Initial Coin Offerings: A Global Perspective

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With the increasing popularity of Initial Coin Offerings (ICOs) (a product which adopts the blockchain technology), financial services businesses which are looking to adopt the product should be aware of each global regulator’s stance on the product.

ICOs are a form of crowd-sourced funding which utilises cryptocurrencies rather than traditional forms of currency. ICOs have become increasingly popular for businesses seeking to raise investment funds. A typical transaction involves a business issuing its own form of cryptocurrency generally in exchange for another cryptocurrency.

Regulators globally have publically condemned the product due to its high risk, with some even banning the product entirely. In many jurisdictions ICOs are unregulated and investing in the product is at the risk of each individual investor.

Where can you trade ICOs?

As depicted in the image above, ICOs can be traded in a large number of jurisdictions globally. This does not mean, however, that the product is specifically regulated but rather that it has not been banned. A summary of the different regulator responses on ICOs is below:

  • Australia – In Australia, regulation of an ICO is dependent on the individual characteristics of the product being offered. The ICO may fall within the regulatory and licensing regime where the ICO is deemed to be one of the following (but not limited to) a managed investment scheme, security, derivative or a non-cash payment facility. For further information on the regulation of ICOs in Australia, see our blog article entitled ASIC’s Guidance for Initial Coin Offerings.
  • Canada – The regulation of ICOs in Canada is dependent on whether the product falls within the pre-existing securities regulation. The Canadian regulator encourages all businesses wanting to engage with ICOs to consult with them prior to establishment through its Regulatory Sandbox. Most interestingly in Canada, financial services regulation is traditionally by territory and province, however, the Canadian Securities Administration has been established, which is a group of territorial and provincial regulators who aim to protect investors from risky financial products and are predominantly active in the ICO space.
  • Hong Kong – Similar to Australia’s regulation of ICOs, the Hong Kong Securities and Futures Commission (SFC) has stated that the individual circumstance of the ICO will determine whether or not a business needs to be licensed and regulated under the SFC’s existing regulatory regime. Generally, where the ICO falls within the definition of a “security”, regulation is required.
  • Israel – The Israeli Securities Authority (ISA) has established a specialised committee to review whether ICOs fall within Israel’s current regulatory regime and more broadly whether cryptocurrencies should fall within the regulatory scheme of the ISA. At present, dealings in cryptocurrencies are not regulated in Israel.
  • Japan – Businesses dealing with ICOs in Japan may be subject to regulation under the Payment Services Act or the Financial Instrument and Exchange Act. Whether or not a business is subject to regulation is dependent on the structuring of the ICO. Businesses which deal in ICOs and are found to fall under the Payment Services Act or the Financial Instrument and Exchange Act regime who have not obtained the relevant registration are subject to criminal prosecution. The Japanese Financial Services Agency (JFSA) has also issued a statement informing potential ICO investors that any dealings in the product should be carefully considered due to the products high risk.
  • Malaysia – Although ICOs have not been banned, the Securities Commission of Malaysia (SCM) has publically stated their concerns with the product due to the high risk to investors. The SCM also encourages potential ICO investors to seek advice prior to investment.
  • Russia – The Russian regime is developing a regulatory framework which fosters the cryptocurrency space. A regulatory regime will be developed by mid-2018 that specifically regulates ICOs and other cryptocurrencies.
  • Singapore – ICOs are subject to regulation in Singapore by the Monetary Authority of Singapore (MAS) where the product falls within MAS’ pre-existing “security” regulatory regime – that is, all financial products which are regulated by the Securities and Futures Act. The MAS has stated that ICOs which fall outside the scope of the Securities and Futures Act are not regulated.
  • United Arab Emirates – The Dubai Financial Services Authority does not actively regulate ICOs or more broadly, cryptocurrencies and has issued a statement voicing their concerns about these products. Abu Dhabi’s Financial Services Regulatory Authority has issued guidelines for the planned regulation of ICOs but has not yet determined how the product will be classified. The Abu Dhabi Authority has stated that where it decides an ICO is similar to a security, regulation will be much the same as the current security regulatory framework.
  • United Kingdom – The Financial Conduct Authority (FCA) assesses the regulation of businesses offering ICOs on a case by case basis. The FCA reviews each business and determines whether the ICO structuring falls within its already established regulatory regime. The FCA has a dedicated webpage which deals with ICO regulation in the UK. The webpage also includes a prominent statement of the associated risks to investors.
  • United States – The Securities and Exchange Commission (SEC) has not banned dealings of ICOs in the US but has a strong view on the risks associated with an ICO transaction. Once again, the SEC has stated that any ICO which falls within the scope of a “security” will be subject to regulation.

Where is trading ICOs banned?

The following regulators have banned ICOs, in a step beyond other regulators who have expressed their concerns regarding this product. These regulators have also been identified in our image above.

  • China – China was the first jurisdiction to ban ICOs. The statement banning all ICO products was issued by the People’s Bank of China which came as a result of consultation with the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission. The Chinese Ban on ICOs came into effect in early September 2017.
  • South Korea – Following China’s ban on ICOs in early September 2017, South Korea’s Regulator has also banned the product. The Financial Services Commission has banned all forms of businesses adopting the blockchain technology, not just ICOs. Fintech businesses in South Korea are under intense scrutiny by the regulator to ensure they are not operating within the scope of the ban.

If you are looking to establish a business that deals with ICOs, Sophie Grace would be happy to meet with you to discuss your options further. Please contact us.

About The Author

Sarah Murray

Sarah works with the Compliance Team with a particular focus on compliance and legal services. Sarah works with the Legal Team providing ongoing assistance in drafting and reviewing documentation as well as legal research. Sarah assists clients with AFSL and ACL applications, variations and also assists in the implementation of compliance reviews. She provides ongoing compliance support in the form of compliance program implementation and reviews.

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