Following recent comments from regulators around the world (discussed here and here), regulators in other jurisdictions have offered guidance on businesses wishing to conduct an ICO. Two distinct regulatory approaches have emerged. Certain regulators have adopted a position that the existing financial services regulatory framework will apply to tokens, while other regulators have banned ICOs and prohibited residents from participating in ICOs. The latest developments are set out below:
- South Korea: South Korea’s Financial Services Commission (FSC), following a meeting with the finance ministry, Bank of Korea and National Tax Service, has prohibited domestic companies and start-ups from conducting ICOs and made margin trading of virtual currencies illegal. Calling ICOs a “violation of capital market law”, the FSC has also announced on-site inspections, the review of operations of cryptocurrency companies and analysis of cryptocurrency accounts for user data. The governor of South Korea’s central bank, Lee Ju-yeol has also stated that cryptocurrency is to be regarded as a commodity rather than a currency and indicated that the bank would be focusing more on researching digital currencies.
- Macau: The Macau Monetary Authority (MMA) has announced that banks and payment providers have been banned from engaging with cryptocurrencies directly or indirectly, including via ICO.
- Switzerland: Switzerland’s Financial Market Supervisory Authority (FINMA) has issued guidance applying existing financial services regulation to ICOs. Depending on the characteristics of the token, the ICO may be regulated under money laundering and terrorism financing laws, banking law provisions, securities trading provisions, and provisions set out in collective investment scheme legislation. FINMA announced that it is currently investigating numerous ICOs for potential breaches of regulatory law. This is particularly significant as Switzerland has long been a popular jurisdiction for ICOs for its technology neutrality and perceived cryptocurrency-friendly ‘Crypto Valley’ in Zug.
- Abu Dhabi: Abu Dhabi Global Market's Financial Services Regulatory Authority (FSRA) also released similar guidance. FRSA indicated that tokens offered via ICO would be considered on a case-by-case basis to determine whether they constitute securities and thus fall within the scope of financial services regulation.
- Lithuania: Lithuania’s central bank has released guidance in relation to ICOs, instructing financial market participants who provide financial services to refrain from participating in activities or providing services associated with virtual currencies. In relation to ICOs, the bank suggested that token offerors would need to consider securities law, crowdfunding laws, collective investment regulations, laws regulating the provision of investment services and anti-money laundering and counter-terrorism financing laws.
- Russia: In relation to ICOs, Russian authorities have indicated that securities regulation will apply and suggested the formation of a single payment space for the member states of the Eurasian Economic Union.
- European Union: In a statement to the European Parliament’s Committee on Economic and Monetary Affairs, the President of the European Central Bank (ECB), Mario Draghi, has indicated that it is not within the power of the ECB to “prohibit and regulate” bitcoin and other digital currencies.
- United States: The United States Securities and Exchanges Commission (SEC) has announced a new taskforce called the Cyber Unit that will focus on cyber-related misconduct including violations involving distributed ledger technology and ICOs. The SEC has sought to create a cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts.
- Singapore: The managing director of the Monetary Authority of Singapore (MAS) has indicated in an interview that the MAS has no intention of regulating cryptocurrencies, however it will implement rules to apply to intermediaries (ie, exchange operators) to address money laundering and other criminal activities.
The guidance being released globally indicates that token offerors should carefully consider the economics, circumstances and purpose of their tokens and seek legal advice before their seed funding round or ICO. The regulatory guidance issued by these regulators will impact the documentation which governs ICOs. These developments also reflect that choice of jurisdiction is an increasingly important consideration in the conduct of a token sale.
It is important to note that while the bans which have been implemented by certain regulators may have an adverse impact on investor demand to participate in a token sale, the guidance released by other regulators, and compliance with that guidance by offering companies and intermediaries, will,in our view, further legitimise ICOs as an investment class. With more than USD $2 billion raised in ICOs over the course of 2017 and ICO fundraising now outpacing traditional equity fundraising for start-ups, the market for ICOs is at a critical regulatory juncture.