To what extent have initial coin offerings taken place in your jurisdiction and what has been the attitude of relevant authorities to ICOs?
While the data on ICO activity in Australia is opaque, a number of Australian businesses such as Synthetix (formerly Havven), Power Ledger and CanYa have raised significant sums of money through ICOs.
As discussed, regulators such as ASIC and AUSTRAC have generally been receptive to fintech and innovation but at the same time, regulators have been active in highlighting the risks of trading and investing in cryptocurrencies particularly in respect of retail consumers. ASIC has referred to ICOs as being “a highly speculative investment” and that “while the potential returns may look attractive, these projects are mostly unregulated and the chance of losing your investment is high”. This approach to issue public statements and warnings to consumers specific to ICOs aligns with the approach of that of many members of the International Organization of Securities Commissions.
The ASX has taken a staunch stance towards cryptocurrency in its recent announcement of plans to crackdown on ICOs to help protect consumers investing in speculative investments. ASX recently compared the increase in investments of cryptocurrency to the tulip crisis in Holland stating that ‘cryptocurrency has been used for fraud right around the world’ and ‘needs to be stopped’.
Please refer to section 15.
It should also be noted that, pursuant to the loi PACTE, an “optional visa” from the AMF is now available in respect of ICOs. (see section 11).
The market for cryptocurrencies and ICO’s has grown rapidly in recent years. In the first half of 2018, 13 of approximately 200 start-up financings in Germany were ICOs.
At the same time, the number of reports on fraud cases and warnings from the supervisory authorities is increasing. The Federal Government of Germany has published a warning relating to the unlawful marketing of cryptocurrencies, where it expressly underlines the fact that cryptocurrencies are not legal tender, but merely substitute currencies (Ersatzwährungen). Furthermore, the BaFin released a public warning that the acquisition of cryptocurrency coins – also referred to as token, depending on their form – as part of ICOs may result in substantial risks for investors. BaFin states that an ICO is a highly speculative form of investment that is often not subject to existing capital market regulations. As is the case with most trends, the high level of public interest in ICOs is also attracting fraudsters.
Relatively few ICOs have been carried out in Ireland and Irish authorities have generally been cautious when it comes to ICOs. The Director of Policy and Risk of the CBI indicated that the CBI supports ESMA's position that 'depending on how they are structured, ICOs may fall outside the regulatory space', but cautioned that firms which are 'involved in ICOs must consider whether their activities fall within the perimeter of regulated activities'.
For the time being, no relevant initiatives concerning ICOs in Italy are underway. A study conducted by the Politecnico university in Milan in March 2019 found that only a few ICOs have taken place in Italy to date, the relevant data regarding which have yet to be disclosed to the public. Conversely, Consob has highlighted that the lack of a specific legal framework may undermine the safeguard of users’ interests and rights. In a discussion paper published in March 2019 (“Discussion Paper”), Consob stated that “ICOs display significant similarities with public offerings of financial products/instruments”. Consob is therefore considering adopting an ad hoc regulatory framework to protect potential buyers on the primary market.
Based on the prevailing view and current practices, where a token issued via an Initial Coin Offering (“ICO”) is already in circulation on a Japanese or foreign cryptocurrency exchange, such token would be deemed a Crypto Asset under the PSA, since a market of exchange for that token is already in existence. It is worth noting that due to a lack of exchange restrictions, such tokens that are not yet in circulation are also likely to be considered Crypto Assets under the PSA if they are readily exchangeable for Japanese or foreign fiat currencies or cryptocurrencies.
Separately, on September 27, 2019, the Japan Virtual Currency Exchange Association (“JVCEA”), a self-regulatory organisation established under the PSA, published its self-regulatory rules and guidelines regarding ICOs for Crypto Asset-type tokens entitled “Rules for Selling New Virtual Currency” (“ICO Rules”). Under the ICO Rules, an ICO can be legally launched in Japan as long as such launch is conducted in compliance with the ICO Rules.
Plenty of Token Offerings have taken place in Liechtenstein. The recommended process is drafting of a legal opinion describing the legal nature of both the business model and of the token under Liechtenstein law in order to file it with the regulator.
The Netherlands had its fair share of ICOs. The focus of the Dutch government and the financial regulators, with regard to cryptos and ICOs, is two-fold – preventing the criminal and fraudulent use of cryptos and ICOs by some, while also acknowledging the potential benefit for others (see question 8).
In previous years, issuers of ICOs sought to avoid all types of regulations, with varying degrees of success. We now see that the market is starting to embrace the advantages – of clarity and certainty – that comes with regulation (for example, the rise of STOs), including making use of legal exceptions and exemptions (see questions 8 and 13). In our opinion, this marks the next evolutionary phase for cryptos in becoming mature market instruments.
In 2018 the largest Russian state-owned bank Sberbank launched in its regulatory sandbox the first closed ICO on blockchain. This offering was performed on Russian blockchain protocol Masterchain (see Q.2).
From a legal point of view fundraising through specialized investment platforms will become legal in Russia in the beginning of 2020 (the law “On Fundraising Through Investment Platforms” will come into force on January 01, 2020). Although this type of fundraising existed in Russia over the years, a developed and actual legal framework for these procedures will appear in 2020 only.
On September 29, 2017, the FSC issued a press release banning any type of ICOs in Korea, including those taking the form of securities. The FSCMA acts to directly prohibit an ICO if the offered coins are classified as “securities” under the FSCMA. Under the FSCMA, an offer or sale of securities (tokens) to 50 or more non-accredited investors would be regarded as a public offering and be subject to the FCMA’s offering restrictions. If a token is classified as a “security”, the issuer must file a securities registration statement for the tokens to be offered in Korea with the FSC. If the offered coins are not classified as “securities” under the FSCMA there are technically no specific legal grounds that would prohibit the ICO, but there is a strong possibility (as evidenced by the September 29, 2017 FSC press release) that Korean regulators would challenge the legality of the ICO.
As far as we are aware, only a few ICO’s have taken place in Sweden (for example by Starflow AB and Chromaway AB).
The SFSA has been reluctant regarding giving (official as well as non-official) statements on cryptocurrencies and blockchain. The SFSA believes that it is not in position to determine whether cryptocurrencies generally are considered financial instruments or not. The SFSA’s view is that this assessment must be made on a case by case basis, taking into account, inter alia, how the cryptocurrencies are electronically registered, their transferability and whether they entail any rights or obligations on behalf of the holder and issuer respectively.
ICO activity in Switzerland rose significantly from 2016, peaking in 2018 with a total of 86 completed ICOs in the first 10 months of the year, representing an investment volume of approx. USD 1,65 billion (ZHAW Zurich University of Applied Sciences, Initial Coin Offerings – Survey 2018, p. 9). However, in the more recent past, the market for ICOs has become significantly less active as regulators around the world caught up with the phenomenon and crypto currency valuations experienced major drops. Regulated security token offerings (STOs) have so far not been able to generate the same levels of market interest.
The Swiss Financial Market Supervisory Authority FINMA continues to take an open-minded approach towards projects for token issuances in or out of Switzerland to the extent they are structured and conducted in line with Swiss and applicable foreign financial regulation. Organisers are encouraged to pre-discuss their projects with the regulator prior to launch and to obtain formal feedback in the form of a regulatory no-action letter or confirmation of the regulatory requirements to be complied with.
There have not been any initial coin offerings in Uganda yet. There has thus been no display of reactions from which concrete discernment of government attitude can be gleaned.
There are no outright prohibitions on launching an ICO in the UK, although, depending on the particular ICO, various regulations may apply (as further described in question 11 below).
In terms of the UK market: in the peak period of ICOs in early 2018, according to a report by PWC in collaboration with Crypto Valley, the UK was in the top 5 countries globally (based on funding volume) for launching ICOs. In line with the global trend, the market for ICOs declined significantly during 2018—the so-called “crypto winter”. However, more recently the market appears cautiously to be growing again, with the focus shifting away from ICOs involving the launch of unbacked cryptocurrencies towards more stable coins, security tokens and utility tokens.
The advent of ICOs has seen the UK authorities adopt a relatively sceptical approach, urging caution on the part of investors. In September 2017, the FCA issued a consumer warning about the risks of ICOs advising consumers that ICOs are “high-risk, speculative investments” and that “[y]ou should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.” The warning goes on to highlight that this is an unregulated space, there is no investor protection, the value of tokens tends to be extremely volatile, there is a high potential for fraud, there is usually inadequate documentation for many of these projects and many of the projects are very early stage, meaning “[t]here is a good chance of losing your whole stake.”
The House of Commons Treasury Committee, in its September 2018 report on cryptoassets (referenced at question 6 above), echoed such sentiments, emphasising that “[c]rypto assets and ICOs are extremely risky” and the PRA and the Cryptoassets Taskforce share largely the same concerns. Indeed, as highlighted at question 7, the PRA has written to the CEOs of banks, banks, insurance companies and designated investment firms to emphasise the risks associated with cryptoassets, enjoining firms to consider the risks relating to crypto-exposures in their capital and solvency assessments, and ensuring they have an appropriate risk management approach.
With the development of ICO funding beginning back in 2014, and a first peak in 2016, the SEC created a new Cyber Unit to, among other things, investigate and bring charges against ICOs and issued various statements to investors warning about the risks and potential for fraud when investing in ICOs. ICOs reached their peak in late 2017 and early 2018 but with the increased scrutiny by the SEC which published additional guidance in April 2019 further reinforcing that ICOs could fall under the purview of securities laws and therefore under the SEC, ICOs are no longer viewed as a medium to bypass the regulatory framework associated with traditional funding sources to raise money.
ICO activity in Singapore has been significant. In 2018 alone, the number of ICOs conducted in Singapore reached 194. The level of ICO activity had prompted MAS’ issuance of the MAS Guide mentioned in our response to question 3 above which offered regulatory keynotes on ICOs and illustrations on digital token features that would result in such digital tokens being regulated.
Generally, MAS is not looking to restrict such ICOs if they are “bona fide businesses”, but will take firm action against digital token exchanges, issuers or intermediaries who breach securities laws. For more details on such regulatory actions, please refer to the response to question 18 below.
Hong Kong has emerged as a leading Asian ICO hub, likely due in part to the People’s Bank of China’s announcement in September 2017 of an outright ban on ICOs in China.
According to a joint report published in June 2018 by PricewaterhouseCoopers (“PwC”) and Crypto Valley, Hong Kong was one of the top ten countries for ICOs in the first half of 2018 based on funding volume, with US$223m raised across 20 closed ICOs and with 15 more planned. The report ranked Hong Kong second for ICOs by funding volume across Asia, behind primary hub Singapore and noted that whilst the United States, Switzerland and Singapore remain key global ICO hubs, the United Kingdom and Hong Kong had gained significant ground.
Notable examples of successful Hong Kong ICOs include: Gatcoin, which offers a solution for businesses to transform their traditional discount coupons, shopping vouchers and loyalty points into digital tokens, and which raised US$14.5 million in January 2018; AirSwap, which is developing a decentralized cryptocurrency marketplace and which raised US$36 million in October 2017; and the OAX Foundation, which is building a decentralized cryptocurrency exchange platform and which raised US$18 million in July 2017.