ICO Regulations Worldwide
If you followed the news from the crypto-sector, you should have noticed an increasing number of references to attempts to regulate the cryptocurrency market on the part of governments. Some of the resources and experts are positive and hopeful in describing the consequences of government interference in the cryptocurrency sphere, while others are downright alarmist.
Indeed, many countries have already expressed their intention to regulate crypto-transactions to a certain extent. No matter which route the ICO regulations take, after all, there are going to be changes. Let’s see what the governments may have in store for the crypto-world and how the legislative innovations may affect the overall situation.
Reasons for the implementation of government regulations
The reason that seems to lie on the surface is that governments are afraid to lose power. They see a great mass of relations, transactions, currencies, operations, and whole enterprises that is slipping through their fingers. The crypto-space is getting bigger causing the nations to worry about the influence of its trends on the global economy and politics.
However, the real situation is not that straightforward and, in fact, has quite a lot of benefits for the crypto-traders, investors, and businesses. Right now, ICOs are already required to comply with the Know-Your-Customer and Anti-Money Laundering regulations that ensure better transparency and trust. And it looks like the ICO regulations proposed by the governments may actually help the startups launching ICOs.
In this article, we will dive into the specifics of the regulatory changes for the cryptocurrencies and ICOs. But before it, let’s see why the need for such regulations ever arose.
What was the need for ICO regulations?
Before 2017, ICOs were few and far between and represented only a small trickle of crypto-coins from startups wishing to raise their initial capital through ICO. In 2017, however, the trickle grew into a tsunami rolling over the entire globe and sucking in billions of dollars worth of cryptocurrencies. Today, not only startups but fully established businesses adopt ICO as a capital raising process. We have witnessed the Telegram ICO that closed with an all-time record amount of $850 million, and recently Kodak decided to launch an ICO regulations in an attempt to secure its recovery from the spectacular failure to embrace the digital disruption and the subsequent bankruptcy.
At the time of writing, ICOs have raised more than $6 billion in the year 2018 alone, so you get the idea of the popularity and user engagement of ICOs. This is not without reason – to launch an initial coin offering is much easier than to seek investments through angels or venture capitalists. By running an ICO, the startup can raise the seed capital having only the idea of its future product. Of course, there are certain rules and requirements that the startup should follow to ensure the success of its ICO, but they are nowhere near those that apply to venture capital investments or IPOs. You can find a detailed description of the ICO basic concepts and principles in our blog.
However, as any booming trend, ICOs, unfortunately, attract not only the legitimate startups seeking to raise funding for their projects. We have already seen quite a number of ICO scams – “projects” launched with the sole purpose of collecting money and walking away. The relative easiness of a custom coin launch allows scammers to create ICOs that look totally valid until they close and disappear.
This is the main reason for the governments’ decisions to apply ICO regulations – protecting the investors. Bringing the law into a formerly unregulated environment can make it more difficult for scammers to launch their schemes.
ICO regulations in different countries
Just like in any other sector, different countries have different views on ICOs and cryptocurrencies. And, their regulations may differ in the range from extremely liberal to totally prohibitive. We have put together a brief summary of government regulations that several countries implemented or proposed with their possible consequences.
The US was the first country ever to regulate initial coin offerings. The straw that broke the camel’s back was the DAO case when the code vulnerability caused theft of about $50 million worth of Ether, a split of the Ethereum network, a drop of the Ether price, and, quite expectedly, close scrutiny by the government agencies.
In July 2017, the US Securities and Exchange Commission (SEC) passed a ruling stating that tokens issued during an ICO may be considered securities. And, therefore, they may be subject to the same regulations. The criterion that the SEC uses to classify tokens as securities is their ability to grow in value with time. Thus, any token that is potentially capable of bringing a profit to its holder through trading is immediately considered a security.
In such a case, you may need to register the ICO with the SEC. And, consequently, do the mandatory disclosure providing more information to the potential investors.
So far, the effect of the SEC ruling was that only the ICOs issuing “utility tokens”, that is, tokens providing access to the company’s product or service, can be exempt from the new requirements. A more serious consequence is the unavailability of ICOs to the US citizens. Under the SEC regulations, only accredited investors can purchase securities and, since they have included ICO tokens in the category of securities, this rule now concerns ICOs, as well.
While ICOs cannot guarantee that a US citizen is an accredited investor, they often try to prevent all US citizens from purchasing their coins. Either by geolocation or a complicated identity verification procedure. This is, of course, very discouraging for the people in the USA.
The SEC officials say that the regulations may be eventually revised or totally lifted if the technology develops so that the tokens no longer bear the features of securities.
The Canadian Securities Administration (CSA) followed the US example. They stated that some tokens issued during ICOs can be regarded as securities and regulated as such. However, Canada seems to be rather supportive towards businesses wishing to raise funding through initial coin offerings.
ICOs have been included in the scope of the so-called “regulatory sandbox” that has to support fintech enterprises that do not fit the traditional financial regulations. The Canadian authorities recognize the importance of innovation and admit that new technologies sometimes cannot fully comply with the existing laws. Thus, the CSA implemented the regulatory sandbox to develop a tailored approach to fintech businesses on the case-by-case basis. The sandbox procedures apply to ICOs, too.
Israel holds a reputation of a Middle East techno hub and, quite predictably, is rather supportive towards ICOs and the cryptocurrencies. While recognizing the scam threats, the Israel authorities have chosen not to take any restrictive measures so far and preferred to investigate the matter closer.
At the moment, Israel is studying the US experience of regulating ICO tokens like securities and thinking of adopting similar regulations. This causes a certain concern among ICO owners. However, there isn’t a definite decision so far.
At the same time, the Israel government is speculating over implementing tax laws in respect of ICO owners. The idea is to tax the revenue obtained from an ICO. While the draft regulations include various deferrals and special treatments, token issuers are still reluctant to bring their businesses within the Israel jurisdiction.
At the moment, Japan has no specific ICO regulation, however, its authorities are also concerned about the risks ICOs present to investors. At the same time, their aim is not to restrict or ban ICOs. On the contrary, the Japanese government is looking for ways to legitimize ICOs, thus providing additional protection to investors.
The government of Japan supported a research group whose purpose was developing the guidelines for bringing ICOs within the scope of the law. The group created the basic roadmap of the eventual ICO adoption that includes various means of increasing the ICO security – investor verification, project progress tracking, protection against money laundering. In general, the group has come up with a rather ICO-friendly set of recommendations. The Financial Services Agency of Japan will review and analyze these recommendations. If approved, the guidelines may become a law within a few years.
Basically, the Japan authorities welcome ICOs and the related technology, they recognize the importance of progress and innovation. And they intend to interfere only to the extent of making the ICO procedures more transparent.
While other countries are considering ICO-favorable regulation, China has taken a totally opposite stance towards the crypto-trading. In September 2017, the Chinese government banned all ICOs and cryptocurrency exchanges in the country. The officially stated reason was that the ICOs were considered to be illegal trade and thus have to be prohibited. All businesses that had completed their ICOs by the time of the ban had to refund the money they had collected.
At the moment, all access to ICOs and cryptocurrencies is denied within the territory of the mainland China. This move resulted in the attempts by the investors in China to find ways to circumvent the restriction. At the same time, there are rumors that the Chinese authorities are thinking of revising the ICO restrictions and introducing regulatory measures instead of the total ban. This way, they hope to bring the ICO and cryptocurrency market within the scope of the law and prevent ICO scams.
The European Union used to have a rather welcoming position towards ICOs and expressed their support to startups using this fundraising model. The only requirement was to adhere to the KYC and AML regulations.
However, on November 13, 2017, the EU issued a statement alerting the businesses involved in ICOs about the compliance with the regulatory requirements. The statement says that the businesses running their ICOs should proactively research whether their operations fall under the applicable regulations and whether the coin they launch qualifies as a “financial instrument”. Here, we can see that the EU is following in the steps of the US Securities and Exchange Commission in the attempt to include tokens in the category of securities. According to the position of the European Securities and Markets Authority (ESMA), the ICO whose tokens may be considered securities will be required to prepare a prospectus that should be approved by the EU authorities.
EU Fintech Action Plan
At the same time, the EU by no means is trying to fit the ICOs within the existing legislation. The 2018 FinTech Action Plan issued by the European Commission is intended to develop the regulatory measures that will, on the one hand, support the technological innovations in the financial sector and, on the other hand, prevent fraud and protect investors.
The EU position in respect of ICOs is still more complicated with the fact that many member states have already adopted own regulations of the crypto-market. The new approach that the European Union is going to develop should take into account the different laws of member countries.
While the United Kingdom has not introduced any restrictive measures on ICOs and crypto-trading as of now, its attitude to this format of fundraising can be described as guarded. On September 12, 2017, the Financial Conduct Authority (FCA) issued an official warning to ICO investors in which it brands ICOs as “very high-risk, speculative investments”.
The document describes the potential risks of participation in an ICO for the investor, such as the absence of regulation or investor protection, high volatility of the token price, possibilities of fraud as well as the potential loss of investment due to the project failure.
At the same time, the FCA imposes no direct regulations on ICOs and suggests that businesses running ICOs should consider whether they are subject to any regulatory requirements. On the other hand, the authority encourages individual investors to report ICOs that have some indications of being a scam via an online form.
The Swiss have always been famous for their clever handling of money matters, and they are again leading the pack in the crypto-market. Switzerland has boldly announced that it intends to earn the name of the “crypto-nation”, and, indeed, has been welcoming the blockchain-based projects of various types. The city of Zug, the home of the Ethereum network, a.k.a “crypto-valley” hosts multiple crypto-startups.
However, Switzerland is not standing aside in the matters of ICO regulations. Observing the growing number of ICOs running in its jurisdiction, the authorities saw the need of introducing certain regulations with the stated purpose of helping the blockchain startups and supporting the technology innovations.
Swiss guidelines on applying the financial market laws to ICOs
On February 16, 2018, The Swiss Financial Market Supervisory Authority (FINMA) issued its guidelines on applying the financial market laws to ICOs. According to these guidelines, all tokens fall under the following three categories – payment tokens, utility tokens, and asset tokens, the latter being considered securities. If the tokens issued during an ICO are qualified as “asset tokens”, they are subject to the rules of the Swiss Code of Obligations.
However, the applicable rules are not as strict as may be expected. They impose certain bookkeeping requirements which are rather formal and easy to comply with.
At the same time, issuers of payment tokens are subject to the anti-money laundering rules. Such businesses must establish the KYC procedures to verify the identities of their customers and submit to the FINMA supervision.
In general, the Swiss ICO regulations can be described as friendly and positive and aimed at supporting the projects working in the blockchain industry.
Should we start panicking yet?
Not at all. Although it may seem that the governments are clamping down on the cryptocurrency market on all sides, the fact that they have not been in much hurry to implement regulations and that in some jurisdictions they are rather favorable and supportive towards the crypto-projects, allows to assume that they want to find the balance between preventing fraud and encouraging the technology innovations.
True, the news of impending regulations may affect the crypto rates and cause some market volatility, however, the overall trend is rather positive. Despite some harsh actions, such as China’s blanket ban or Iran’s initiative to ban Telegram over its successful ICO, the governments are generally leaning towards introducing better transparency and investor protection while retaining the major advantages of the blockchain.
We have been closely following the news from the crypto-market and adapting our blockchain practices accordingly. We are positive about the future of the blockchain technology and ICOs and welcome any measures aimed at improving the ICO data protection and the security of token sales. Adoriasoft believes that a lot depends on the quality of the ICO smart contract development service and the security measures implemented within it. See the description of one of the recent ICO projects we took part in to get the idea of the scope and quality of the security mechanisms implemented for the initial coin offering.
If you have any questions or concerns about the current state or the future of the crypto-space, contact us for a free consultation. However, let us assure you that the future of cryptocurrencies is bright and positive, as we now live in the era when the technology can influence the law and not the other way round.