandbox. This could be a new ‘SandCoin’ or
could rely on the Bank of England’s RSCoin (see ‘Bank of England & UCL working on bitcoin
alternative RSCoin’: http://www.cs.ucl.ac.uk/news/article/bank_of_england_ucl_working_
on_bitcoin_alternative_rscoin/). The fiat money could come from any jurisdiction given
that the funding is permissible and approved as legitimate. This would provide a
20 J. TRUBY

significant advantage for the Sandbox firms as they could receive funding from global
investors, and would mean the UK attracts foreign direct investment whilst also providing
opportunities for national investors to invest in innovative tech firms.
This would create a market to add value to the firms, but also a market for the Sandbox
coin itself. Such a coin would develop a value based upon its transferability to the Sandbox
firms. The Sandbox regulator would receive significant sums of investors’ fiat money which
it could use to fund the Sandbox services. Investors would transfer the Sandbox coin to
buy Sandbox firms’ own individual digital coins, or otherwise invest in the Sandbox
such as through share purchases or crowdfunding.
Requiring investors to purchase the Sandbox coin would give the Sandbox regulator
further control and supervision over transactions which could be monitored through
the distributed ledger.

3.4.4. Sandbox 100 exchanges

With many of the Sandbox firms offering their own digital coins, transferrable for the
Sandbox coin, the next stage would be to open a digital coin exchange listing the
various Sandbox coins and their comparable prices to transfer with the Sandbox coin.
The Swiss bourse is developing its own cryptocurrency exchange to cement its position
as a hub nation for FinTech (Financial Times 2018c). Germany’s Stuttgart Börse is going
further, developing both an ICO platform that issues and finances digital tokens, followed
by a digital currency trading exchange for emerging and established digital currencies
(Finextra 2018). There is very much scope to adopt such concepts for the Sandbox.
Opening such a version for the Sandbox would attract investment, draw the attention
of FinTech start-ups to the legitimacy and opportunity of the UK’s Sandbox, and create a
market connected with the digital coin exchange. It would create employment and
business opportunities and would vastly support investment in and interest in the
Sandbox firms’ activities. Promoting the exchange as the ‘Sandbox 100’ of top trading
coins akin to the London Stock Exchange FTSE 100 could provide enormous opportunity
for growth of the market itself and the firms within it. Its unique selling point would be that
the digital coins available are fully legitimate, and from firms supervised and regulated by
the FSA, supported by partnered businesses and organisations as provided in the existing
Sandbox. The Sandbox exchange and even the Sandbox services could be funded by a
nominal fee on every transaction in the exchange.
Many investors have been spooked by fraudulent or inadequately presented ICOs, or
have bought digital coins and subsequently received very little information about the
firm’s subsequent activities. It was also alleged that Tether, a digital ‘stable’ coin with its
price fixed to the value of the United States Dollar (USD), did not have the fiat currency
reserves it claimed (Popper 2018). Investors had relied upon Tether to transfer their vari-
able digital currencies into the equivalent of USD to hold a hypothecated monetised
version of their digital currency. Tether buyers had bought it in good faith that there
was one USD held in reserves for every Tether purchased. The allegation was particularly
worrisome for many investors as they were unable to verify whether or not the USD
existed, and New York Times article alleging this led to lost confidence in the digital cur-
rency market because users relied on it as a fall-back security for their digital currency
holdings. Indeed, research by Zetzsche et al. (2017) recommends that transparency in
Sandboxes ‘is the issue with perhaps the greatest room for improvement’ and it is vital
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 21

to be ‘assuring other jurisdictions that regulators are not concealing a race-to-the-bottom

within the sandbox’ (40).
Once the firms have the required funding in the form of the Sandbox currency, they
would be able to both exchange it for fiat currency, or make or receive digital payments
using the Sandbox coin. Both types of transactions would be fully supervised by the FCA
approved body and the capital would be monitored by both investors and the FCA
given the transparency of accounting. This will provide a high level of confidence and
mitigate risk.

3.4.5. Real time accounting transparency

A supervised digital currency exchange would certainly provide confidence, but for the
maximum level of confidence it is argued there ought to maximum transparency of
accounting and internal processes. Investors need to be able to trust the investment
they are making and verify those involved, and an offering which recklessly, knowingly
or negligently evades these basic requests distorts the faith in the sector. La Porta et al.
(2000, 15) demonstrate that investor protections make securities more valuable and
help develop the financial industry, making firms more valuable. Indeed, Coffee (1984,
750–751) demonstrates the need for disclosure requirements in order for investors to
properly assess risk levels (see further Coffee, Sale, and Henderson 2015). Citing Puckett
v. Rufenacht,57 Black (2013, 1505) shows that courts in the US expect investors to do
their due diligence when making an investment and cannot be protected if they have not.
To provide the highest levels of confidence and transparency to investors, Sandbox
firms would offer real-time ‘view only’ access to the firm’s banking transactions and
instant records of all contracts entered into (with provisions for client confidentiality
and data protection obligations). This would enable a full and instant understanding of
income, assets and liabilities which would provide a ‘unique selling point’ for global inves-
tors. Utilising the concept of the distributed ledger, the online accounts and real time
income and expenses could be entered into a publicly accessible ledger. In the same
way that Blockchain removed the need for trust in the verification of banking transactions,
this proposal removes the need for trust and good faith of investors, and indeed for the
firm to provide quarterly reports. White (2016) advocates the need for transparency of
risk in financial innovation, and the enhanced transparency advocated herein would
both attract and facilitate investment into start-ups based on their performance and
financial health, and subsequently provide credibility for the Sandbox 100 exchange.
Balancing the benefits of promoting FinTech and the systematic risks associated with
both disruptive technology innovation and the decentralised nature of much of its out-
comes, Magnuson (2018, 1215) sees the advantage of Sandboxes as being able to
‘promote observed experimentation.’ As well as real-time accounting transparency, the
Sandbox firms would be subject to monitoring to minimise risk to investors, clients and
financial stability. Consumers are protected during the testing stage of financial innovation
through regulatory supervision as with the existing Sandbox rules (see 80). Magnuson
argued that ‘regulators should create incentives for FinTech firms to provide information
about their business and voluntarily seek guidance on the applicability of current regu-
lations’ (see 80). The Sandbox 2.0 model proposed here provides significant benefits to
start-ups but matches that with enhanced disclosure requirements and support for regu-
latory compliance.
22 J. TRUBY

3.4.6. E-registration
The barriers to entry of the Sandbox are currently sensible but to attract further start-ups,
electronic registration of firms within the sandbox would enable further promising firms to
partake even if they are physically located outside of the UK. This form of virtual Sandbox
would make the UK one of the world’ most flexible but retain the same protections and
supervisions. Since the firm’s digital currency is transferrable only to the Sandbox coin,
the regulators have advanced control over the types of transactions permissible and the
users of the coin. The FCA could prevent the SandCoin being transferred to any place
or body as needed, as they would be in charge of the exchange.
Estonia has introduced both e-registration for companies which can be operated from
anywhere in the world (see https://e-resident.gov.ee/start-a-company/) and this flexible
open can encourage investment. Providing such firms meet the entrance requirements
for the Sandbox and their accounts are under the control and supervision of the
Sandbox body, they would be able to start-up remotely. The UK would benefit from
both the inward investment and the firm’s activities.

3.4.7. Intellectual property

The proviso would be that intellectual property developed from firms utilising the e-regis-
tration would need to be registered in the UK, so that the UK retains the benefits. If the firm
in unsuccessful and goes into administration, the intellectual property rights could be
inherited by the Sandbox who could licence them to other Sandbox firms to utilise –
unless otherwise agreed with the Sandbox regulator. This would create further advantages
for future Sandbox firms.

3.4.8. Review of waivers

In terms of internal compliance with the Sandbox, there are mandatory requirements
which some Sandbox regulators are prepared to waive. Whilst not wishing to be too lax
with start-ups, the FCA should analyse the comparative jurisdictions’ versions to learn of
their successes and failures. Some areas such as client confidentiality, AML/CFT and custo-
mer money requirements cannot be dispensed with, as identified by Arner et al. (2018).
They detail Singapore’s version which offers flexibility with regard to licensing fees, an
entity’s capital requirements, leadership requirements, credit rating and relative size,
and the organisation of the entity relating to supervisory standards of financial soundness,
risk management, and outsourcing (FCA 2017a, 76). They also highlight other require-
ments such as Know Your Customer checks which have been waived by the Ontario Secu-
rities Commission. It is possible for the FCA to offer similar waivers where appropriate, and
continuous review of its waivers is always possible.

3.5. Tax incentives

Aside from the types of innovative finance described and moving to more established
forms of funding such as credit, loans and share purchases, to maximise investment in
Sandbox firms from sources such as financial houses and banks, it could be possible
further to explore tax incentives for investments in research and development (R&D). To
advance the technology for use in the market, the Sandbox could provide both advice
and support on research and development. R&D tax credits could benefit both the
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 23

start-up firms as well as the investors. Private individuals already have the option through
the Innovate Finance investment saving account (ISAs) to invest in tax-free ISAs (currently
up to £20,000 per annum) that provide investments in peer to peer loans for start-ups.58
An analysis of the UK’s R&D by EY (2016), commissioned by HM Treasury, found the UK’s
tax regime to be ‘market-leading’ (60). To encourage investment in smaller high risk com-
panies, there is the Seed Enterprise Investment Scheme59 which is a venture capital
scheme providing up to £150,000 tax relief for investors buying shares in start-ups.
The Enterprise Investment Scheme60 is also designed to help start-ups raise investment
up to £5 million a year by providing tax reliefs for those investing in trading companies
with fewer than £15 million in assets. The Venture Capital Trust Scheme61 helps small
unquoted companies to gain finance from such trusts registered on the stock exchange.
They can either acquire shares in, or loan funds to, these types of companies and
consequently benefit from exemptions on corporation tax and capital gains tax. It
provides qualifying shareholders with limited income tax relief, as well as exemptions
from tax on dividends and capital gains tax. For entrepreneurs selling business assets
worth up to £10 million, capital gains tax relief is provided via the Entrepreneurs Relief
scheme.62
Such legislation has proven successful in attracting investment from both amateur and
professional investors. It is worth continually comparing benefits to retain competitive-
ness, as the EY (2016) report does, noting that Singapore for example offer a lower
overall rate of tax plus exemptions from tax for start-ups as well as tax credits for inno-
vation. It is also noted in the UK’s FinTech Strategy that the Government of France
provide EUR 6 billion annually worth of tax credits for such R&D costs. Amongst other
benefits, this generously covers 30% of all R&D expenses up to a maximum of €100
million, as well as 75% of investments in R&D operations (see France’s Research Tax
Credit: https://www.tresor.economie.gouv.fr/Ressources/File/409099). Overall however it
seems the UK is proactive in taking the lead on tax advantages to encourage finance
for start-ups, but should periodically compare to ensure it retains its competitiveness.
Finally, a recommendation of the IPPR is to ‘Strengthen the role of the British Business
Bank in regard to support for tech start-ups’ (Longlands, Round, and Kibasi 2018, 5). It may
be possible to do by underwriting certain loan agreements from third party loan agree-
ments in promising start-up, as well as to provide direct partial investment from the
British Business Bank’s investment fund (HM Treasury 2018, 11) alongside private investors
in eligible firms. Word limits will restrict further analysis of the legal and economic case of
such investments (see for example Hong et al. 2016).

3.6. Beyond the Sandbox

Although this article is largely limited to exploring reforms of the Sandbox, the author calls
for further research on how to promote development of firms in the wider economy
outside of the Sandbox. This would very much require both the regulator and existing
official entities to adopt technological innovations to engage. Two further brief rec-
ommendations are proposed as follows.
If a Bank of England digital coin or other British government digital coin is adopted, it
would be possible to add significant value to it and normalise its use by requiring payment
of certain Government services using its own digital coin. This would significantly
24 J. TRUBY

advantage the UK of firstly being able to collect fiat currency in exchange for an initially
valueless digital coin, but then to utilise the coin’s value for payments of public procure-
ment projects and contractors – allowing the saving of the fiat currency deposits for
alternative uses. Such alchemy is already widely in practice in the FinTech world. The
UK would be able to use monitor and control transfers of its digital currency, requiring
licensing of any other exchange accepting its own digital currency. Such security
benefits are extremely difficult to adopt with fiat currencies. It is also possible that some
online firms operating in the UK could be required to utilise this digital currency, allowing
monitoring and controls to limit tax avoidance.
The London Stock Exchange could also itself introduce an ICO platform and digital cur-
rency exchange in the same way that Swiss and German bourses have managed to. This
would require regulatory efforts but has the potential to create significant business oppor-
tunities. The official British Government digital coin could be the currency that all such
coins are valued in, which would create a significant market for it.
It is right that the UK use all its clout to promote a healthy, competitive FinTech sector
that can help retain the competitiveness of the City of London and ensure the UK remains
a global economic power.

4. Conclusions
Financial technology start-ups as explained are frequently looking for a means to be legit-
imised to avoid legal uncertainty, enabling investors to more confidently provide finance.
As well as simplified means of starting up they are also looking for simplified access to
finance. The article has focused upon ICOs in particular, arguing that the risks associated
with ICOs can be mitigated, with the benefit of potential investment from the far corners
of the earth. Alternative funding sources have been examined in addition. Various refor-
mative measures have been suggested and existing rules have been explored. These rec-
ommendations need exploring with further detail but provide the conceptual basis for
enhancing the UK’s FinTech Strategy.
Specifically the recommendations have covered:

. pre-approved ‘off the shelf’ methods of innovative funding including ICOs;

. one-stop shop for all investors to avoid the need for repeat registrations and AML/CFT
and KYC documentations with every ICO or investment in Sandbox firms;
. introduction of a SandCoin (Sandbox digital currency) that must be purchased and uti-
lised to invest and trade with Sandbox firms;
. introduction of an ICO platform and digital currency exchange (the Sandbox 100) pro-
viding further business opportunities;
. real-time ‘view only’ access to the firm’s banking transactions and instant records of all
contracts entered into (with provisions for client confidentiality and data protection
obligations);
. e-registration and re-examination of the barriers to entry;
. compliance and intellectual property support;
. re-examination of tax incentives;
. support for commercialisation of the technology; and
. further possibilities of a Bank of England digital coin.
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 25

It is shown that to achieve the UK’s strategic objectives, it may need to utilise its current
position as the centre for finance and law to further attract financial technology start-ups
through simplified access to finance and legal certainty. The rewards in hosting firms pro-
viding technological efficiency advantages may enable the City continue to provide the
most effective and beneficial financial services, rather than be overtaken by one of the
many competitor states. FinTech has changed the game and states are fighting to host
these firms offering vast financial services benefits and huge growth potential and the
firms themselves.
The article has further proposed a means by which entrepreneurs outside of the UK can
simply register in the UK and gain access to finance and the market, with suitable investor
protections, AML/CTF and other financial protections. This would facilitate access to the
innumerable small investors not only in the UK but in places such as India and China,
whose capital can give life to a company and its technology, where more established
investors have overlooked it. Indeed the positive side of the history of ICOs has demon-
strated the enormous potential available from small investors, and this should be seen
as a breakthrough opportunity to attract foreign direct investment as well as to democra-
tise opportunities for profit generation.

Notes
1. ‘“Fintech” is used interchangeably to describe both technology-driven innovation across
financial services and to pick out a specific group of firms that combine innovative business
models with technology to enable, enhance, and disrupt the financial services sector’ (see
HM Treasury 2018, 3).
2. Block.one raised $4 billion in its ICO in 2018 (Rooney 2018).
3. See 2.4 Sandbox 1.0.
4. Incubators were previously proposed as a means of facilitating growth for entrepreneurs (see
Aernoudt 2004).
5. See figures compared to European neighbours (Longlands, Round, and Kibasi 2018).
6. Financial services accounted for 6.5% of the UK’s economic output in 2017 (Rhodes 2018).
7. Including artificial intelligence.
8. Hong Kong (9/2016), Malaysia (10/2016), Singapore (11/2016), Abu Dhabi (11/2016), Australia
(12/2016), Mauritius (1/2017), Netherlands (1/2017), Indonesia (1+7/2017), Brunei-Darussalam
(2/2017), Canada (2/2017), Thailand (3/2017), Bahrain (6/2017), Switzerland (8/2017).
9. Each country’s start-up date is charted in Zetzsche et al. (2017, 27–29).
10. ‘“Startup” refers to a company which is partly or fully owned by an individual or group of indi-
viduals who founded it, who are also involved in its day-to-day activities in any capacity. It may
also still be at the stage of seeking external investment to develop its products and services.’
(HM Treasury 2018, 3).
In this report, ‘tech’ refers to the digital tech industries and to digital activities in the non-
tech industry.
11. Examining the Upcoming Agenda for the Commodity Futures Trading Commission: Hearing
before the Committee on Agriculture, U.S. House of Representatives. 25 July 2018 (10:00 AM).
12. Multiple further Sandboxes are being planned around the world in addition to those in exist-
ence (see Cambridge Centre for Alternative Finance 2018, 34).
13. The possibilities are explored in Greenfield (2017).
14. The UK’s Fintech Census showed 34% reporting raising equity finance as a key problem (HM
Treasury 2018, 11).
15. This would require amendment to the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001/544.
26 J. TRUBY

16. This would require amendment to the Financial Services and Markets Act 2000 (Carrying on
Regulated Activities by Way of Business) Order 2001/1177.
17. This issue is considered in Sheridan (2017, 417).
18. This would requirement amendment to the Financial Services and Markets Act 2000 (Exemp-
tion) Order 2001/1201.
19. A survey of financial technology founders and investors released last week by Silicon Valley
Bank identified regulation as the biggest impediment to growth (Elliott 2015).
20. Established pursuant to the Financial Services Act 2012 (as amended).
21. ‘Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be
proved as matter of fact that they were widely offered or dealt in under terms or courses of
dealing which established their character in commerce as “investment contracts,” or as “any
interest or instrument commonly known as a “security””.’ (SEC v. C.M. Joiner Leasing Corp.,
320 U.S. 344, 351 (1943)).
22. Securities and Exchange Commission v. W. J. Howey Co. (1946) No. 843 67 S.Ct. 27. [328 U.S.
293, 294].
23. ‘“Smart contracts” involve greater automation of the processes of creating, monitoring and
enforcing contracts. This may be intended to increase efficiency and reduce the risk of
human error’ (HM Treasury 2015a, 8; see also Fairfield 2014).
24. Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on
OTC Derivatives, Central Counterparties and Trade Repositories. Office Journal of the European
Union (OJ. L. 201). 27 July. Available from: http://eur-lex.europa.eu/legalcontent/.
EN/TXT/?uri=celex%3A32012R0648, Recital 13 and arts. 4(1)(a)(i) to (iii) and art. 4(1)(a)(v).
25. 468 F.2d 1326 (2d Cir. 1972).
26. The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of
Business) Order 2001 (SI 2001/1177).
27. ‘ … a public record of firms, individuals and other bodies that are, or have been, regulated by
the PRA and/or FCA’ (see https://www.fca.org.uk/firms/financial-services-register). This is
required by the Financial Services & Markets Act 2000, Payment Services Regulations 2009,
Electronic Money Regulations 2011 and Money Laundering, Terrorist Financing and Transfer
of Funds (Information on the Payer) Regulations 2017.
28. Engaging in a controlled or specified ‘investment activity’ is as defined in the FSMA, s.21.
29. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on
markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and
Directive 2000/12/EC of the European Parliament and of the Council and repealing Council
Directive 93/22/EEC.
30. The order explains the compliance with EU law: The definition of ‘personal recommendation’
in article 53(1A) follows that in Article 9 of Commission Delegated Regulation of 25 April 2016
supplementing Directive 2014/65/EU of the European Parliament and of the Council as
regards organisational requirements and operating conditions for investment firms and
defined terms for the purposes of that Directive(c).
31. The amendment was recommended by HM Treasury (2017a).
32. See FCA definition of ‘personal recommendation’ at https://www.handbook.fca.org.uk/
handbook/glossary/G877.html?starts-with=P.
33. Financial Conduct Authority, Consumer warning about the risks of Initial Coin Offerings (‘ICOs’)
https://www.fca.org.uk/news/statements/initial-coin-offerings.
34. Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on
the prospectus to be published when securities are offered to the public or admitted to
trading on a regulated market, and repealing Directive 2003/71/EC OJ L 168, 30 June 2017,
p. 12–82.
35. Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010
amending Directives 2003/71/EC on the prospectus to be published when securities are
offered to the public or admitted to trading and 2004/109/EC on the harmonisation of trans-
parency requirements in relation to information about issuers whose securities are admitted
to trading on a regulated market Text with EEA relevance.
 INTERNATIONAL REVIEW OF LAW, COMPUTERS & TECHNOLOGY 27

36. Commission Delegated Regulation (EU) No 862/2012 of 4 June 2012 amending Regulation (EC)
No 809/2004 as regards information on the consent to use of the prospectus, information on
underlying indexes and the requirement for a report prepared by independent accountants or
auditors Text with EEA relevance.
37. Coffee (1984) advocates the need for disclosure requirements.
38. Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on
the prospectus to be published when securities are offered to the public or admitted to
trading on a regulated market, and repealing Directive 2003/71/ECText with EEA relevance.
OJ L 168, 30 June 2017, p. 12–82.
39. See also Financial Services and Markets Act 2000 (Financial Promotion) Order 2005; The Finan-
cial Services and Markets Act 2000 (Financial Promotion) (Amendment No. 2) Order 2007 No.
2615.
40. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the
prevention of the use of the financial system for the purposes of money laundering or terrorist
financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the
Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council
and Commission Directive 2006/70/EC OJ L 141, 5 June 2015, p. 73–117.
41. Section 18 of The Money Laundering, Terrorist Financing and Transfer of Funds (Information
on the Payer) Regulations 2017 2017 No. 692.
42. Section 19–21 of The Money Laundering, Terrorist Financing and Transfer of Funds (Infor-
mation on the Payer) Regulations 2017 2017 No. 692.
43. Section 33-35.
44. The Money Laundering Regulations 2007 (SI 2007 No. 2157).
45. Section 40.
46. Section 24.
47. Sections 5 and 6 of the regulations define what are beneficial owners for these purposes: The
Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regu-
lations 2017 2017 No. 692.
48. The Proceeds of Crime Act 2002 (as amended by the Crime and Courts Act 2013 and the
Serious Crime Act 2015).
49. Part 9 of the Section 19–21 of The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017 2017 No. 692. Rules are also applicable
from The Terrorism Act 2000 (as amended by the Anti-Terrorism, Crime and Security Act
2001, the Terrorism Act 2006 and the Terrorism Act 2000 and Proceeds of Crime Act 2002
(Amendment) Regulations 2007).
50. Financial crime task force eyeing binding crypto exchange rules: Japan official, Reuters June
12, 2018, https://uk.reuters.com/article/us-cryptocurrency-regulations-fatf/financial-crime-
task-force-eyeing-binding-crypto-exchange-rules-japan-official-idUKKBN1J80UZ.
51. Electronic Money Regulations 2011, SI No. 99, and Directive 2009/110/EC of the European Par-
liament and of the Council of 16 September 2009 on the taking up, pursuit and prudential
supervision of the business of electronic money institutions amending Directives 2005/60/
EC and 2006/48/EC and repealing Directive 2000/46/EC OJ L 267, 10 October 2009, p. 7–17.
52. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on
markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/
61/EU.
53. Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on
markets in financial instruments and amending Regulation (EU) No 648/2012.
54. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on
markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/
61/EU Text with EEA relevance, OJ L 173, 12 June 2014, p. 349–496.
55. Pursuant to Article 4(1)(15).
56. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on
Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/
EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1 July 2011, p. 1–73.
28 J. TRUBY

57. Puckett v. Rufenacht, Bromagen & Hertz, Inc., 587 So. 2d 273, 278 (Miss. 1991).
58. Finance Act 2016 (as amended).
59. Finance Act 2012 (as amended).
60. Finance Act 1994 (as amended).
61. Finance Act 1995 (as amended).
62. Finance Act 2008 (as amended).

Acknowledgments
This publication was made possible by the NPRP award NPRP 11S-1119-170016 from the Qatar
National Research Fund (a member of The Qatar Foundation). The statements made herein are
solely the responsibility of the author.

Disclosure statement
No potential conflict of interest was reported by the author.

Funding
This work was supported by Qatar National Research Fund [grant number NPRP 11S-1119-170016].

ORCID
Jon Truby http://orcid.org/0000-0002-9184-7033

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