ICO Regulation: Possible Solutions and Consequences
The ICO regulation climate causes confusion amongst participants of the entire cryptomarket. Some are unhappy with the intervention of legislative bodies, from which blockchain technologies have tried to fence themselves off. Others consider attempts at ICO control as a step towards recognizing cryptocurrencies. In any case, the consequences concern all those involved in the regulation process. Let’s try to understand the goals and means of regulators and the possible implications of their work.
Today’s ICO Regulation Worldwide
The issue of ICO regulation is on the agenda of many states and does not always coincide with the issue of cryptocurrency regulations. For example, in some US states, cryptocurrencies have a semi-legal status. But here also we find ICOs under strict government control.
The European Union has doubts about cryptocurrencies in general but puts forth a clear position in terms of ICOs. Thus, ICO EU regulations imply the initial coin offering campaign should be conducted in accordance with specific directives to avoid money laundering and force the ICO’s organizers to confirm their identity.
ICO regulation has become one of the top priority issues in the field of cryptocurrency for the USA, Canada, Australia, France, Switzerland, Japan, Singapore, Estonia, and Belarus. ICO regulation in the USA has already defined strict requirements. Here, the initial coin offering process is fully regulated and subjected to a specific algorithm. The organizers have rigorous obligations and investors are able to apply to the court if the project fails or turns out to be a scam. Considering the ICO regulation by country, it should also be said that the UK, Germany, Ukraine, Russia, Lithuania, and other countries are now working on regulation laws. In other words, IСO regulation in Europe is just starting to gain momentum.
ICO Regulation Methods
One of the most common regulatory measures is to equate the ICO token with shares and the ICOs with IPOs (initial public offerings). In this case, investors are under the same protection as any shareholder and the ICO organizers must meet the requirements to enter the market. In different countries, requirements for conducting IPOs vary, but in general, they assume:
- A full audit of the company and the auditor’s report to the regulatory body
- Creation of the document with full information about the issuer, the procedure for issuing and shares
- Review of this doc by independent analysts and provision of a final report
- Severe restrictions on the report timing and punishment for their violation
- Development of exhaustive documentation that regulates the rights of the investor
- And many other parameters.
Another ICO control method may involve reconciliation of the project in turn with various regulatory bodies such as security commissions or bank management entities. As a result, the ICO is (or is not) granted permission and bodies determine which laws the ICO must comply with. They may be legal acts regulating the conduct of IPOs, or acts regulating crowdfunding, trade, the exchange of property, and others.
ICO regulation can involve determining the rights and responsibilities of all stakeholders. Failure to perform the duties of the organizer entails punishment from administrative to criminal (depending on the country’s legislation, the nature of its position vis-à-vis the ICO, the severity of the violation, and so on). Obligations usually include:
- Registration of the company and the organizer’s confirmation using the KYC procedure (confirmation of identity)
- Providing the regulatory body with full information about the product
- Providing a business plan
- Open access to full information about the investors’ rights
- The provision of material security and other
Carrying out the ICO may make it subject to financial restrictions. For example, the maximum possible amount of funds raised may be indicated. This could be applied to any ICO and determined individually or based on the ownership of tokens to a specific asset category.
A similar limitation for investors is possible. It specifies the maximum allowable amount of investment in general or the maximum allowable amount for legal entities and for individuals. This restriction may also vary depending on the investor’s experience.
Another option is the regulation by means of platforms for ICOs, similar to the securities exchanges for IPOs. Here, as a rule, among the requirements is the confirmation of the identity on both sides, the presence of a third party-intermediary, and sometimes the limitation of investment volume.
Implications of the ICO Regulation
Regulators do not use all of the above methods. Basically, legislation is quickly amended, which can be bypassed by a good lawyer. However, by making amendments, many countries continue to develop a full-fledged legal framework. It often applies not only to ICOs but to cryptocurrency regulation in general, which obviously will not accelerate the emergence of regulatory rules for initial coin offerings.
The formation of the legislative base for ICOs is complicated by the fact that this market is completely new. The market will change. The current legislation will be enlarged with precedents resolved individually due to the lack of analogs in legal practice.
Regulators are now in a quandary. On the one hand, creating laws on such a new industry is meaningless because they will cover a very small segment of the ICO market. On the other hand, laws are necessary if only because too many investors suffer due to their absence.
There are many prospects for cryptocurrencies and it is impossible to predict which way of development they will go. So that intelligent regulation of the ICO market in the near future is unlikely to be worth waiting for. But still, legal regulation brings clarity to ICOs. This attracts more serious developers and investors who were afraid to work in previous conditions of uncertainty. Secondly, it makes the market safer.
On the other hand, regulation pushes potential developers and startups away who may have good and promising ideas but are wary of bureaucracy and the pitfalls of private enterprise. This is especially true for developing countries where private entrepreneurship faces unchecked difficulties.
On the third hand, virtual space implies the possibility of registering a company in the state’s jurisdiction with more favorable laws and transparent implementation. Hence, a developer with a really good idea will certainly find a way to declare it through the ICO. For investors, it is good. A reliable project with good financing will definitely make a profit.
There are two disadvantages of ICO regulation for investors:
- Complicating the investment process
- Loss of anonymity
Both these cons are not too significant for serious players.
In general, the effectiveness of ICO investments will increase not because of the expense of experience in the new market. It will be due to the fact that it is easier to work in the regulated environment. Investors will be able to invest money in projects that garner much more confidence plus less fear that the ICO organizer will simply disappear.
So we at Trudex feel strongly that ICO regulation is a positive sign both for investors and developers.