ICO regulation: Global trends

The year of 2017 has been namely the year of ICOs. This innovative form of financing involves issuing a digital token to early contributors of a (usually) blockchain-based project in exchange for cryptocurrency. ICO projects have raised over $2 bn since the start of the year. This figure even surpasses that of traditional VC funding of bitcoin and blockchain startups! Obviously, ICO is a genuine innovation with long-term potential, but the industry is currently experiencing growing pains.
One of the reasons why ICO has become such a popular method of funding is because it was entirely unregulated until this summer. Anyone with sufficient technical knowledge could launch his or her own startup. For a long time, the legal status and necessary procedures of ICOs have not been determined in any country in the world. While offering more freedom to entrepreneurs and backers, at the same time this position increased doubts of ICO’s reliability and security level. Actually, such projects belonged to a System D shadow economy sector. However, the situation is now changing rapidly.

Due to the similarity between ICOs and securities, some market players believe that selling tokens must comply with the jurisdiction of the Securities and Exchange Commission (SEC) and thus be illegal in the US. The question was on hold for several months, until SEC finally issued a ruling that some of the tokens are actually securities and are subject to the agency’s regulation. The ruling followed the investigation into a German corporation behind a group called “The DAO” that raised $150 million in ICO last year. The ruling provides some guidance about ICOs, specifying that the question of whether tokens are securities will depend on the particular circumstances of each case. The agency also posted a bulletin warning investors to be careful in deciding whether to invest in ICOs.

Besides SEC regulations, some other US laws should be taken into consideration when dealing with cryptocurrency, if you wish to avoid any problems with the watchdog. In October, Commodity Futures Trading Commission (CFTC) issued a virtual currency primer intended to educate the public the risks associated with investing in crypto assets. While it doesn’t constitute a definitive regulatory position, it does hint that the agency will classify ICO tokens as commodities, stating that “virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.” Back in 2013, the Financial Crimes Enforcement Network (FinCEN) published a regulatory guidance on administering, exchanging, and using virtual currency. Its subsequent statements make clear that FinCEN will enforce anti money laundering requirements against money transmitters, particularly on exchanges of crypto currency and systems providing services for such exchanges. In 2014, the Internal Revenue Service (IRS) issued Notice 2014-21 that stated that crypto assets were viewed as property. Thus, those who invest in cryptocurrency should not need to report the asset. However, according to the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions are required to provide information about accounts held by US taxpayers. This definition includes cryptocurrency exchanges as financial institutions. Currently, IRS’s clear guidance on how to handle cryptocurrency is lacking, but, according to tax experts, this year IRS may start considering cryptocurrency taxable.

Some US states are seeking to build own legal framework around blockchain, with Arizona, Vermont and New York pioneering the initiative. Assemblyman Clyde Vanel introduced four bills that would define blockchain in a legislative context and have the government seek information on how blockchain can be used for state record keeping and to boost the local economy.

Several efforts were made to legitimize ICOs. One of the most interesting is a legal framework, which came up with a “simple agreement for future tokens” (SAFT) model that will allow token sales to be compliant with US securities laws. If the SAFT approach holds up, US investors could join these funding mechanisms. The SAFT framework is based on ensuring that issued tokens fail the Howey test (the measure of whether a financial instrument is a security). In order for tokens to fail the test and not be considered securities, they must be delivered to investors only after a functioning product or service is in place. The lack of such product is, in fact, one of the distinct features of ICOs.
Actually, it seems that the US watchdog is less interested in threatening large offerings backed by major players, and more interested in catching small fraudsters. As for other countries, the situation is not that optimistic across the globe.


In August Canada joined the countries wary of ICOs. In the dedicated notice, the Canadian Securities Administrators (CSA) explained its approach to token sales. The regulators also noted that digital currency offerings would in many cases be considered securities or derivatives, meaning they’re subject to a variety of rules that dictate how and when they can be subject to the public.


Australia may soon pass laws regulating digital currencies in an effort to stop money laundering and terror financing. If the new laws are passed, the financial intelligence regulator AUSTRAC will be given new powers to manage digital currency exchanges. These exchanges would need to be registered under the new regime. It will also become an offence for an "unregistered person" to provide digital currency exchange services.

ICO regulation in Asia


Chinese regulatory agencies issued a joint statement declaring that ICOs are a form of unauthorized, illegal fundraising and that all individuals and companies in China are prohibited from launching token sales to fund their business ventures. China is the first country to issue a full ICO ban. Shortly after that, lawmakers also communicated to bitcoin exchanges that they will need to shut down and that digital currency trading on exchanges will also be prohibited. Some believe, however, that this is only temporary, as China seeks to regulate the industry and that exchanges will soon be opened again.

South Korea

In September, South Korea's financial regulator banned ICOs, as trading of digital currencies needs to be tightly controlled and monitored. Penalties will be issued on financial institutions and any parties involved in issuing of ICOs. The decision to ban ICOs as a fundraising tool was made as the government sees such issues as increasing the risk of financial scams.


When China and South Korea turned away from ICOs, many seemed to hope that Japan, now trading 63% of the world’s Bitcoin, will be the cryptocurrency safe haven. But there is still uncertainty over the country's position regarding ICOs. Contrary to popular opinion, many of Japan’s industries are risk-averse and conservative, and a crackdown on a new fundraising model is still possible. There is a growing concern over numerous cases of cryptocurrency fraud, which puts more pressure on regulators to protect consumers. On the other hand, cryptocurrency has already enters a traditional financial sector. Big banks agreed to launch the J Coin, a Japanese digital currency, and some large retailers including Bic Camera accept Bitcoin.


The Securities and Exchange Commission of Philippines (SEC) is considering new rules for cryptocurrency exchanges ICOs. It said that his agency could categorize ICO offerings as “possible securities” that would come under the Securities Regulation Code. SEC is also currently holding negotiations with the Bangko Sentral ng Pilipinas (BSP), the country’s central bank, concerning the licensing of cryptocurrency exchanges. Earlier this year, the central bank released new guidelines for bitcoin exchanges operating in the country, suggesting that exchanges need to register with BSP and the country’s Anti-Money Laundering Council Secretariat, and will be subject to “registration and annual fee services”. Similar regulations are inThailand, Malaysia and Hong Kong.


The Monetary Authority of Singapore (MAS) have issued a warning to consumers regarding ICOs. Earlier MAS stated that some digital tokens may represent ownership or a security interest over an issuer’s assets or property, thus in some cases ICOs must be regarded as securities and regulated appropriately. Now it advises the public against hasty decisions regarding participation in ICOs and recommends to regard such funding model with caution.

ICO regulations in Europe


Germany’s top financial regulator, BaFin, has recently issued a warning to investors about the risk of investing in ICOs. In its statement, BaFin warned investors about the various risks involved in ICOs and token sales. Among the risks is the possibility of losing one’s entire investment. The agency also warned that the ICO as a funding model can attract fraudsters.

United Kingdom

The UK Government is searching to work out the regulation of bitcoin, being concerned about criminals using cryptocurrencies to launder money and avoid taxes. The Treasury wants to regulate bitcoin under the EU anti money laundering rules, forcing traders in the cryptocurrency to disclose their identities and any suspicious activity. It expects changes to new EU-wide rules to come into effect by the end of December or early next year.


Switzerland's financial watchdog, the Swiss Financial Market Supervisory Authority (FINMA), is concerned that some ICOs are violating the country's laws against terrorist financing" It announced that it was looking into a number of ICOs for breaching "provisions on combating money laundering and terrorist financing" and other regulations. Before that, Switzerland has been relatively open to cryptocurrencies, with one town in the country allowing residents to pay their taxes in bitcoin/ Still, the massive growth of the ICO has forced the agency to crack down on crypto currency. However, Switzerland is still one of the best places to conduct an ICO, due to the country's predictable, stable and decentralized legal and political system.


The Gibraltar Financial Services Commission (GFSC) has issued an official statement regarding the regulation of ICOs. It indicates that Gibraltar will incorporate ICO regulations into its new regulatory framework, which is expected to come into effect in January 2018. The GFSC’s statements on ICOs are welcoming, suggesting that the territory will move to develop a permissive regulatory model. The GFSC indicates that it will seek to regulate the issuance of securities through ICOs, stating that when “tokens represent securities… their promotion and sale are regulated as such.” Gibraltar’s financial regulator also warned investors of the risks associated with initial coin offerings.

Isle of Man

Known for its favorable tax regime, the Isle of Man has revealed that it has developed a permissive regulatory framework designed to encourage ICOs. Having first outlined rules and legislation for businesses that handle or exchange digital currencies in 2014 and 2015, the Isle of Man authorities have continued to develop a regulatory framework which will allow token sales to be compliant with anti-money laundering and KYC regulations. Having completed a test case of an ICO launched by Adel, a fintech incubator which incorporated on the island, the Financial Services Commission has been putting their principles of regulation into action.

In November the European Securities and Markets Authority (ESMA) has also issued two Statements on Initial Coin Offerings (ICOs) similar to those of SEC, alerting token sale participants of the high risk of losing all their invested capital and describing possible legislation rules applicable to firms involved in ICOs. ESMA stresses that projects aiming for ICO should carefully consider whether their activities constitute regulated ones, as any failure to comply with the applicable rules will be considered as a breach.

In general, we see ICOs coming through a series of ups and downs, as any groundbreaking initiative that is set to change the world. Huge potential of the new fund-raising model lets us believe that it will successfully survive the turmoil and become accepted by most of the countries, who don’t wish to lag behind.


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