A global perspective on ICO

ICO has taken business by storm, but the lawmakers are lagging behind. 2017 is likely to go down in history as the year of ICOs, but this overheated market may well bring about the year of ICO regulations.

Source: CoinDesk ICO Tracker

These are largely uncharted waters for governments. While they are still figuring out how to deal with cryptocurrencies, reasoning about a mechanism that relies on them is even trickier, especially if this mechanism doesn’t quite fit any of the current financial categories. The key question is whether tokens should be considered securities, and in most countries the jury is still out.

Source: Smith + Crown

Some tokens are securities

The DAO, the (in)famous virtual cryptocurrency investment fund, suffered a $50m breach in 2016. This was the first time the US Securities and Exchange Commission got involved in an ICO investigation. SEC concluded that the DAO tokens were, in fact, securities, and their offering in the US should have been registered accordingly. However, the commission admitted that some tokens may be exempt from regulation if they offer specific utility other than representing a stake. The regulator shrewdly left out the details, reserving the right to evaluate each case individually.

SEC chose not to go after anyone then, but it clearly established its dominion over the ICO market and set a notable precedent. A global wave of warnings followed. Canada, Singapore, Thailand, Hong Kong, and Australia agreed that some tokens can be considered securities on a case-by-case basis, but they showed a much more welcoming attitude towards legitimate startups.

Israel may soon set a similar precedent. CoinDash, an Israeli cryptocurrency trading platform, was hacked in July right in the course of its ICO. The $7m hack is most likely what prompted the Israeli authorities to establish a committee for ICO assessment. Although not as damaging as the DAO hack, this was the first attack executed during an active ICO. And just like the SEC ruling on DAO, it will send an important signal to the market.

Laissez-faire

A leader in banking, Switzerland is also becoming a fintech hub with a thriving community based in the municipality of Zug, now known as the Crypto Valley. To date 6 out of 4 largest ICOs were hosted in Switzerland.

Source: PwC

Although the Swiss Financial Market Supervisory Authority is letting the market figure itself out, the government-backed Crypto Valley Association has announced that its team of experts is drafting an ICO Code of Conduct. The CVA hopes that companies and investors will build a self-regulating business environment. The new “framework outlining their legal and moral obligations” may well become the new cryptocapitalist manifesto.

Another prominent financial leader in Europe, Luxembourg has taken a similar approach of open discussion and collaboration with business stakeholders. The country’s dedicated platform, Luxembourg House of Financial Technology, relies on thorough research of the industry to educate and establish dialogue between the investors and the entrepreneurs. In a recent statement the organization has indicated both the risks and the benefits of ICO and recognized that regulations should be kept minimal so that they don’t become an unreasonable burden for blockchain innovation.

The UK, The Emirate of Dubai, and Malaysia have expressed an even more liberal attitude. Their financial authorities have issued official warnings about the highly risky nature of ICO investments, while showing no intention to interfere.

On the other hand, prominent financial hubs dependent on the British Crown are willing to harness the energy of tech startups. The Isle of Man and Gibraltar have pledged to build a solid ICO-friendly legal framework maintaining their favorable and lenient approach to business regulation. Gibraltar’s government is hoping to draft regulatory guidelines in collaboration with blockchain industry representatives as early as within a few months. Apart from the ambition to become an ICO hub, Gibraltar is keenly incorporating blockchain technology into existing financial mechanisms such as the stock exchange.

Waiting out the storm

The EU and Russia are at the epicenter of the ICO fever but are yet to determine their official position.

ICO remains a gray area in Russia. Lawmakers postponed the introduction of a cryptocurrency bill until further notice, and there is a chance it won’t include any provisions regarding ICO. Instead, the Russian government has focused on researching the market while “analyzing international experience”.

The EU’s perspective is even more uncertain, given the complex legal relationship between the union and its member states. While some of them have opened their doors to ICO-funded startups, the European Securities and Markets Authority has remained silent so far.

An Estonian state official recently rocked the boat suggesting a government ICO to fund its unprecedented e-residency program. However, this would hardly agree with the union-wide structure and monetary policy. Mario Draghi, president of the European Central Bank, gave an uncompromising response: “No member state can introduce its own currency; the currency of the euro zone is the euro”. If tokens look less like shares and more like government bonds or even parallel currencies, the EU regulators will step in. However, thanks to the initiative of Switzerland and Luxembourg, it is highly unlikely that the EU will take a blindly aggressive approach and miss out on the opportunity to nourish local business environments.

Cautious or draconian?

China has taken the most radical step declaring all ICOs illegal. While the market has been hit quite hard by the announcement, it is showing signs or recovery as rumors and fears are fading. Experts say the ban on ICOs may be a temporary measure until the party makes key political decisions on the upcoming congress in October, or until the government investigation into the ICO market is over.

Despite its rising influence on the Asian cryptocurrency market, South Korea took similarly aggressive measures and outright banned on all ICOs “regardless of technical terminology”. Here, the motives are purely economical: the regulators expressed concern about a high risk of fraud and speculative demand overheating the market.

For now, ICO startups in China and South Korea will have to consider more conservative funding strategies or flee to more friendly jurisdictions like Hong Kong, Singapore, or Japan. However, some doors may soon be closed: worried about a wave of ICO enthusiasts coming its way, Taiwan is already pushing for an urgent ICO law.

Given their zeal for innovation, it is unclear whether China and South Korea are making a definitive sacrifice for the sake of economic stability, or are choosing to wait out the ICO rush in the shelter of prohibitive regulations until the market matures.

A challenge for lawmakers

A key aspect of ICO is that it easily transcends national borders. The laws regulating ICO in the country of origin might not apply to its investors in other jurisdictions. To further complicate matters, the ICO mechanism relies on highly decentralized, anonymous, and largely unregulated cryptocurrencies. We are yet to discover a proper legal framework for ICO that will have to be just as transcendent and responsive as the market it aims to govern. However, it is certain that this revolutionary fundraising model is here to stay. ICO funding is already racing ahead of venture capital, and missing this opportunity to democratize investments and get them up to speed with cutting-edge technology would be a throwback for businesses and governments alike.