Highlighting the risks: The Emirates Securities and Commodities Authority adds its voice to ICO concerns

by Hogan Lovells

Hogan Lovells

What you should know

The UAE's federal financial services and securities regulator, the Securities and Commodities Authority (SCA), has issued a public warning statement on 4 February 2018 in relation to initial coin offerings (ICOs).

The dual-language English and Arabic statement cites the following concerns in relation to ICOs:

  • certain ICOs are not regulated and therefore may be subject to fraud risks;
  • tracking and recovering funds in case of an ICO collapse may prove difficult in practice as ICOs may be issued abroad and subject to foreign regulations;
  • ICO trading on secondary markets are subject to opaque and volatile pricing and insufficient liquidity;
  • retail investors may not be able to comprehend the risks, costs and expected returns from investments in ICOs; and
  • ICO information disclosure to investors may be unaudited or incomplete and may present an investment case in a misleading manner by emphasising benefits over risks.

What does this mean?

The SCA's statement echoes concerns raised by 27 regulators around the world that have suggested that ICOs are highly speculative, not standardised in their legal and regulatory status, and that investors (and in particular, retail investors) are putting their entire capital at risk.

"ICOs involve the issuance of digital tokens created using distributed ledger technology and sold to investors by action or through subscription in return for cryptocurrency. The terms and features of ICOs differ in each case, as does the nature of the rights or interest (if any) that is acquired by the investor. ICOs are highly speculative and characterised by high volatility in the prices of tokens," the statement said.

The SCA warns that, "at present, [SCA] does not regulate or mandate or recognise any ICO. No legal protection is currently offered and investors are entering into these investments at their own risk."

The SCA's warning follows recent announcements from other financial regulators in the United Arab Emirates, including the Dubai Financial Services Authority (DFSA, the financial services regulator of the Dubai International Financial Centre free zone (DIFC)) and the Financial Services Regulatory Authority (FSRA, the financial services regulator of the Abu Dhabi Global Market free zone):

  1. The DFSA announced in September 2017 that ICOs and the systems and technology that support them are complex, with their own unique risks which may increase when offerings are made on a cross-border basis. The DFSA's announcement concludes by stating that ICOs are high-risk investments, that it does not currently regulate these types of product offerings or provide licensing to firms in the DIFC to undertake ICO fundraises.
  2. The FSRA published guidance on the regulation of ICOs and virtual currencies under the Abu Dhabi Global Market's Financial Services and Markets Regulation (FSMR). Under the FSRA's guidance, virtual tokens that have the features and characteristics of a "Security" (as defined in the FSMR) will be deemed to be, and regulated as, Securities under the FSMR. All financial services in relation to a Security-based ICO, such as dealing, trading, advising on, or managing investments in tokens will be subject to the regulatory requirements of the FSMR. Conversely, other virtual tokens and currencies (such as Bitcoin) which do not exhibit the features and characteristics of a Security will be deemed to be commodities and therefore not regulated as Specified Investments under the FSMR, and spot transactions in those commodities will not constitute Regulated Activities.

This statement by the SCA also follows a recent warning by the International Organisation of Securities Commissions (IOSCO). The SCA and numerous global financial regulators are members of IOSCO and the similarities between recent warnings suggest that the members of IOSCO are seeking to standardise or harmonise their approach towards regulation of ICOs. IOSCO is the leading international policy forum for securities regulators, including the US Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA) and the European Securities and Markets Authority, and sets global standards for securities regulation.

In an interesting twist with a Dubai nexus, in January 2018, the SEC obtained a court order to freeze the assets of AriseBank during its on-going ICO, in which AriseBank claimed to have raised more than US$600 million. The SEC stated that the two founders of AriseBank, based in Texas and Dubai, had illegally raised funds from retail investors without registering with regulators. As a result, the SEC froze various cryptocurrency assets received by AriseBank and appointed a receiver to return them to investors. This was the first appointment of a receiver and the most substantial action taken by any financial regulator in connection with an ICO to date, and the SEC's actions followed numerous warnings which it had issued in relation to token offerings which could be deemed to be securities under the Howey test in the United States.

Andrew Tarbuck, capital markets partner of Hogan Lovells (Middle East) LLP, commented on the SCA circular:

"The UAE is very much a part of the global conversation relating to the risks and regulatory treatment of ICOs, with three financial services and securities regulators from the country now reiterating regional concerns about ICOs. The UAE attracts tech companies and developers of innovative and disruptive solutions that may look to use an ICO to raise funds. Willing investors, particularly retail, are also concentrated in the region. The SCA's statement echoes the concerns of the likes of IOSCO, the SEC and the FCA, highlighting that this is an important global issue with a regional impact for fundraisers and investors in the Middle East."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Hogan Lovells | Attorney Advertising

Written by:

Hogan Lovells

Hogan Lovells on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.