In recent months, initial coin offerings (ICOs) have become one of the more popular investment opportunities currently available. Fueled by the explosive growth of Bitcoin and Ethereum, the excitement surrounding the next big potential altcoin boom has fueled investor interest.
However, press concerning government crackdowns on ICOs, such as China’s banning of all ICOs in the country and the United States’ Securities and Exchange Commission charges against two ICOs for selling products that “don’t really exist,” is showing that the unregulated nature of ICOs is rapidly changing. Nations are increasingly taking a position on the regulation of ICOs.
This article will detail the status of ICOs across the world and discuss why some nations are moving toward finally codifying their positions on the controversial investment device.
The Perceived Problem with ICOs
One of the problems that many of the countries have with ICOs is that, technically, it is a regulatory workaround. The idea behind ICOs is that instead of seeking an initial public offering, businesses can seek low amount seed funding without the due diligence, regulatory requirements, time, or fiduciary permissions a traditional IPO would require. For a small business dealing with untested or unknown technologies, this peer-based alternative offers funding opportunities to businesses otherwise ineligible to traditional funding schemes.
This approach, however, can be rife with fraud. China and South Korea both claim that the possibility of scammers using ICOs to defraud investors is the primary reason they have moved to ban the creation or selling of them in their countries. Meanwhile, the U.S. SEC has issued an alert indicating that public companies may be engaging in “pump-and-dump” schemes to manipulate their market prices.
Many nations are pursuing changes to their regulatory policies to codify adherence to anti-money laundering/know your customer (AML/KYC) practices into law for ICOs and require additional oversight, such as registrations and disclosure statements.
Additionally, if the ICO relates to property transfers or to fiat currencies, these ICOs, in fact, may be dealing with securities. This has implications on taxation and securities integrity.
Embracing the Future
However, there are also nations that are seeking regulations to protect ICOs.
The unregulated nature of ICOs leaves them subject to exposure to additional regulations that may be excessive. A case of this is Wyoming in the U.S., which requires 25 percent of the value of all exchanges transmitted in or to Wyoming to be held in deposit. These incidents of “over-regulation” have a chilling effect on new ICO development.
The Isle of Man and Switzerland have indicated that they will seek regulations to close these loopholes. Thus, as many countries seek to tighten controls on ICOs, others are looking to become leaders in the ICO world.
The chart below list nations that have indicated potential or actual changes to regulations. This information is correct as of October 1, 2017. As always, it is the responsibility of the investor to do his or her due diligence before investing in any ICO. While regulations can help to reduce the investment risk, the best risk reduction practice is extensive research and preparation.
|European Union||Allowed/Subject to future regulations||ICOs are allowed, given they are in adherence to Anti-Money Laundering/Know Your Customer (AML/KYC) policies and to required business regulations and licenses, per the ICO’s business function.
However, potential new regulations being considered might make altcoins a new class of assets where there is no consumer or seller engagement, and therefore no laws are needed to guide the behavior of parties involved. This may make Europe a hotspot for ICO development.
|The Canadian Securities Administrators have ruled that ICOs and altcoins are securities, subject to regulations on a case-by-case basis.|
|China||Banned||ICOs are banned for all businesses and individuals by order of the People’s Bank of China. Chinese ICOs that have completed their funding cycles have been requested to refund any altcoins raised. The PBoC has indicated it will investigate any company or individual found to be in violation of its ruling.|
|Estonia||Allowed||Estonia is currently considering starting its own ICO to raise funds.|
|Germany||Allowed||Germany has no specific regulations for ICOs, but expect ICOs to adhere to existing regulations, including those encapsulated in the Banking Act, Investment Act, Securities Trading Act, Payment Services Supervision Act, and Prospectus Acts.|
|Israel||Allowed, but subject to future regulations||The Israeli Securities Authority is scheduled to report on whether ICOs and altcoins should be regulated on December 31, 2017.|
|Japan||Allowed, but subject to future regulations||The Financial Services Agency is looking at regulations that may help to strengthen AML/KYC protections for altcoins.|
|Russia||Allowed, but unregulated/subject to future regulations||The Russian government is uneasy concerning altcoins and may recognize altcoins as derivatives or other financial instruments for the purpose of regulations later. Currently, however, ICOs are unregulated. Future regulations may impose AML/KYC, taxation, and transaction monitoring.|
|Singapore||Allowed. but subject to future regulations||Singapore authorities have indicated that they may be interested in considering regulations on ICOs. It is likely that ICOs with “independent utility” — that is, no involvement with fiat currencies or other securities or properties — will be exempt from regulations, however.|
|Switzerland||Allowed, but subject to future regulations||Recent attempts to regulate ICOs have failed, but the need to codify protections may reignite the regulation efforts. Regulations are not thought, however, to be able to stop the current momentum to incorporate ICOs into Swiss culture.|
|United Kingdom||Allowed, but subject to future regulations||The UK recognizes altcoins as “private currency,” similar to “Disney Dollars” at Disney properties. Currently, ICO operators are free to interpret existing laws and regulations as they see fit for their own properties. However, the UK is testing out ICOs and altcoins in its “regulatory sandbox”; new regulations may be released soon.|
|United States||Allowed, but heavily regulated||ICO rules vary widely from state to state, from no regulations at all in some states to regulations requiring deposits in equal to or in excess of all local transactions to regulations requiring a license for businesses to engage in altcoin activities. On the federal level, there are no current regulations banning ICOs specifically, although ICOs are expected to be registered and licensed the same as if they were not ICOs. This includes registering with the SEC if the ICO is to sell or trade securities. The SEC has recently found that some altcoins may be a security, and as such, may be subject to SEC’s ruling in the future. ICOs are expected to adhere to AML/KYC practices. Failure to adhere to these practices may leave an ICO open to legal action or possible seizure.|
|Gibraltar (UK)||Allowed, but subject to future regulations||Regulators are planning to offer regulations for ICOs by January 2018 in hopes of permanently codifying legal protections for the altcoins.|
|Isle of Man(UK)||Allowed, but subject to future regulations||The Isle of Man has indicated that it is seeking to forge regulations in the future that will establish and protect ICOs’ legal status.|
|South Korea||Banned||South Korea has banned all ICOs in the country on September 29. The Financial Services Commission cited the growing risk of scams for being the reason behind the crackdown.|
|Thailand||Allowed, but subject to future regulations||The Securities and Exchange Commission has released a statement paper, welcoming the use of altcoins, but leaving open the possibility of regulating altcoins thought to be securities.|
|Hong Kong (China)||Allowed, but subject to future regulations||Regulators have indicated that certain altcoins might be securities and should be treated as such.|
|Philippines||Allowed, but subject to future regulations||Regulators have recognized Bitcoin as a valid form of remittance payment. However, the country also feels that regulations addressing AML/KYC protections may also be needed. Additional, companies offering exchange services are now required to register.|
|Australia||Allowed/Regulated||One of the first countries to formally launch ICO regulations, Australia requires ICOs that involve combined investment to adhere to the Corporations Act, to keep track of those shares — if the ICO issues shares — and to issue a disclosure document and acquire a financial services license if the ICO offers financial advice to customers.|
It is clear that many nations are attempting to come to some conclusion about the future of ICOs within their national boundaries. Therefore, it behooves ICO investors to carefully research their country’s ICO regulations as well as the ICOs themselves prior to investment. For news on current and future ICOs, subscribe to Bitcoin Market Journal.