Last year, Initial Coin Offerings (ICOs) exploded into the limelight with an estimated 891 ICOs raising over US$6 billion. As the capital raising model was previously unknown, regulators had to start investigating the model and begin their determinations on the various legalities.
However, with all that money and hype pouring in and scam artists taking advantage of a new opportunity, regulators around the world are now taking action and either introducing temporary bans, delivering warnings, or creating new rules. While the regulatory framework is still in flux, here’s the latest news about ICO regulations around the world.
As witnessed by the volatility of crypto markets, there’s not one standard view of how this entire space will play out — or how to regulate it. In the US, two major regulators who have an interest in the sector are taking very different approaches.
The Commodity Futures Trading Commission (CFTC) has already permitted two exchanges to offer Bitcoin futures. While Bitcoin is well past the ‘initial’ stage, it does indicate that the CFTC believes that it has jurisdiction over working digital currencies and considers them commodities.
As opposed to working digital currencies, theoretical coins (digital currencies) or tokens (utilities) are a different matter and it seems they are coming under the jurisdiction of the SEC (exact rules are still to be determined). As tokens are tradeable on exchanges, aren’t yet commodities, and, in many cases, meet the definition of a security, the SEC is taking the lead on regulating ICOs.
To date, no ICO has taken the steps to register with the SEC and ensure a fully compliant ICO. The SEC has issued warnings, filed several law suits, and filed fraud charges against at least one ICO. According to SEC Chairman Jay Clayton, “we have brought cases, and if people don’t change their ways we’re going to be bringing more cases.”
In one cease and desist order, described as the “Munchee Order”, the SEC offered a legal analysis:
“Tokens, coins or other digital assets issued on a blockchain may be securities under the federal securities laws, and, if they are securities, issuers and others who offer or sell them in the United States must register the offering and sale with the Commission or qualify for an exemption from registration.”
South Korea has been a hotbed of cryptomania; according to one report it is the 3rd largest market of Bitcoin trading and accounts for one-third of Ethereum trading. Due to the potential impact on investors, regulators have taken steps to better control and monitor the sector.
On September 28, 2017, the Financial Services Commission banned ICOs as a fundraising tool.
In 2017, China looked like it was on the path to become the biggest player in all things crypto. It was home to the largest Bitcoin mining pools, the yuan-bitcoin exchange markets had the most trading volume, and numerous ICOs were launched and quickly snapped up by hungry investors. However, that’s all changed with China’s financial regulators taking multiple steps to make an “orderly exit from the market.”
On September 5, 2017, China banned ICOs.
While some countries are running away from ICOs, others see an opportunity and are making moves to legitimize and regulate the field. On December 14, 2017 Gibraltar set guidelines for operating a blockchain business, enabling it to become the first jurisdiction with a regulated ICO market.
Samantha Barrass, chief executive of the Gibraltar Financial Services Commission, said: “Today’s publication places Gibraltar at the forefront of the regulation of Distributed Ledger Technology businesses and is a wonderful example of what can be achieved through greater collaboration among industry, government and the regulator.”
In November 2017, the Monetary Authority of Singapore released A Guide to Digital Token Offerings, providing guidance on how tokens can be offered under existing security laws.
Some countries seem to have a positive stance toward developments in the burgeoning field. For example, Japan, Canada, Switzerland and Malaysia are some jurisdictions that either allow ICOs or are taking steps to do so.
The critical element for all these jurisdictions to develop the ICO ecosystem is to have clear rules and processes in place. That way all participants — companies, investors, and regulators — know exactly what is permissible and what isn’t.
If a defined regulatory model is in place, ICOs will have the opportunity to become another legitimate way for companies to raise money. Regulations will help weed out scams and weak offerings, and make for a stronger, safer market.