The history of cryptocurrency is marked by continual legal battles in a variety of venues and for a plethora of reason. The rise of Initial Coin Offerings, however, have created an even more significant legal stir in the United States. The recent -lawsuit- filed against Ripple Labs has done much to highlight some of the key legal questions surrounding Initial Coin Offerings.
Initial Coin Offerings are crowdfunding efforts in which new companies that seek to found or create a specific product offer tokens, or cryptocurrencies generated on the blockchain (typically Ethereum), to investors in exchange for the promise of profit or access to the product being created.
Legal problems for Ripple arose when some investors who lost money claimed that the lines between Ripple Labs, the company running the ICO, and the tokens that were sold to investors were blurred. When the ICO ended and the coins began to drop in value, investors felt as though they had been defrauded.
But the biggest implication of this case has nothing to do with investors being unhappy with their choices and the company they chose to back. Instead, the key issue in the case is whether or not the sale of tokens in ICOs constitutes the exchange of securities. In the United States, their classification as securities would mean that the trade of tokens in an ICO could constitute the trade of securities on an exchange—a monetary action regulated by the Securities and Exchange Commission.
If ICOs are to fall under the regulatory authority of the SEC, the impacts could be wide and massive. Companies would now be forced to comply with federal law regarding the trade of currencies, and investors would have to follow regulations typically surrounding investors in the traditional economic sector.
But the United States is not the only company looking into the prospect of further regulating tricky Initial Coin Offerings. Thousands of reports of scams and millions of dollars lost to alleged “pump and dump schemes” have prompted discussions of regulation and definitions all over the world. In order to properly predict the future path of cryptocurrency and ICOs, investors should be aware of the global trends, both towards and away from regulation by the government.
But information regarding countries outside of the United States can sometimes be difficult to find. Because of this, this guide has been created. Consolidating information from the main countries with vested economic interest in both ICOs and their regulation, this piece seeks to inform the modern investor of the current global trends regarding regulation and, hopefully, make a judgement on where cryptocurrency regulation is heading.
Pros Of ICO Regulation
Despite the backlash from many within the cryptocurrency community, it is important that investors understand the possible benefits that might come from governmental regulation. Though specific benefits will likely vary based on country and regulatory authority, a few key justifications for regulation seem to be innate to the nature of ICOs and decentralized currencies. These will be discussed in this first section.
First, there is an obvious benefit to the kind of buyer protection offered by most regulatory agencies. In a warning released in March 2018 by the U.S. Securities and Exchange Commission, the organization warned investors of the dangers of becoming financially engaged with cryptocurrency exchange, or Initial Coin Offering, platforms. The agency articulated that, because no ICO is officially registered as an exchange. The consequence of this lack of classification means that the SEC is unable to offer the same kind of protection they would offer to investors in legitimate exchanges within the traditional Wall Street investment market.
Furthermore, their lack of classification as an exchange means that the federal government is generally unable and/or uninterested in the prospect of securing lost funds to scams. Scams are incredibly prevalent and have been on the rise since the market for ICOs became oversaturated with thousands of hopeful startups.
Regulation could have a direct benefit for investors. SEC regulation of ICOs as a legitimate exchange would allow the agency to publish regulatory information regarding the business in which investors place their money. This classification would also make it possible for the commission to evaluate the legitimacy of businesses seeking crowdfunding and provide key protections for investors from fraud and theft of investments.
Additionally, some analysts predict that institutional regulation of ICOs will result in governments being more willing to work with startups to create new and exciting regulations. Countries all over the world have thrown around applications of the revolutionary public ledger blockchain technology to expediate, transfer, and protect privileged data.
But this feat cannot be achieved without the help of the innovative private sector. Just as hundreds of government organizations rely on for-profit companies to drive some of their most important products, so too would the involvement of private companies in the development of institutionally-applied blockchain technologies help governmental agencies greatly.
This trend does have roots in empirical evidence. Investments from governmental agencies in the ICO for Telegram’s communication service helped to fund the product, and its messaging technology is employed in various ways as an effective and free form of communication for public entities.
The government’s regulation of ICOs implies that they recognize and endorse their legitimacy. While this may be a headache when it comes to investors and participants trying to conform to thousands of miles of regulatory red-tape, the benefits from a capitalist standpoint could be great.
Finally, governmental regulation could help to improve the success of ICOs after the initial funding period is over and help these same companies to raise more funds during their campaigns. As it stands, the prevalence of scams within the ICO bubble has caused a serious lack investor faith in the market. This makes it harder for companies to raise money for their products, and even harder to sustain their business’s operation after the ICO ends.
Governmental regulation, just like the SEC remarked, provides an unrivaled level of protection against the scams and failed companies that shies many potential investors away from monetary contribution. Regulation could bring skittish investors back into the fold and help to rejuvenate a shy cryptocurrency capitalist culture.
Cons Of ICO regulation
The uproar in the cryptocurrency community over the prospect of increase governmental regulation has made it clear that a large body of the blockchain ecosystem is opposed to governmental intervention. This is to be expected; the initial concept of a decentralized currency is predisposed to resist centralized involvement and regulation.
It is clear, then, that there exist clear ideological conflicts between cryptocurrencies and regulation on the part of a centralized government. For many, the idea of having an anonymous currency raised to the same standards as actual stocks bought and sold on Wall Street or in foreign markets is worrisome. Their anonymity would become, in many cases, a violation of the law.
Stricter reporting requirements take away from the anonymous allure of currencies like Bitcoin while governmental intervention seems to be the antithesis to a currency intended to be for and by the people who verify and support its ecosystem.
Even ignoring, briefly, the philosophical qualms that some pundits articulate with regulation, there are clearly several substantive pragmatic arguments against increase governmental regulation of Initial Coin Offerings.
Most importantly to the average investor, classification as a security or international regulations could mean very serious increases to taxes paid and reporting required. Many investors in ICOs have been able to take advantage of vagueness in their country’s tax laws to make significant profits off of investments. If investments in ICOs are globally viewed as identical to fiat investments in securities, taxes paid and paperwork required could drastically increase.
Furthermore, the red tape offered by governmental oversight could spell major trouble for existing cryptocurrency-funded projects. Because the sale of a security puts companies into a different bracket of organization demanding different compliance measures, companies generally do not want to be classified as exchanges for securities.
New startups may also be discouraged from entering the market if governments begin to put their foot down with Initial Coin Offerings. Even the mere perception of complication by government regulatory authority could push many hopeful startups away from the blockchain. This could be disastrous for innovation; companies that otherwise would have introduced new and exciting products to an excited market would instead never create the products because of their disdain for the red tape of securities regulation.
Regulatory Efforts By Country
In any case, there is still much debate to be had. Both sides of this legal battle will duke it out inside and outside of the courts. But for the average investor, a worldwide resolution of the cryptocurrency regulation problem is a concern for the future. The short-term consideration for most crypto-fanatics is how countries are currently working to regulate the currencies, and how these regulation talks may pan out in the coming years.
It should be noted that this article does not constitute an official legal opinion or ruling. Speculation is based off of readily-available information released by governmental institutions and advisory organizations. Any financial decision concerning legality should be taken with great caution and preluded by deep investigation and personal speculation.
That being said, it is clear that countries all over the world are simultaneously holding their own talks, debates, and waging their own wars over the future of cryptocurrencies. More specifically, the increase popularity of ICOs in many countries has prompted a unique debate regarding if and how the projects should be regulated by economic authorities within the government.
The following sections will break down ICO regulation efforts and statuses by countries. Not all countries are included. The nations listed below are those countries which generally have the most economic engagement and public interest in the ICO market.
The United States has a long history with cryptocurrencies. The SEC made remarks in 2017 that cryptocurrencies can sometimes be securities. Additionally, their closing remarks to their report on the DAO hacking last year revealed that the commission viewed the coins used to fund the ICO for the organization were considered securities and should be treated as such.
The SEC’s press release in early March of 2018 warned investors of the dangers of cryptocurrencies but made little mention of their definitive classification as securities. However, the organization has articulated on several occasions that currencies which meet certain definitional conditions may constitute either a security or a commodity—both of which are regulated by financial authorities in the USA.
Early 2018 yielded one of the first enforceable SEC rulings on Initial Coin Offerings. An SEC rule known as ‘Regulation D,’ which required startups to conduct anti-money laundering procedures before selling stocks to investors, was enforced and continues to be a requirement for startups.
Fortunately, some popular startups have taken advantages of a loophole which imposes fewer regulatory burdens on companies that raise less than $50 million through their ICO. Some companies have gone so-far as to set their ICO’s total hard cap at less than this magic number to avoid triggering additional regulation action from the SEC.
But the future of regulation for the United States is still in the air. The debate rages on concerning whether or not Initial Coin Offerings constitute the exchange of securities. Additionally, some authoritative voices supporting regulation have argued that cryptocurrencies could be considered commodities, which would open holders to additional, separate regulations.
For the U.S., the future of regulation comes down to two main factors. First, court decisions on landmark cases such as the class action lawsuit against Ripple Labs will establish key legal precedents to help guide SEC regulation on criminal and civil accusations against fundraising startups. Second, the SEC as an agency continues to release new statements and rulings to clarify how the unique situation of Initial Coin Offerings fit into existing rules that exchanges and security-holders are bound to.
Hong Kong maintains a significant reputation as a haven for many cryptocurrency-related businesses. However, recent actions on the part of the government throw into question the extent to which Hong Kong’s government supports the widespread economic interest in Initial Coin Offerings and cryptocurrency investment.
Hong Kong’s shaky condemnation in late 2017 of ICOs was prompted in part by China’s radical decision to ban Initial Coin Offerings entirely. The country outlined that no ICO would be allowed in the country. The justification for this decision is largely rooted in the fears of countries like the United States; scams in the ICO community were far too prevalent to allow them to continue.
Hong Kong failed to take such a radical stance but did act to regulate some types of startups using ICOs, especially when these startups trade tokens for shares, value, or participation in a product being developed by the startup.
The future of ICO regulation in Hong Kong is unclear. The government continues to provide clarifications on their original statement of intent to regulate some forms of ICO token-trading platforms.
In a similarly reactionary manner to the timeline for Hong Kong’s regulatory statement, Canada waited around one month after the U.S. Securities and Exchange Commission’s statement on ICOs was published to make their own press release on the issue. Taking a similar stance to the United States, the government of Canada concluded that certain types of ICO offerings were securities. Consequently, the government would be able to regulate some ICOs using traditional currency strategies.
Canada also published an informative document detailing what ICOs need to do in order to be compliant with existing regulations to which they are bound, as well as the punishments levied for companies who fail to follow the rules.
Because their decision allows for ICOs to be evaluated individually and does not offer a definitive, objective classification for the offerings to fall into, the future of Canada’s cryptocurrency investment regulation is similarly up-for-grabs.
Thailand is one of the few countries on this list who have come forward with brand new regulations specifically targeted at cryptocurrency startups looking to crowdfund their initial projects. Though the government’s press release in late 2017 embraced blockchain businesses for their contributions to innovation and technological progress, 2018 has seen a reversal of opinion within the ruling government.
New companies looking to raise money through an Initial Coin Offering in Thailand will now have to pay the standard 15 percent tax applied to capitalist startups. Additionally, though, these companies are also to be responsible for a value-added tax of 7%. The extent to which these taxes will be enforced, and the legal battles which may be raised regarding the presence and fairness, are still yet to be determined.
European Union Regulatory Trends
Though not a country by itself, the European Union seems worthy of their own category in a list of regulation efforts all over the world. As a general rule, fans of ICOs will appreciate the European Union’s interest in the development of blockchain technology and the encouragement of this budding industry of startups and free enterprise.
These policies coincide heavily with the banking practices employed in many of these countries. However, it should be noted that the European Union’s countries do demand that new companies conform to traditional requirements preventing money laundering, as well as tax laws applicable to their business.
It would be unfair, however, to say that the European Union is unified under a singular stance when it comes to ICO startups and their place in regulation. Some countries have taken different paths on the road to proper governmental responses to the growing industry.
Switzerland is notable as an example in the EU because of their active efforts to encourage the formation of startups and the creation of Initial Coin Offerings. One author praises the country for their pattern of cooperating with “genuine ICOs” to ensure their success.
On the other end of the spectrum is Germany. Germany has taken a hard stance on ICOs, demanding that prospective startups follow several difficult steps before officially offering their coins to interested investors.
This is not unexpected, and it is fair to speculate that countries like the United States will apply similar requirements to ICOs within their own countries.
Following suit with Germany, French authorities have made it clear that there will be no free rides for blockchain-based and publicly-funded crypto-companies. Basic regulations and rules are mandatory and must be followed before a company will be allowed to host an ICO to fund their organization.
For both France and Germany, all political cues point to a future of increased regulation of key aspects of ICOs. In particular, the countries seemed concerned primarily with limiting the ability of sketchy ICOs to deceive and scam investors out of their cash.
Singapore is another hopeful example for fans of unregulated ICO campaigns. Singapore’s policies seem to be slightly confusing, though. While the government had previously maintained that only those cryptocurrency companies that were deemed to be selling “assets” would be subject to additional regulation, a press release from the Singapore government hinted that further regulations might be imposed by the Central Bank.
More clarification and research seems necessary before involved parties begin to really understand how they might be affected by Singapore’s regulatory decisions regarding ICOs and cryptocurrencies alike.
ICO Predictions: A Future Of Regulatory Battles
Though it is difficult to draw commonalities among hundreds of varying countries of the world, the governments with economies most interested in cryptocurrency and ICOs appear to be working towards an increase to regulatory authority over Initial Coin Offerings. Though it is true that some countries (i.e. Germany) are harder on the institutions than others, nearly every country on our list has clearly taken steps to at least begin discussing additional restrictions on ICOs.
One substantial barrier to effective discussion of this major financial issue is the speed at which the cryptocurrency market is subject to change. New companies appear every day and generate new problems and solutions. As lawsuits, questions, and clarifications continue to complicate an already-difficult issue, governments are faced with the difficult task of hitting a moving target.
Consequently, it is hard to predict how the governments of the world will react to the continued growth of the Initial Coin Offering model. It is safe to say, however, that between complete lack of regulation and total centralized control, something has to give.
Reflections—Sensible And Transparent Regulation
The concerns expressed by both the cryptocurrency community and the governments of the world highlight the need for a sensible, fair medium of regulation. The most successful ICOs flourish in countries that provide enough regulations to protect investors and maximize market faith, but not enough constrictions to suffocate progress and profits.