Global Regulation of Initial Coin Offerings: Part 2

Applications of Existing Legislation/Securities Law to ICOs

While some jurisdictions have taken a hostile approach to ICOs, such as the bans by Korea and China, discussed in Part 1 of our 2 part series on international regulation of ICOs, a more measured approach is more common. Many jurisdictions have taken the stance that ICOs can and should be regulated by existing legislation, with slight variations in approach.

Securities Regulation

By far the most frequent conclusion regulators around the world have come to is that, depending on the nature of the ICO, securities laws may be applicable. This is the stated approach in Canada, the USA, the United Kingdom, Hong Kong, Abu Dhabi, and most recently, as of November 14, 2017, Singapore. The analysis of whether an ICO amounts to a security is carried out on a case-by-case basis in these jurisdictions, and the determination of whether certain ICOs will amount to a security is likely to vary from jurisdiction to jurisdiction. Certain regulatory authorities like the Monetary Authority of Singapore have tried to be clear about what offerings will and will not constitute a security in their guidance, while others have been more vague. In any event, a careful reading of local securities laws would be prudent in all these jurisdictions to determine what rules must be followed and when.

In cases where securities laws are deemed applicable per local regulation, the business launching the ICO will be required to comply with securities laws or seek exemptions. Compliance can include licensing of the business and/or individuals involved in the ICO, and substantial disclosure obligations. Commentators have predicted that the US SEC, in particular, may become particularly vigilant in prosecuting enforcement actions against ICOs that do not follow securities law requirements.

Many of these jurisdictions also have in place a regulatory sandbox, which may help to ease compliance requirements in those locations as regulators try to work with cryptocurrency businesses to develop rules that provide investor protection without greatly stifling innovation. Such regulatory relief is usually sought by applying to the regulator/sandbox on a case-by-case basis. Canada’s own sandbox approach saw the Ontario Securities Commission grant exemptive relief approving TokenFunder’s ICO, subject to the company’s compliance with certain conditions.

In many of these jurisdictions, it has also been either expressly stated by the relevant regulator, or suggested by securities regulators, that ICOs should comply with other applicable laws, such as anti-money laundering and terrorist financing legislation. However, generally, securities regulators have been more proactive about making clear that their laws apply, and implementing nascent efforts at enforcement and investigation of ICOs.

ICO Regulation in Switzerland

Switzerland, which is home to “Crypto Valley”, has taken a similar approach, though arguably is presenting a more ICO friendly posture. The latest announcement from the Swiss Financial Markets Supervisory Authority (FINMA) is that it is investigating the regulation of ICOs, though notes that “FINMA recognises the innovative potential of such technology and has been supporting efforts in developing and implementing blockchain solutions in the Swiss finance industry for several years.” FINMA indicated that it may come out with new regulations, but stated that with respect to the following areas, current Swiss laws may apply to ICOs depending on how they are structured:

1. provisions on combating money laundering and terrorist financing;
2. banking law provisions;
3. provisions on securities trading;
4. provisions set out in collective investment scheme legislation.

While the announcement indicates that ICOs must comply with existing legislation where applicable, Switzerland is also still in the nascent stages of determining how best to carry out investigations and enforcement for ICOs.

ICO Regulation in Japan

Japan’s Financial Services Agency (FSA) has determined that ICOs are regulated under existing legislation, namely, the Payment Services Act and/or the Financial Instruments and Exchange Act (FIEA) may apply.

Determining which act applies is dependent on the structure of the ICO and the nature of the coin being offered. In a recent announcement, the FCA stated that those ICOs whose coins constitute virtual currency are regulated under the Payment Services Act. Per the FCA, businesses whose coins constitute virtual currencies are likely providing exchange services on a regular basis and must be registered with each Local Finance Bureau”. Further, “if an ICO has the characteristics of an investment and the purchase of a token by a virtual currency is practically deemed equivalent of that by a legal tender,” the ICO is subject to regulations under the FIEA, which is the main statute regulating securities in Japan.

Global Regulation of ICOs

Overall, regulators’ scrutiny of ICOs worldwide is increasing.  The current trend is for regulators to take a measured approach and try to use existing frameworks to govern ICOs, though some jurisdictions are shutting down activity as they attempt to grapple with ICO implications, while others are offering temporary relief from the rules through the sandbox approach. It is an interesting point of time in the development of ICOs and one that asks regulators to balance investor protection concerns with facilitating innovation and also providing a competitive jurisdiction for crypto business.  Watch this blog for further developments or subscribe and get updates from the EKB Fintech Blog sent directly to you.