Jun 12, 2018
ICOs and
Regulations: Taming the New Wild West
ICOs
- or Initial Coin Offerings - are a widely used method for
cryptocurrency startups, and also how some blockchain
technology companies raise their initial funds to get
their projects started. It is very much like a Kickstarter or
GoFundMe, with the “reward” being given in newly created tokens.
These tokens can be used on the product or service that is being
built, which is referred to as a utility token, or in some cases,
held like a stock and entitles the holder to a profit share, which
is referred to as a security.
With an ICO, businesses
will usually write a whitepaper which gives all the details about
their purpose, ideas, and a roadmap to allow investors (both small
and large) to have the information needed to buy into these
projects for a fraction of the speculated cost, once the coin hits
the open market. These projects, are mostly still in the beginning
stages of development.
That’s right, most have no working product yet, but still ask
people to pay them… and people do! By the tens of thousands, or
even millions in some cases. ICOs took in over $2
billion dollars in 2017. There are currently over 1500
ICOs that have taken place, with thousands more on
the horizon. All on the promise of what might be.
If that doesn’t sound scary enough, add this factor in - ICOs have
been mostly unregulated. Until now.
Until recently, the industry has not been taken seriously by
governments, financial institutions, or most of the general
population. But with a market cap today of over $424 billion
dollars at the time of writing (May 2018), it is now just beginning
to get the attention it warrants.
While many have gotten rich beyond their wildest expectations,
others have been defrauded, robbed, and scammed. For even a
discerning mind, it can be difficult to tell the difference when
taking in a project at first glance. As 2018 moves forward,
governments around the world are taking notice and passing laws
they feel best protects their people.
There are many concerns:
Fraud, is the first, and most obvious, concern. China and South
Korea have both banned ICOs. The United States has
launched several SEC investigations, and is considering whether it
can claim crypto coins are securities (which can only be sold by
licensed individuals/institutions).
Ponzi/Pyramid schemes have been a big problem also. USI-Tech and
Bitconnect are two of the largest successful scams to date, taking
in hundreds of millions of dollars, on false pretenses, only to
shut down (or be shut down by the government).
A substantial amount of money is now leaving the traditional
investment sector, to a place where it can vanish and never be
recovered if a company goes under. For money to leave the country
in the past, a wire transfer had to be created, which was recorded
and monitored, and took a long time to complete. A
cryptocurrency transaction can move any
amount of money around the world in just a moment, with or
without a trace (depending on which currency is used).
Price fixing is an issue as well, with many coins being mineable
(created), using computer hardware performing work. It is
considered a “pump and dump” technique, to create and flood the
market with supply at will, to control the price.
Some cryptocurrencies are untraceable and private,
so governments are worried they will be used for money laundering
for criminals, and avenues that can be used to fund terrorism.
It is important to mention in context, that all of the above
activities still existed and thrived long before
cryptocurrency ever came around. Even though
automobiles are used by bank robbers to make their escape, not
every car on the planet is used by a criminal. Hopefully, the same
logic will prevail.
Despite all the calamity, why are ICOs still
growing in popularity? Because it gives people a chance to make an
investment. The minimum investment into a wall-street
IPO is tens of thousands of dollars. Many
offerings are restricted to accredited investors only. The common
person isn’t permitted or endowed enough to participate at the most
profitable stages in traditional finance. Cryptocurrencies
and blockchain companies are built and financed by
the common person, united to build something that makes the world a
better place. On social media channels and community sites like
Telegram, you can see thousands of loyal (sometimes rabid)
followers and investors who believe in their project of choice, and
back it like their favorite sports team.
Legal Standing in 2018:
China - ICOs are banned 100%. The
Chinese companies who completed their ICOs were instructed to
refund all the money they received. The government has also banned
crypto exchanges and may be soon blocking all
sites related to the cryptocurrency industry
entirely.
European Union - ICOs are regulated, as of
November 13th, 2017. An ICO must adhere to
Anti-Money Laundering and “Know Your Customer” policies.
Investments cannot be anonymous, and full personal disclosure must
be made by investors.
United States - ICOs are heavily regulated.
ICOs are required to obtain a license, and
register with the SEC. Many who have not considered their own token
to be a security have not registered yet, and are fearful the SEC
will come after them. Anti-Money Laundering and Know Your Customer
procedures are required. There is more regulation to come from
currently ongoing investigations.
Canada - ICOs are regulated. Depending on the type
of coin, it may be classified as a security, and is subject to
government regulation. Canada looks at each project on a case by
case basis, rather than one sweeping law that rules everything
related.
Switzerland - ICOs are treated with supportive
regulation! Laws are friendly, and help protect cryptocurrency
companies against suffocating regulations from other countries.
They go through each ICO to weed out the potential
fraud and poorly designed projects, leaving behind a good promising
ICO market.
Israel - ICOs are allowed, though a study is being
conducted to decide how to regulate these operations in the future.
There are plans to introduce tax laws on ICO
tokens.
Germany - ICOs are regulated. Germany warns the
public that investments in these projects are risky. Germany defers
to the November 13th, 2017 European Securities Market instruction
to comply to securities standards.
Japan - ICOs are allowed, but regulation is on the
horizon. Japan is considering whether ICOs could fall under the
Payment Services Act, or Financial Instruments and Exchange Act. In
2016, Japan declared Bitcoin a legal currency, a monumental
achievement for the crypto community!
Russia - ICOs are allowed. The government is
currently watching things unfold while it determines what stance to
take. In October 2017, it issued a ruling that requires all altcoin
(a blanket term for any cryptocurrency besides
Bitcoin) miners to register, and tax laws will be modified.
Singapore - ICOs are allowed. Regulation seems to
be coming soon, as the Monetary Authority stated in November 2017,
that altcoins could qualify as a “capital market product” and be
subject to existing regulations for other products in that
industry.
United Kingdom - ICOs are allowed. The government
has issued warnings to investors about the risks of investing in
these products, calling them “experimental”. Regulation could be
coming soon, but there are no clear indicators of what the attitude
will be.
Brazil - ICOs are regulated. Virtual currency
exchanges are banned. ICOs are considered
securities and are subject to all applicable laws.
Australia - ICOs are regulated. Australia looks to
weed out scams and fraudulent ICOs, promoting the
remaining ICOs as free from fraud.
United Arab Emirates - ICOs are allowed. The UAE
plans to pass regulation at some point in the near future.
Taiwan - ICOs are allowed. The Taiwanese
government is supportive of blockchain technology and
cryptocurrency.
While ongoing legislation is underway, the crypto
market experiences extreme volatility and has nearly unimaginable
dips and peaks, when fears about unfavorable rules or country-wide
bans occur. In February 2018, the market overall value dropped more
than 60% from January highs, as China passed its law banning
cryptocurrencies and exchanges. As of mid-April
2018, it has since recovered the majority of that loss, (much of
that growth happening in a 2 week span). It is a scary place to be
a day trader, but those who hold for the future are always
optimistic.
With so much happening so fast, it can get confusing very quickly.
In some places, the rules hurt ICOs. In some
places, the rules help ICOs. In some places, the
rules apply only to the ICO but not the actual
coin and company itself. In some places, the rules apply to the
entire industry regardless of the product. It is safe to expect
that as time goes on, only more laws (and taxes) will be
implemented. Some may see this as a good thing, paving the way for
financial institutions and the general public to feel safe
participating in the financial revolution, boosting the portfolios
of everyone else who got in early. Others feel these rules are
burdening and suffocating a decentralized worldwide market,
prohibiting natural growth. In any event, there are many more
changes to come in the next few years. It’s an exciting time to be
alive.
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