Global Regulation of Initial Coin Offerings: Part 1

Background, Bans, and ICO Outliers

Over the past few weeks there have been a number of interesting developments in the regulation of Initial Coin Offerings (ICOs, sometimes referred to as Initial Token Offerings or ITOs), so we decided to take this opportunity to summarize the state of ICO regulation worldwide. (For an overview of ICOs, see our recent blog post What is an ICO Anyways?).

Regulators across the globe are grappling with similar issues surrounding ICOs. On one hand, ICOs offer a number of exciting possibilities. They can democratize early stage investing by offering retail investors around the globe a chance to participate in a potentially lucrative investment and they give businesses access to a global capital market.  However, there are some serious concerns stemming from ICOs and some view it as the job of regulators to protect the public and manage those risks. Some often cited concerns of regulators include the following:

• the need to protect the public from fraudulent ICOs;
• prevention of illegal activity, like money laundering and terrorist financing; and
• the volatility of these cryptocurrency offerings and the corresponding need to protect less savvy investors from unwittingly making potentially risky investments.

ICOs and cryptocurrencies generally are novel and fast moving and have proven difficult for regulators to keep up with. To date there has been a varied response from regulators internationally, ranging from total bans to a wait-and-see approach that leaves ICOs with little oversight at present. In Part 1 of this post series, we discuss outright ICO bans and outlier approaches that don’t fit well with the approach taken by the majority of regulators.

ICO Bans

Certain jurisdictions have responded to the rise in ICOs with the view that there is too much risk to allow ICOs in any capacity, at least at the present time.

On September 29, 2017, the Financial Services Commission (the “FSC”) of South Korea announced a ban on ICOs in the name of consumer protection, citing many of the concerns listed above. The ban applies to all ICOs, regardless of the purpose. The announcement indicates that the FSC will be taking a proactive approach to seeking out violators and imposing penalties accordingly. The regulator has promised harsh penalties against anyone unlawfully raising money through an ICO, but has not yet provided details on what those penalties will be.

Korea’s ban followed China’s announcement earlier in September, in which it also placed a blanket ban on ICOs. China took some fairly draconian steps against cryptocurrency offerings, including going so far as instructing companies that had already received funds in respect of ICOs to return those funds to investors. Chinese crypto exchanges were also reportedly ordered by regulators to shut down domestic operations, resulting in the oldest bitcoin exchange in the world, Shanghai-based BTCC, ceasing cryptocurrency trading on September 30.

ICO Regulatory Outliers:

1. Russia
While legislation to govern ICOs is coming to Russia, according to an announcement made in October, there’s not much regulation in Russia currently and there is no set timeline for when Russia’s new laws will be put in place. Per its announcement, Russia has said it will alter its legislative framework to deal specifically with crypto-currencies, including ICOs. The announcement suggests that ICOs will be regulated in a similar manner to Initial Public Offerings (IPOs) of securities, which is in line with the approach taken in many nations, but Russia is an outlier in that it is building new cryptocurrency specific ICO regulations.

Russia will also be accepting proposals on creating a regulatory sandbox that could apply to such offerings. While it is unclear what Russia’s regulations will ultimately look like, the country has also announced it will be looking into how it can utilize distributed ledger technology to create a payment space for the Eurasia Economic Union, showing it is trying to leverage the innovative potential of this technology through its new laws.

2. Gibraltar
Gibraltar’s Financial Services Commission (FSC) issued a statement on ICOs in September, underscoring the fact that they are not regulated in the British territory. However, Gibraltar also released draft legislation in October that will require anyone dealing in distributed ledger technologies for value to be licenced with the FSC. The proposed rules are principles-based and relatively non-prescriptive, implying that Gibraltar is seeking to continue to foster a friendly environment for ICOs.

Part 2 of our series on global regulation of ICOs will deal with the approach taken in the majority of jurisdictions, including Canada.  Check back in a few days to read it.