The common opinion that Initial Coin Offerings (ICO) are a form of raising capital that is subject to no regulations is increasingly facing headwinds from international regulatory authorities. Supervisors in many countries have made it clear through public statements that ICO regulation might entail regulatory consequences not only for future projects but also for ICOs already completed.
No opinion on ICO regulation given by BaFin yet
The competent authority for capital market supervision in Germany, i.e. the Federal Financial Supervisory Authority (BaFin), has so far made no public statement on the regulatory treatment of ICOs. However, it is very probable that it will not leave unsupervised the sometimes very successful funding rounds through crypto-tokens and consider the German capital market supervisory legislation to be applicable to at least some types of tokens.
In such case, the BaFin’s legal opinion would apply not only to future but also to previous ICOs because this would not be a change of law but only a public announcement of the BaFin’s interpretation of law.
China and South Korea completely ban ICOs
In early September 2017, the People’s Bank of China chose the big solution and banned any kind of fund raising through ICOs arguing that this kind of raising capital carried a high risk of fraud. In late September, the South Korean FSC (Financial Services Commission) followed with a comprehensive ban on the implementation of ICOs. In its reasoning, the authority stated that ICOs violated existing capital market laws.
It is questionable whether the authorities can maintain this strict position if, at the international level, ICO financing is considered to be legally compliant. By maintaining the ban, China and South Korea would be excluded from this technical achievement in the long run.
USA, Russia, and Switzerland consider existing regulation sufficient
As early as in late July, the U.S. SEC announced that some tokens issued in connection with ICOs might have to be classified as securities. Russia followed in late October 2017 with government decrees, according to which ICOs had to be treated in the same way as IPOs (Initial Public Offerings).
The opinion published by the Swiss Financial Market Supervisory Authority “FINMA” (Eidgenössische Finanzmarktaufsicht) in late September is especially interesting as the authority assumes that some of the numerous ICOs implemented in Switzerland might have violated Swiss financial market regulations. In particular, it was said that FINMA intended to examine compliance with the legal provisions on the prevention of money laundering, on banking and capital market supervision, and on securities trading.
ICO regulation in Canada, Singapore, Malaysia and the UK
In recent months, the capital market supervisory authorities of the United Kingdom, Canada, Malaysia, and Singapore expressed similar views and pointed to the possibility that ICOs might fall under the capital market regulations existing in the respective countries.
With this approach, fundraising through ICOs would still be permitted provided the respective organizer of the token sale (i.e. the sale of the newly created currency) complies with existing regulations.
ICO regulation will prevail at the international level
It is expected that the BaFin and other international regulatory authorities will issue their views on the treatment of funding rounds through ICOs in the near future. In this context, an approach aiming at fitting ICOs (as far as possible) within applicable regulations seems to be the most promising to ensure that this new form of capital procurement can become a reasonable and adequately regulated alternative instrument of corporate financing.
If endowed with an adequate regulation, the advantages of capital raising by ICOs, like low transactions costs and a comparably uncomplicated design and implementation, might outstrip conventional equity investment models.
Our experienced attorneys will be pleased to answer your questions on the regulation of ICOs. We are looking forward to hearing from you.