Unregulated Tokenised Shares and Digital Securities in UK: Legal Risks Involved
Introduction
Tokenised shares in UK have gained popularity for offering frictionless trading, instant settlement, and broad access to investment markets. This article explains the legal landscape for startups, investors, and others interested in tokenised shares in UK and digital securities operating outside the Financial Conduct Authority’s (FCA) regulatory scope.
What Are Tokenised Shares?
Tokenised shares in UK convert traditional company shares into digital tokens, usually on a blockchain. These tokens grant the same economic rights as conventional shares, including dividends and voting. Investors can buy, sell, and transfer these shares digitally. Distributed ledger technology enables tokenised shares to reduce costs, speed up settlement, and provide international market access, traditionally reserved for public markets or major institutions.
Digital securities broadly include any digital representation of securities such as shares, bonds, or fund units on the blockchain. This article focuses mainly on tokenised shares in UK.
The Regulatory Landscape: Inside and Outside FCA Perimeter
The FCA regulates activities related to securities and certain crypto assets. Yet, some tokenised shares in UK and digital asset models legally operate outside FCA regulation. Whether a token falls inside or outside FCA rules depends on its characteristics and how it gets marketed and sold.
Authorities classify some tokens as security tokens when they grant rights similar to shares, triggering regulation. Others qualify as unregulated tokens when structured to avoid formal securities rights like voting or dividends.
When projects issue tokenised shares that do not meet the UK definition of a “specified investment,” they can avoid FCA regulation. Many projects rely on legal structuring or restrict transferability to exclude their tokenised shares from registration as regulated securities.
Key Features of Unregulated Tokenised Shares
Tokenised shares offered outside FCA regulation often exhibit several features. They do not provide clear voting or dividend rights and instead mimic economic exposure without conveying ownership. Marketing language purposely avoids calling tokens “shares,” “equity,” or “investor rights.” Issuers often limit token transferability to evade market regulations. Targeting fewer investors or using private placements helps avoid regulatory triggers. Sometimes tokenised shares in UK emphasize “utility” or “membership” rights rather than securities to bypass regulation.
Risks and Challenges
Operating outside FCA rules does not remove risks for tokenised shares. Investors lose protections under the UK’s Financial Services Compensation Scheme. No guaranteed standards govern custody, dispute resolution, or disclosure. Recourse options remain limited if problems occur.
Fraud, scams, and technical failures pose significant dangers, especially without independent oversight. Investors may not hold clear legal rights to the company or assets. UK proposals aim to define many digital assets, including tokenised shares, as new personal property types. This development offers courts better clarity in disputes but does not yet guarantee regulatory protection.
Evolving Policy and Recent Developments
UK authorities and the Law Commission push for clearer laws on digital assets. A 2024 bill proposes to classify digital tokens, such as tokenised shares, as a distinct form of personal property. This change strengthens legal certainty in fraud, dispute, or divorce cases.
The UK’s Digital Securities Sandbox (DSS) allows certain tokenised shares in UK and digital securities to operate in a controlled environment with temporarily relaxed regulations. However, the sandbox excludes pure cryptocurrencies, stablecoins, and most unregulated tokens. Projects outside these categories must carefully avoid regulated activities that the FCA governs.
Real-World Use Cases
UK startups explore tokenised shares for several applications. These include maintaining private (unlisted) company share registers on distributed ledgers, fractionalizing property investments, granting “membership” rights within closed communities, and representing economic entitlements in fund structures without formal share status.
Most projects work closely with legal advisors to avoid crossing into regulated territory inadvertently, as the FCA’s stance constantly evolves.
Best Practices for Startups and Investors
Anyone involved with tokenised shares outside FCA regulation should seek legal advice early, before launching any project. Investors should review whitepapers, terms, and confirm ownership rights carefully. They must recognize that failing tokenised shares in UK projects typically result in total loss without compensation protections. Transparency about risks, technology, and legal structures promotes better outcomes.
The Future of Tokenised Shares
Regulation around tokenised shares is developing rapidly. Initiatives like the Digital Securities Sandbox, new personal property laws for digital assets, and consultations aim to cover more digital asset models under FCA oversight.
As tokenised shares technology and markets mature, current regulatory gaps will shrink. More projects will likely face formal regulation to ensure investor safety.
Tokenised shares offer exciting new investment and fundraising methods. However, ventures must proceed cautiously and informed, especially when they operate outside FCA supervision.
Disclaimer: This article provides general information, not legal advice. For specific issues, consult our legal experts.
