European financial supervisors, including ESMA, the Belgian FSMA and the Dutch AFM, published warnings on the risks of ICOs to investors and on the rules applicable to firms involved in ICOs.
The market for so-called cryptocurrencies is red hot. The estimated total market capitalization of all cryptocurrencies increased from 18 billion dollars at the beginning of 2017 to a mind-boggling 200 billion dollars at the time of writing of this article. Needless to say that this hype has some people worried, not in the least the European financial supervisors.
A key concept in cryptocurrency is ‘Initial Coin Offerings’ (ICOs), a type of crowdsale where developers of a project offer a new type of cryptocurrency (also called ‘tokens’ or ‘coins’) through distributed ledger technology. The cryptocurrency can take on widely different characteristics based on the purpose of the specific project: they can be intended for use, among others, as money/virtual cash, as a financial instrument, or as a means of granting access to a product or service.
On 13 November 2017, European financial supervisors, including ESMA, the Belgian FSMA and the Dutch AFM, published warnings on the risks of ICOs to investors and on the rules applicable to firms involved in ICOs.
Investors are warned about the unregulated character of the space, making it vulnerable to fraud or illicit activities, about the high risk and volatility of cryptocurrency and about the lack of information.
Furthermore, firms involved in ICOs are reminded of their obligations under the EU financial legislative framework. From our experience advising on ICOs, typically the following regimes may be applicable to ICOs: the Prospectus Directive, MiFID, AIFMD and the 4th Anti-Money Laundering Directive. For each ICO, it should be assessed on a case-by-case basis whether it falls under one or more of the regimes mentioned above (or any other regulatory regime) and to what extent it should comply with the relevant licensing or other obligations.
These warnings by European financial supervisors may signal the long-awaited start of increased regulatory scrutiny in the cryptocurrency scene.