Regulation in the cryptocurrency space, and especially with ICOs, has been vague and loosely enforced. As the global compliance environment is changing rapidly, it can be very hard to remain current with regulations. In this article we’ll cover some of the current regulations that apply to ICOs in the USA, Switzerland, Malta, and Gibraltar, and how ICOs can better prepare for the changing landscape.
Cryptocurrency regulations in the USA seems to be changing every week, and we hear conflicting statements from prominent regulators such as SEC Chairman Jay Clayton stating “every ICO I have ever seen is a security”.
How is this defined? First there is the Howey Test, which can determine if an ICO is a security, along with other factors. What is the Howey test? Four basic premises are applied to an asset:
- It is an investment of money.
- There is an expectation of profits from the investment.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
When you apply the Howey test, most ICOs could be regarded as securities, however there are ways to combat this. First off, if you or your company are planning on raising money via an ICO, registering as a Reg A+ in the USA grants you ability to raise up to to $50 million a year. It also allows investors of any income level from around the world to participate, unlike traditional IPOs in the equity markets. Reg A+ also allows broad marketing to investors even though marketing to the general public usually means a utility token would be classified as a security.
A lot of ICOs are trying to curb the SEC’s regulation on securities by classifying themselves as utility tokens, meaning the tokens and investors will use the product with no expectation of profit, but what an ICO says is usually not what they do. For one, almost all ICOs hint to some sort of expectation of profits many of them talk about external exchange listings and more importantly they advertise to the general public instead of actual users of their platform. If they are not registered, this would make them an illegal security although regulation is hardly enforced and still being changed.
Reg A+ could help ICOs, however, keep in mind that this requires compliance with KYC and AML regulations and acquiring that information from investors. As of right now, the uncertainty in USA regulation has caused a lot of ICOs to leave the country and forbid American citizens from investing in their token sales. This, however, is not something the SEC wants as William Hinman, the director of the SEC’s Division of Corporation Finance said:
“We are striving for a balanced approach, and one that ensures capital formation while maintaining a strong focus on investor protection.”
Of course these are just words, and in reality the regulations on ICOs are still being changed but in the meantime it seems that Reg A+ solves most if not all problems. Another approach would be relocating overseas. A handful of countries have competitively positioned themselves to be blockchain-friendly with loose regulation, or very forward-thinking regulation that is easy to understand. While some countries have closed the door to ICOs such as China, countries like Switzerland, Malta and Gibraltar have become known hotspots for ICOs and blockchain company relocation.
Switzerland’s FINMA has recently published ICO guidelines for the country, making a distinction between payment tokens, utility tokens and asset tokens.
- Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may, in some cases, only develop the necessary function and become accepted as a means of payment over a period of time.
- Utility tokens are intended to provide digital access to an application or service. These tokens do not qualify as securities only if their sole purpose is to confer digital access rights to an application or service and if the utility token can already be used in this way at the point of issue. If a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities.
- Asset tokens represent assets which are part of real physical underlyings, companies, earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
Before these regulations Switzerland was basically the wild west of ICOs. Now that more strict regulations are in place we may see a relative decrease in ICOs setting up in the country, although the ones that do have generally been higher quality projects.
Malta has passed a new 63-page bill with a set of rules for compliance by all ICOs. The rules include a thorough whitepaper explaining every part of the ICO in detail as well as in truth. The ICO also needs the help of a Virtual Financial Assets (VFA) agent to register with authorities. Malta is a definite possibility for upcoming ICOs if they respect legislation and get professional legal help.
Gibraltar has published a whitepaper explaining it’s new regulation on ICOs stating:
‘’Most often, tokens do not qualify as securities under Gibraltar or EU legislation. In many cases, they represent the advance sale of products that entitle holders to access future networks or consume future services.’’
Gibraltar is very loose in it’s regulation and definition of a security, even tokens that are expected to go up in value don’t necessarily classify as a security. ICOs do need to disclose full and accurate information regarding the token sale, similar to Malta.
In all cases, seeking professional help and working together with local authorities is the best way to go for all involved, this will save everyone from problems in the future. None of the three locations stand out as the best, they are all three great choices, although Gibraltar is a bit more loose with the definition of a security.