Since our last update, regulators in more jurisdictions around the globe have released guidance or warnings in relation to ICOs.

Despite warnings from some Asian, European and North American regulators, the continued development of regulatory guidance in different regions and even an open government-led consultation suggests that ICOs are being increasingly legitimised.

Token offerors should seek legal advice before their seed funding round or ICO to consider not just whether securities laws apply but other obligations including consumer protection obligations and anti-money laundering and counter-terrorism financing (AML/CTF) regimes. 

The latest developments are set out below:

  • New Zealand: The New Zealand Financial Markets Authority (FMA) has released guidance on whether ICOs fall within the existing regulatory regime. In line with the Australian approach, the FMA has noted that tokens with the characteristics of a financial product (debt securities, equity securities, managed investment products and derivatives) will need to comply with the Financial Markets Conduct Act 2013 (NZ) or apply for an exemption from the relevant requirements.  Regardless, all tokens whether offered in or out of New Zealand will need to comply with consumer protection obligations under the Fair Trading Act 1986 (NZ).
  • Singapore: The Monetary Authority of Singapore (MAS) has published guidelines on when tokens offered in ICOs may constitute securities under the Securities and Futures Act (Cap. 289) and Financial Advisers Act (Cap. 110).  This includes when tokens represent shares, debentures or units in collective investment schemes. MAS has indicated that it will examine the “structure and characteristics of, including the rights attached to, a digital token” to determine the token’s status.  ICOs captured within MAS’ regulatory scope will need to comply with relevant requirements, including prospectus and authorisation or recognition requirements. MAS also emphasised that the money laundering and terrorism financing (ML/TF) regime may apply to virtual currencies, including obligations to report suspicious transactions. MAS indicated that, moving forward, it would establish a new payments services framework for virtual currency intermediaries to implement policies, procedures and controls to address ML/TF risks.  MAS has indicated that its jurisdiction extends to persons both in and outside of Singapore.
  • United Kingdom: The UK Treasury has released its second national risk assessment of ML/TF. Notably, the report stated that the risks of ML and TF for digital currencies is low, however the risks are expected to increase as digital currencies become more popular. The assessment supported bringing digital currency exchanges and wallet providers into the remit of the anti-money laundering and counter-terrorism financing regulation. The risk assessment also recommends increased investment in research, horizon scanning and training for law enforcement agencies in order to address to address one of the key findings of the first risk assessment, namely the risks created by the lack of interaction between the regulated sector and digital currencies.
  • India: Three justices from the Supreme Court of India have issued a notice to India’s central bank, market regulator and tax department, to respond to a petition calling for urgent regulatory direction in relation to Bitcoin trading. Currently, Indian authorities have not issued any guidance on cryptocurrencies and ICOs, other than a warning issued by the Reserve Bank against virtual currencies in late 2013. The Indian Government formed a committee to study cryptocurrencies earlier in the year, but the committee has yet to report on its findings.
  • France: The French financial regulator, Autorité des Marchés Financiers (AMF), has released a consultation paper on the development of a framework for ICOs and the launch of its support program, the Universal Node to ICO Research and Network (UNICORN).  Identifying the risks involved with investing in ICOs, the AMF has put forward three methods of monitoring ICOs: promoting a guide to good practice, extending the scope of existing guidance to apprehend ICOs as offers of securities to the public and proposing new legislation in relation to ICOs. The consultation closes 22 December 2017.
  • Japan: The Financial Services Agency (FSA), Japan’s financial regulator, has issued a warning to investors regarding the risks of investing in ICOs.  Highlighting the potential for fraud and the price volatility attached to tokens, the FSA also noted that businesses involved in ICOs should check whether relevant legislation such as the Payment Services Act and Financial Instruments and Exchange Act may apply.
  • Malaysia: The Chairman of the Securities Commission Malaysia (SC) has indicated that the SC is working with Malaysia’s central bank to create a regulatory framework for cryptocurrencies. This will include guidelines for functional token use cases such as secondary market trading of digital assets. The framework is due to be released in the first half of 2018. Malaysia’s central bank, Man Negara Malaysia, is also planning to bring cryptocurrencies within its AML/CTF regulatory framework by including currency exchanges within the scope of “reporting institutions”.
  • Germany: The Federal Financial Supervisory Authority (BaFin) has released a consumer warning on the risks of investing in ICOs. BaFin identified the key risks as being significant token price fluctuations, the experimental nature of the projects being financed, insufficient information provided in contrast to regulated prospectuses and systemic vulnerability to fraud and ML/TF risks.  Following this, BaFin has released a more in-depth article examining the risks and how investors should behave.  Broadly, BaFin recommends researching the identity, reputation and credit standing of the token offeror, verifying whether supervision has been provided by a relevant authority and investigating the benefits and risks of projects. Currently, BaFin is analysing ICOs on a case-by-case basis to determine whether they fall within BaFin’s regulatory scope.
  • Netherlands: The Netherlands Authority for Financial Markets (AFM) has followed in Germany’s footsteps in alerting investors to the risks relating to ICOs. Key risks identified include the possibility of scammers, overestimations regarding returns on projects, a lack of transparency around projects and the teams behind projects, and speculative investors causing price volatility.
  • European Union: The European Securities and Markets Authority (ESMA) has issued two statements on the risks of ICOs for investors and considerations for start-ups wishing to conduct an ICO.  ESMA warned that tokens constituting financial instruments need to comply with legislation including the Prospectus Directive, the Markets in Financial Instruments Directive, the Alternative Investment Fund Managers Directive and the Fourth Anti-Money Laundering Directive.
  • United States: The Chairman of US Securities and Exchange Commission (SEC) recently made unscripted remarks that suggested the SEC would potentially be more aggressive in its approach towards regulating ICOs.  Stating that many of the ICOs he had seen bore strong resemblance to securities, the Chairman also asserted that the cryptocurrency market lacked transparency and was vulnerable to market manipulation. This comes after the SEC’s market-shaping report on the DAO (discussed here) and is significant as regulators around the globe begin examining the enforcement of securities law and ICOs.

While the regulation of ICOs and cryptocurrencies continues to evolve in many jurisdictions, the enthusiasm for widespread application and use of blockchain technology continues to grow.  The European Commission has put out a call for tenders for a study assessing the opportunity and feasibility of using blockchain technologies across the European Union.  The overall objective is to create “conducive environments for implementing more effective public policies, easing private sector engagement with the authorities, developing innovative ecosystems and applications, showing leadership and reinforcing the competitive edge of Europe and its blockchain innovators at a global level”.  The use of blockchain technology across many different applications appears likely to continue.