How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?


Bermuda Small Flag Bermuda

Bermuda has successfully launched the world's most progressive initial coin offering (ICO) legislation in the form of the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 which came into effect on 9 July, 2018 and the Companies (Initial Coin Offering) Regulations 2018 and Limited Liability Company (Initial Coin Offering) Regulations 2018 which came into effect on 10 July, 2018 (collectively, the ICO Legislation). The ICO Legislation applies to companies issuing ICOs and imposes certain legal requirements which a company must comply with, including publishing an offering document (often referred to as a ‘white paper’) with mandatory disclosures.

The ICO Legislation stipulates that conducting an ICO is a restricted business activity and will require the consent of the Minister of Finance. A company can still incorporate in Bermuda in advance of an ICO, but cannot conduct its ICO without prior consent from the Minister. An ICO is defined as an offer by a company to the public to purchase or otherwise acquire digital assets. Digital assets include anything that exists in binary format and comes with the right to use it an includes a digital representation of value that:

(a) is used in a medium of exchange, unit of account, or store of value and is not legal tender, whether or not denominated in legal tender;
(b) is intended to represent assets such as debt or equity in the issuing company;
(c) is otherwise intended to represent any assets or rights associated with such assets; or
(d) is intended to provide access to an application or service or product by means of blockchain.

Given that the ICO Legislation is so recent and, from an international perspective, quite innovative, we anticipate that it may be further honed in the future as necessary.

Cayman Islands Small Flag Cayman Islands

As noted above, there is currently no specific legislation applicable to Initial Coin Offerings (ICOs) and although there are no specific proposals to implement new legislation, there have been working groups established to consider possible legislation.

The applicability of legislation outlined below will need to be considered by Cayman issuers:

The Proceeds of Crime Law (PCL)

The PCL has general application to all Cayman domiciled entities. It is an offence under the PCL to enter into or becoming concerned in an arrangement which a person knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person (commonly known as “money laundering”). In addition, the PCL prescribes ancillary offences to money laundering which includes aiding, abetting, counselling or procuring money laundering.

Schedule 6 of the PCL, provides that certain businesses, which are considered to be conducting relevant financial business (RFB), must also comply with the Anti-Money Laundering Regulations (2018 Revision) (the AML Regulations).

The following business are included in the definition of RFB which may be relevant to the fintech sector; investing, administering or managing funds or money on behalf of other persons, issuing and managing means of payment eg. credit and debit cards, cheques, traveller’s cheques, money orders and bankers’ drafts, electronic money and money or value transfer services.

Anti- Money Laundering Regulations (AML Regulations) and Guidance Notes

If an entity is conducting RFB and therefore subject to the AML Regulations, it is required to implement know your client (KYC) and anti- money laundering (AML) policies and procedures which comply with the AML Regulations.

In addition to monitoring the business of the Company and the downstream investment activities, the AML Regulations require that an entity subject to the AML Regulations obtain customer due diligence information, including source of funds and information on beneficial owners on all initial token holders and transfers.

The Securities Investment Business Law

SIBL regulates securities and investment business in the Cayman Islands. Securities Investment Business refers to dealing in securities, arranging deals in securities, managing securities and advising on securities.

The definition of a "security" is set out in SIBL and contains a list of instruments which are common in today’s financial markets (securities, instruments creating or acknowledging indebtedness, instruments giving entitlements to securities, certificates representing certain securities, options, futures and contracts for differences) and does not in and of itself include tokens issued in an initial coin offering.

Digital assets which take the form of warrants, options, futures or derivatives for securities or commodities may still be securities. If a Cayman Islands entity were deemed to be issuing securities, it would be exempt from any form of licencing under SIBL if the nature of the security were an equity interest, debt interest or a warrant or similar for equity or debt interests.

If a Cayman Islands entity were issuing, or trading in, digital assets which were options, futures or derivatives then it would need to consider the implications of SIBL in respect of licensing. For example a Cayman crypto exchange which offered options, futures or derivatives. A business considered to be conducting securities investment business must be licensed under the SIBL unless considered to be conducting excluded activities which includes those businesses which are only providing services to sophisticated persons, high net worth persons or a company, partnership or trust (whether or not regulated as a mutual fund) of which the shareholders, unit holders or limited partners are one or more persons falling within such definitions. Excluded persons must register with the Cayman Island Monetary Authority and pay an annual fee.

Foreign Account Tax Compliance (FATCA) and the Common Reporting Standards (CRS)

FATCA requires foreign financial institutions and certain other non-financial foreign entities to report on the foreign assets held by US account holders or be subject to a 30% withholding tax on payments of United States source income and proceeds from the sale of property that could give rise to United States source interest or dividends. The withholding tax provisions of FATCA took effect on July 1, 2014 other than in relation to proceeds from the sale of property, in which case they have been postponed to January 1, 2019. The Cayman Islands has entered into an intergovernmental agreement with the United States in respect of FATCA and passed legislation to implement FATCA in the Cayman Islands.

The CRS is a global standard for the automatic exchange of financial account information in respect of holders of financial accounts and requires participating jurisdictions to obtain and report certain information. The Cayman Islands is a participating jurisdiction of the CRS. The Cayman Islands has passed legislation implementing both FATCA and CRS (the AEOI Legislation) which imposes reporting obligations on Cayman entities considered to be “Reporting Financial Institutions”.

The definition of Financial Institutions for the purposes of the AEOI Legislation includes Investment Entities, which are entities “that conduct as a business (or is managed by an entity that conducts as a business)”“investing, administering, or managing Financial Assets or money on behalf of other persons “. The definition of Investment Entity would include investment funds investing in virtual currency and tokenised funds. The definition of Financial Assets is very broad and includes securities and financial instruments however it specifically excludes a non-debt direct interest in real property.

An entity which is considered to be an Investment Entity will be required to implement a compliance and diligence program to allow the entity to identify and report Reportable Accounts. A Reportable Account is an account held by a one or more Reportable Persons or by a Passive Non-Financial Entity with one or more Controlling Persons that is a Reportable Person.

The definition of an account of an Investment Entity is “any equity or debt interest in the Investment Entity other than interests which are regularly traded on established securities markets”.

It is arguable that the tokens issued by an Investment Entity do not constitute either “equity or debt interest”, which are not further defined in respect of an Investment Entity. However, there are anti-avoidance provisions in both the Cayman FATCA and CRS legislation which would arguably apply to these interests.

The Financial Institution is required to register with the US Internal Revenue Service for a GIIN and appoint a principal point of contact and authorised person and then register with the Cayman Tax Information Authority.

The Financial Institution would be required to report, by 31 May in each year, the name, address, taxpayer identification number, date of birth (where applicable), account number and account balance or value as at the period end and in respect of any accounts closed during the period.

In respect of Financial Institutions issuing tokens, the Financial Institution will need to obtain self-certification forms in respect of the initial purchasers and subsequent transferees of such tokens.

Money Services Law

As cryptocurrencies (subject to very limited potential exceptions) are not legal tender in any country, an ICO is likely not to be considered a money transmission business and therefore would not require a licence in the Cayman Islands.

Mutual Funds Law (MFL)

The current definition of “equity interests” in the MFL (which is a key determining factor as to whether an entity qualifies as a “Mutual Fund”) excludes most ICO issuers as tokens are not considered to be equity interests and therefore ICO issuers (as distinct from any blockchain/cryptocurrency asset class focused fund) should not be impacted by the MFL.

Beneficial Ownership Legislation (BOL)

The BOL requires certain companies to maintain details of their beneficial owners and related legal entities on a beneficial ownership register.

If the issuer of an ICO is a Cayman company, the company will need to provide the full name, residential address and identification document details of any entity or person holding more than 25% of the shares or control of the company. If the company is an issuer in respect of an ICO, whether the company will be required to disclose any details in respect of the holders of tokens pursuant to the BOL, will depend on the rights attaching to such tokens.

Cyprus Small Flag Cyprus

Similar to cryptocurrency regulation, at present, Initial Coin Offerings do not fall within the scope of a specially designated regulatory framework in Cyprus. Considerations such as those outlined above should be observed however.

In terms of changes over the next 12-24 months, we would refer to the imminent changes to the AML Law following the publication of 5AMLD by the EU.

Denmark Small Flag Denmark

Referring to our answer in question 14, the absent regulation of initial coin offerings ("ICO") in Denmark is in accordance with the absent regulation in the rest of the EU. Therefore, ICO's do not fall under the financial regulation.

Meanwhile, based on the above-mentioned revision of the 4th EU AML-directive, it is our preliminary assessment that ICO's will fall under the term "providers of exchanging services" and will thus become subject to the AML regulation. A final assessment of this question must be based on the final wording of the national act implementing the directive which is expected to be presented during the course of 2019.

Finland Small Flag Finland

Initial coin offerings ("ICOs") are not explicitly regulated by Finnish law. The FIN-FSA has, however, published unofficial guidance on cryptocurrencies and ICOs, in which it warns the investors of the risks related to investing in ICOs. Similar guidelines have been issued by the European authorities, the European Securities and Markets Authority ("ESMA") and the European Banking Authority ("EBA").

Even when ICOs are not specifically regulated, they may fall within the scope of sector specific legislation, such as legislation regarding securities or even crowdfunding. Applicable legal requirements depend on the type of the ICO (e.g. whether it qualifies as financial instrument).

Firms that utilise ICOs may be bound by, for example, securities markets legislation, mainly the Securities Markets Act (746/2012, as amended), and the anti-money laundering legislation.

As the cryptocurrency and ICO scene is active in Finland, both the regulators and authorities are likely to follow the market developments closely over the next 12-24 months.

France Small Flag France

The French regulators seems to be enthusiastic toward initial coin offerings. As example of this enthusiasm, we can evoke a discussion paper from the French Financial Markets Authority on initial coin offerings published on 26 October 2017. This document contains a warning to investors on the risks related to initial coin offerings. However the AMF has set up UNICORN (Universal Node to ICO’s Research & Network), a program in the framework of which it has initiated discussions with token issuers. Between its launch and 22 February 2018, this program has allowed the AMF to discuss with 15 token issued out of the 21 ICOs the AMF was aware of in France. 14 of the 15 project developers that met the AMF said they wished to conduct their operations and activities in France.

Furthermore, in the public consultation paper from October 2017, it stated that “the tokens issued in France of which the AMF is aware should not fall under French regulations governing the public offering of financial securities. This approach could be different in the case of ICOs giving rise to the issuing of tokens granting the same or comparable rights to those granted by financial securities (i.e. governance of financial rights).” The Public Consultation on 22 February 2018 from AMF indicates that she’s explicitly favoured to the creation of an optional approval regime for ICOs rather than expanding the current law to include ICOs since they make public offerings. For instance, it announced that “The AMF Board has therefore decided to continue to work on the definition of a possible legal framework tailored to ICOs by specifying the appropriate information and guarantees that are necessary.”

The AMF seems to consider that only token that will meet the various criteria necessary for the qualification of securities to apply (for example, the qualification of a token “equity” will require the existence of governance or financial rights, and the qualification as a “debt security” will requires the token to incorporate pecuniary claims on its issuer).

Article 26 draft Law on growth and transformation of enterprises (PACTE) provides for a draft regulatory framework of initial token offerings. Bearing in mind that this draft will be discussed as of September 2018 in both the National Assembly and the Senate and may therefore be amended or rejected, this law, if enacted, would grant power to the AMF to deliver an optional visa to token offerings.

However, the explanatory statement introducing this draft law specifies that the AMF may only deliver this optional visa for tokens “which would not be governed by existing financial regulation” . As a result, the draft article L. 552-1 of the French Monetary and Financial Code states that the proposed regulatory framework would only apply to token offerings that are not already governed by other provisions of the French Monetary and Financial Code, including its Book II, Title 1 on financial instruments.

As a result, it is not possible to infer from recent regulatory developments that something that the issuer self-qualify as a “token” will never qualify as a financial security and be subject to, notably, the regulations on public offerings of financial securities. If a digital asset issued as a token meet the criteria to qualify as a financial security under French law, these regulations, amongst others, will most certainly apply.

Germany Small Flag Germany

ICO’s are not a subject of a special legislative regulation. The general banking supervision laws as well as anti-money laundering provisions have to be taken in-to consideration in order to conduct an ICO. The relevant legal provisions depend on how the ICO is structured and which legal nature the token has. BaFin assess-es on a case based approach whether a token constitutes a financial instrument within the meaning of the German Securities Trading Act (Wertpapierhan-delsgesetz - “WpHG”) or the Markets in Financial Instruments Directive (MiFID II), a security within the meaning of the German Securities Prospectus Act (Wertpapierprospektgesetz - “WpPG”) or a capital investment within the mean-ing of the German Capital Investment Act (Vermögensanlagegesetz – “Ver-mAnlG”). The classification of a token as a security or a financial instrument de-termines which of the relevant capital markets laws and EU regulations apply.

Regulatory outlook: BaFin issued an official consumer warning at the end of 2017 regarding the purchase of coins or tokens within the scope of ICO’s be-cause of their highly speculative character and total loss risk. Since then the mar-ket developments are under the watch of the BaFin, especially with a focus on possible future regulation following the principles of consumer protection and equal standards for equal businesses cases. As for now, we don’t see any change on regulatory standards with regard to ICOs in the next 12-24 months.

Gibraltar Small Flag Gibraltar

At present there are no laws, rules or regulations in place prohibiting initial coin offerings. There is also no regulation in force that was specifically designed to regulate initial coin offerings or initial token sales. It is, however, necessary to consider token sales within the context of Gibraltar’s existing regulatory landscape as tokens may have certain features or characteristics that bring them within the scope of such regulations however the purpose of the forthcoming Token Offering Regulations is to regulate this area. The Token Offering Regulations will focus on three key aspects, namely:

  • the promotion, sale and distribution of tokens;
  • the operation of secondary market platforms trading in tokens; and
  • the provision of investment and ancillary services relating to tokens.

The Token Offering Regulations will set standards for initial coin offerings and initial token sales to be better tailored to the issuers’ needs in terms of structure, to provide investors with more confidence through the implementation of robust standards and consequently, to maintain the credibility of the jurisdiction.

Generally, initial coin offerings and initial token sales will not be caught under the DLT Regulations. However, there may be instances where, depending on what the token will be used for and how the token issue is structured, the token may fall within the DLT Regulations and/or other existing financial services legislation, for example, it could be deemed as a Collective Investment Scheme or an Alternative Investment Fund. Each offering needs to be analysed and considered on a case by case basis.

Entities undertaking an initial coin offering or an initial token sale are required to comply with Gibraltar’s anti-money laundering and counter-terrorism financing provisions by virtue of section 9(1)(p) of the Proceeds of Crime Act 2015 (“POCA”), which provides that:

“undertakings that receive, whether on their own account or on behalf of another person, proceeds in any form from the sale of tokenised digital assets involving the use of distributed ledger technology or a similar means of recording a digital representation of an asset”

will be considered a “relevant financial business” and will therefore be obligated to comply with POCA.

Malta Small Flag Malta

The VFAA regulates the offering of virtual financial assets (or ICOs) and related service providers. It imposes licensing requirements and on-going obligations to be complied by (i) ICO issuers or (ii) by those who intend to provide services ancillary to an ICO, if the issue or the service in question is provided in or from Malta. The Act safeguards investors’ rights by providing a blueprint for minimum disclosure requirements applicable to ICO whitepapers, and by outlining the manner in which advertisements relating to virtual financial assets are to be carried out. ICO issuers must appoint an approved agent and must draw up a whitepaper compliant to the VFAA and the regulations issued thereunder. The MFSA has published two out of three chapters of the rulebook which regulates the new DLT regime. The two new chapters encompass rules on VFA Agents and Issuers of ICOs. The third chapter, which is still at consultation stage, outlines the obligations of operators and service providers of crypto financial services.

Israel Small Flag Israel

As of today, ICOs are yet to be regulated pursuant to the local regulations. As detailed in the previous section, the Interim Report proposes the required regulations for ICOs and it is reasonable to assume that within the next 12-24 months the final report of the committee will be published and the respective legislation proceedings will be finalized.

Japan Small Flag Japan

Tokens issued by way of ICOs take many forms, and the Japanese regulations applicable to each token vary depending on the ICO scheme involved.

15.1 Securities-type Tokens

A token may be deemed to constitute equity interest in an investment fund (i.e., a collective investment scheme) under the Financial Instruments and Exchange Act of Japan (the "FIEA"), if the profits of the issuer are distributed to the holders of such tokens in accordance in the ratio of each holder's ownership of tokens. The issuers of tokens that are deemed equity interests in an investment fund are regulated by the FIEA.

In such cases, the offering of tokens must be conducted by a duly-registered Type II Financial Instruments Business Operator, unless the offer constitutes an exempt private placement restricted to Qualified Institutional Investors and the like, pursuant to Article 63 of the FIEA. If the token also falls within the definition of “Virtual Currency” under the PSA, the token would be subject to regulation under the PSA as well. However, it is unclear in such a case whether the token issuer would be required to comply with the requirements of the PSA in addition to those of the FIEA.

15.2 Prepaid Card-type Tokens

Tokens that are similar to prepaid cards, in the sense of being usable as consideration for goods or services provided by token issuers, may be regarded as "Prepaid Payment Instruments", and accordingly, subject to applicable regulations under the PSA. It is noteworthy that a token subject to "Prepaid Payment Instruments" regulations under the PSA would not simultaneously be subject to PSA regulations applicable to "Virtual Currency", and vice versa.

15.3 Virtual Currency-type Tokens

Where a token falls within the definition of Virtual Currency, Virtual Currency-related regulations under the PSA will apply. Where a token is subject to the PSA, it must be sold by or through a Virtual Currency Exchange Service Provider.

Based on the prevailing view as well as current practices, where a token issued via an ICO is already in circulation on a Japanese or foreign cryptocurrency exchange, such token would be deemed a Virtual Currency under the PSA, since a market of exchange for that token is already in existence. It's worth noting that, due to lack of exchange restrictions applicable to such token, a token not yet in circulation is also likely to be considered a Virtual Currency under the PSA if it is readily exchangeable for Japanese or foreign fiat currencies or Virtual Currencies.

By extension of this reasoning, Virtual Currency-type tokens issued via an ICO would be deemed Virtual Currencies upon their issuance. Similarly, the sale of such tokens would constitute the sale of Virtual Currencies. Hence, as a general rule, a token issuer must be registered as a Virtual Currency Exchange Service Provider if the token sale (i.e., the ICO) is targeting residents of Japan. Notwithstanding the foregoing, it has been argued that a token issuer does not need to undergo registration as a Virtual Currency Exchange Service Provide if the issuer has completely outsourced its token issuance to a reliable ICO platform provider that is registered as an Exchange Provider.

In summary, under current practice, in order to legally implement an ICO to residents of Japan, there are two options:

(i) ICO issuer acquires a registration as a Virtual Currency Exchange Service Provider and then distributes its ICO tokens; or
(ii) ICO issuer delegates the sale distribution of its ICO tokens entirely to a registered Virtual Currency Exchange Service Provider.

There are reports that the JVCEA is currently considering the incorporation of the ICO regulation within its self-regulatory rule. Concurrently, however, the JFSA is also reviewing the relevant regulation with a view of a discussion by the Study Group. Given the rapidity of change in ICO practice, for the time being, ICOs are likely to be regulated by the self-regulatory rule stipulated by the JVCEA. However, it is possible that in the future ICOs will be regulated under a specific law, like the FIEA.

Mexico Small Flag Mexico

In Mexico there is no specific regulation for initial coin offerings. The general provisions for public offers are regulated by the Securities Market Laws (Ley del Mercado de Valores), that defines public offers as those offers of securities, with or without price, that are made in national territory through mass media to subscribe, acquire, sell or transmit securities, aimed to an unknown group of persons.

The securities subject to public offer shall be registered in the National Securities Registry (Registro Nacional de Valores), and obtain an authorization form the CNBV. In accordance with Mexican Law, there are only two type of entities that can offer securities in the Mexican securities market: (i) public companies, and (ii) investment promotion corporations.

British Virgin Islands Small Flag British Virgin Islands

At present, initial coin offerings (ICOs) fall within the scope of unregulated activity in the BVI. Hence, subject to complying with certain AML requirements, an ICO can be structured through a BVI company without the need to obtain a licence from the Regulator to conduct the offering.

Indonesia Small Flag Indonesia

SSEK: Despite the regulators’ opposition to the general use of cryptocurrency in Indonesia, there have been several initial coin offerings in Indonesia. Lacking any legal basis to do so, there seems to be reluctance on the part of regulators to take concrete action to completely ban the use of cryptocurrency. We view it likely that there will be major changes to the status quo in the near future.

Portugal Small Flag Portugal

Considering Portuguese securities law, security tokens do seem to be under the legal framework for securities provided the legal requirements are met. Although not specifically developing or advancing any criteria for certain ICO’s to be subject to market offering rules, the CMVM laid down a general understanding of a case by case basis approach, meaning that tokens that present features similar to those of securities (or for that matter, ICO’s that present features similar or analogous to public market offerings) may fall under securities laws and regulations, and thus comply with its respective obligations regarding public offerings, market information, regulatory submissions, among others. Notwithstanding, we have no knowledge of any ICO-related transaction or crypto assets offering that either fell under the securities law provisions, or that voluntarily submitted itself to the CMVM’s procedure for public offerings.

We do not envisage that Portuguese regulators will take the first step in reviewing the legal and regulatory treatment for ICOs, and we should probably expect a wait and see approach regarding the European institutions (notably ECB and ESMA) in this respect before any paradigm shifts take place at a national level.

United States Small Flag United States

The SEC has indicated that ICOs are generally subject to federal securities regulation and enforcement. This position was put forward by SEC Chairman Clayton at a February 2018 Senate hearing in which he stated that ‘‘every ICO I’ve seen is a security.’’ Over the ensuing months, the rigid stance has softened a bit, with the understanding that some cryptocurrencies—such as bitcoin and ether—do not fit the definition of a security. The latest announcement reflects this ongoing evolution of the SEC’s understanding of cryptocurrencies.

Generally, under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, the definition of security does not specify a token or coin, but does specify an “investment contract.” The term “investment contract” is the residual category in the definition that captures securities that do not fall within other categories.

In SEC v. W.J. Howey Co., the U.S. Supreme Court articulated a test for determining whether something is an “investment contract.” The test—which has become known as the “Howey test”—provides that an “investment contract” is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. According to the SEC, this definition embodies a “flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” In considering whether something is a security, “the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto.”

The prongs of an investment contract, as articulated in Howey, are thus fourfold: (i) an investment of money (ii) in a common enterprise (ii) with a reasonable expectation of profits (iv) to be derived from the entrepreneurial or managerial efforts of others.

Prior to July, 2017, the SEC had not applied the Howey test to an ICO. However, on July 25, 2017, the SEC provided important initial guidance on its application of the Howey test to ICOs when it released a Section 21(a) Report of Investigation on its findings regarding the token sale by The DAO. The DAO functions as a decentralized autonomous organization, which essentially means a virtual organization embodied in computer code and executed on a distributed ledger or blockchain.

In its analysis of whether The DAO had improperly offered and sold securities via an ICO, the SEC noted that new technologies do not remove conduct from the purview of U.S. federal securities laws. Based on the facts and circumstances regarding The DAO’s offering of tokens, the SEC found that (i) DAO tokens are securities under federal securities law, (ii) The DAO was required to register the offer and sale of DAO tokens under the Securities Act absent a valid exemption, and (iii) any exchange on which DAO tokens were traded was required to register under the Securities Act as a national securities exchange or operate pursuant to an exemption. In its report, the SEC did not say that all tokens would be securities. Rather, the SEC noted that the determination depends on the particular facts and circumstances and economic realities of the transaction.

As noted, more recently, SEC staff has made statements that certain cryptocurrencies that exhibit sufficient decentralization (i.e., bitcoin and ether) may cease to be securities over time. Certain SEC commissioners have expressed some willingness to consider that certain digital tokens may not be securities. The SEC has appointed a cryptocurrency czar that has expressed an openness to consideration of non-security tokens.

UAE Small Flag UAE

UAE Onshore
The SCA announced on 9 September 2018 the approval of a plan to regulate initial coin offerings and recognise them as securities. The plan developed includes a set of mechanisms as part of an integrated project to regulate digital securities and commodities. The relevant regulations are expected to be issued during the first half of 2019.

As mentioned above, the DFSA issued an investor warning stating that cryptocurrencies are “high-risk investments” and that it does not currently regulate these types of product offerings or license firms in the DIFC to undertake such activities.

Initial coin offerings are permitted under ADGM jurisdiction. The FSRA has issued a Regulation of Initial Coin/Token Offerings and Crypto Assets under the FSMR, therefore offering regulatory clarifications on the use of this technology in its jurisdiction.

Ukraine Small Flag Ukraine

The Initial Coin Offering (ІСО) is not regulated by the law.

Taking into account the large part of ICO with elements of fraud, the reputation of this type of financing is extremely low, and therefore lobbying for such amendments to the legislation is not timely. In addition, several criminal proceedings have been initiated based on the fraud with respect to ICO.

Therefore, the regulatory legal acts to stimulate ICO are not expected in Ukraine within the next 12-24 months. Nevertheless, the ICO fundraising is considered by the government as an activity to be regulated up promptly and legalized.

Switzerland Small Flag Switzerland

Finma was the first regulator to issue detailed guidelines on ICOs; these are not expected to change in the upcoming 12 to 24 months. Finma accepts ICOs to be legal in Switzerland; however, it requests ICO projects to be submitted to its fintech desk prior to beginning the presale and if not, will transfer the file to its enforcement desk which will proceed to investigate the ICO. Finma distinguishes three different classes of tokens, with differing regulatory treatment:

A cryptocurrency token can only be issued by a company that is an SRO member (or subject to Finma supervision) and is subject to AML rules.

A utility token can be issued without license or AML checks, provided the token is operative at the time of issuance.

A security token can be issued subject to the rules applicable to the respective security, which may mean it is subject to prospectus requirements.

Finally, in case a token has characteristics of more than one class, it needs to comply with the requirement of each such class (hybrid token).

Entitlements to tokens issued prior to the ICO (e.g. in the presale) will be qualified as security rights.

India Small Flag India

There are no specific laws on initial coin offerings in India. However, in the absence of any specific definition for the term ‘Virtual Currency’, all initial coin offerings in India are likely to be impacted as they will be cut off from the Indian financial system as a result of the RBI’s circular discussed above.

The chances of any change over the next 12-24 months would be subject to the ruling of the Supreme Court of India on the constitutionality of the VC Circular. In addition, as per a Government press release, on October 30, 2018, FSDC “deliberated on the issues and challenges of crypto-assets/ cryptocurrency and was briefed about the deliberations in the High-level Committee to devise an appropriate legal framework to ban the use of private crypto currencies in India and encouraging the use of Distributed Ledger Technology (DLT)”. In the absence of a clear definition of crypto-currencies or VCs in India, this is likely to affect the growth of the virtual currencies and ICOs in India. Even blockchain platforms which depend on some level of tokenization for their functioning are likely to be affected.

Other factors which could change this position are the results of the General Elections, which are scheduled for 2019 and the composition of the new government.

United Kingdom Small Flag United Kingdom

Initial coin offerings – i.e. a fundraising method akin to crowdfunding under which retail investors pre-purchase crypto-assets on platforms that typically have not been built yet, at a reduced price – reached their peak in the autumn and winter of 2017, on a wave of enthusiasm that was likely fuelled by the huge rise in the value of ‘cryptocurrencies’ leading up that period. There were a huge number of ICOs carried out in many different jurisdictions, that raised vast amounts, and not infrequently on the back of vague or even entirely unfounded promises of technical development. Amongst those were a number of genuinely good offerings, but a relatively small proportion of those ICOs have launched products to date.

The vast majority of ICOs are not financial regulated offerings, since most cryptotokens do not quite fall within any of the “specified investment” definitions that would trigger compliance with the existing regulatory mechanisms. In light of this, in September 2017 the FCA issued a warning to consumers about the risks of ICOs, describing them as “very high-risk, speculative investments”, pointing out that most are not regulated and have no form of investor protection, and often inadequate documentation. Whilst some ICOs offer tokens which do constitute “transferable securities”, and therefore trigger compliance with the prospectus regime as with normal share offerings, the majority do not.

Two main points emerge from this, for fintechs considering engaging in an ICO.

Firstly, the structure of the tokens and their proposed usage will need to be looked at with great care, as small changes could mean that the tokens and therefore the ICO fall into the regulated sphere. Typically, “utility tokens” are more likely to sit outside the regulated sphere than “security tokens”, but this is by no means always the case.

Secondly, although there is no specific regulatory regime in relation to ICOs, other legal principles will still apply, particularly in relation to consumer rights, misrepresentation and fraud. As such, those offering ICOs need to be clear that what they are offering to consumers is genuine and evidenced – even if heavily caveated – so that they do not fall foul of these protections.

A joint committee between the FCA, HM Treasury and Bank of England reported in October 2018 that further consultations will be run in respect of potential prohibitions on cryptocurrency derivatives to consumers, further guidance on the regulatory perimeter in respect of cryptoassets and whether that perimeter should be extended.

The Netherlands Small Flag The Netherlands

Provided a digital token does not have clear characteristics of a ‘security’, such as dividend-, interest-, and/or voting-rights in the issuer, initial coin offerings (ICO’s) remain largely unregulated in the Netherlands. Unlike in the US, there’s currently no case law on this nor do we have something similar like the so-called Howey test, which aims to determine whether a token qualifies as a security. Despite the lack of legislation, the AFM and DNB have issued several warning regarding serious risks associated with ICOs. The issuance of digital tokens, mostly to fund start-ups, is considered vulnerable to misleading information, fraud and manipulation.

That said, there is one piece of legislation that may be relevant here. The Dutch unfair trade act applies to all trading activities vis-à-vis consumers, including ICO’s. This regulation aims to prevent unfair trade practices. In essence, it ensures that consumers are to be fully informed on the product or service and that no (unreasonably) unfair terms apply. Enforcement of the unfair trade act lies with the Dutch consumer and market authority, but to date there are no known cases of enforcement following ICO’s, or the (lack of) information provided prior an ICO.

Furthermore, the European Parliament and the European Commission have been working on a draft proposal for a new regulation for ICOs and other alternative investment channels such as crowdfunding. The EU acknowledges that these channels can help small and medium enterprises (SME’s) to obtain finance, which is why the EU wants to legislate them. However, these new ways also carry risks, such as fraud and the risk of cybersecurity attacks. Therefore, parties that want to offer ICOs should comply with the new rules as set out in the draft proposal.

China Small Flag China

The initial coin offering and operation of cryptocurrency exchange platform within the PRC territory is defined as illegal fund raising and illegal public offering of securities, and hence is strictly prohibited by the law. We do not foresee any change to such determination in the next 12 to 24 months period.

Taiwan Small Flag Taiwan

Thus far, there is no law or regulation specifically dealing with initial coin or token offerings ("ICO") or other investment activities involving cryptocurrencies in Taiwan. The FSC expressed the following view on ICO through several press releases. An ICO refers to the issuance of "virtual commodities" and the sale thereof to investors to raise funds. Whether the tokens in an ICO would be deemed "securities" under the SEA would depend on the facts of each individual case. In the event that an ICO involves any offering and issuance of "securities", it should be subject to the SEA.

Wellington L. Koo, the Chairman of the FSC, indicated in press interviews in October 2018 that the FSC was drafting regulations for ICO, and that the draft regulations may be published in 2019.

Malaysia Small Flag Malaysia

Under The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019, Initial Coin Offerings (ICO’s), otherwise known as ‘Digital Tokens’ are defined as a digital representation which is recorded on a distributed ledger whether cryptographically-secured or otherwise.

The Order further defines that a Digital Token which represents a right of interest of a person in an arrangement made for the purpose of, or having the effect of, providing facilities for the person is prescribed as securities for the purpose of the securities law, where:
a) The person receives the digital token in exchange for a consideration
b) The consideration or contribution from the person, and the income or returns are pooled
c) The income or returns of the arrangement are generated from the acquisition, holding, management or disposal of any property assets or business activities
d) The person expects a return in any form from the trading, conversion or redemption of the digital token or the appreciation in the value of the digital token
e) The person does not have day-to-day control over the management of the property, assets or business of the arrangement, and
f) The digital token is not issue or guaranteed by any government body or central banks as may be specified by the commission

In addition to this, The Malaysian Securities Commission then issued an updated Guideline on Recognised Markets on the 31st of January 2019 covering Market Operators, Equity Crowdfunding Platform, Peer-to-Peer funding platform, Digital Exchange and Digital Asset. Digital Asset refers collectively to a Digital Currency or Digital Token.

Pursuant to Paragraph 15.17 on the latest guidelines on recognized markets, if a person wishes to issue a Digital Token, it must comply with the relevant guidelines issued by the SC. Such Digital Token would still require approval from the SC prior to being traded on any digital asset exchange.

Updated: February 26, 2019