Last year saw a massive amount of capital raised from Initial Coin Offerings — around 5.2 billion USD. Yet even so, 2018 has already surpassed the previous year in terms of capital raised! It was also discovered in a recent study that 80% of ICOs in 2017 were scams, permitted to occur due to loose regulations and immaturity in the market. With a rising concern for scams in the ICO space, many financial regulators distanced themselves and their countries from the fundraising method.
However, it is interesting to note that some of the most verbal nations, in regards to ICO cautionary warnings, have changed tone considerably this year, and in a short period of time. What used to resemble severe flood warnings are quickly turning into warm welcomes and promises of sunshine and beaches.
Naturally, we’re talking about the United Kingdom, Malta, and Switzerland.
For example, Malta Financial Services Authority issued in July 2017 a warning to the general public. This memo highlighted the vulnerabilities in cryptocurrencies and that investing in ICOs was a high risk exercise.
Similarly, the Financial Consumer Authorities in the UK issued a warning in September 2017, calling ICOs very high-risk and speculative investments; at this time they had added a link for investors to report suspected scams.
While the rest of the world works slowly to understand and provide clear opinions on the emerging, distributed ledger technology space, we take a look at some of the more forward-thinking governments that have made definitive moves to make their countries the next “crypto hubs”.
Shifting sands and greener pastures
Examining the highly publicised “blockchain island”, Malta has recently legislated three major bills (MDIA, ITAS, VFA) that address distributed ledger technologies, receiving praise for having a strong technical perspective when it comes to passing laws. With a technology-first approach, the Maltese financial authority stands out by allowing itself to be flexible, and changing laws as the technology matures.
These laws establish a presence of an institution called Malta Digital Innovation Authority, and deal with governance for ICOs, crypto exchanges, wallet providers, certification of DLT platforms, and ensure credibility and legal certainty for users wishing to use distributed ledger technology.
”We believe that we have found the right formula that will allow us to enact a solid regulatory framework that will protect consumers, safeguard investors and will allow for more transparency and visibility… Regulation will be done without stifling innovation, which is the main driver for economic growth. Think about it as a regulation of engineers by engineers.”— Dr. Abdalla Kablan, Blockchain Advisor to the Maltese Government
A recent arrival to the island has made a huge splash. Binance, the world’s largest cryptocurrency exchange by traded value, has announced the establishment of an office on the mediterranean island. Last week, Binance also announced that it would back Founders Bank, the world’s first decentralized, tokenized bank, which would take root in Malta. These decisions come after Binance had received an official warning from Japan’s FSA, as well as having legal issues in Hong Kong where it is based.
High profile business moves like this are yet another indicator that Malta is part of defining history by promoting digital innovation to a high degree. Malta offers an oasis for innovation in a desert of bureaucracy that makes it hard for crypto companies to operate. Blockchain and other DLT companies can, in Malta, feel comfortable in driving innovation and economic growth, without feeling stifled by tightened regulations. By providing clear guidelines on their classification of tokens, DLT companies can find certainty in terms of where they stand in relation to the law, freeing up time and resources to commit to innovation.
For an expanded list of influential crypto companies in Malta, check this list out.
Switzerland (Crypto Valley, Zug)
While we’re on the topic of hotspots for attractive DLT regulation, Zug deserves recognition for being an early mover in enabling crypto businesses to thrive. Situated in a idyllic valley in Switzerland, Zug is home to over 200 crypto-related firms. Among the more notable firms, we have Ethereum Foundation, Tezos, Bitfinex, Monaco, Shapeshift, Cardano, and the list goes on and on. But what is it that attracts crypto companies to this unlikely, little city on the shores of Lake Zug?
For one, Zug regional “canton” offers a low-tax environment, which has attracted all kinds of entrepreneurs over the past few decades. Second, the local government has been very receptive to cryptocurrency and DLT, and has from an early stage developed an understanding that allowed crypto businesses to feel welcomed.
Switzerland has been successful in maintaining a balance between fostering innovation and keeping a clean record when handling money, placing emphasis on creating transparency at a time where there is a high level of demand in the market.
Switzerland’s Financial Market Supervisory Authority (FINMA) has issued guidelines for ICOs that are in line with Swiss anti-money-laundering and securities laws — these new guidelines classify many token offerings as securities. That being said, the regulatory guidelines break ICO tokens into three categories: payment tokens, utility tokens, and asset tokens (securities).
Thanks to “crypto valley”, Switzerland holds the 2nd place for most money raised in ICOs in 2017, following behind USA, where the SEC has been working tirelessly to define their approaches towards ICOs; recently having issued mandates on the more specific-named Security Token Offering.
“Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.” — Mark Branson, FINMA CEO
However, it may not be all it’s rumoured to be. In recent months, cryptocurrency projects in Switzerland are feeling pressure from the banking world, as many banks are beginning to close their doors to businesses with funds originated from ICOs, for fears of AML violations. A few companies have approached authorities to intervene during this crisis, urging the Swiss government to maintain the level of growth and innovation that are evident since the establishment of “Crypto Valley”.
“All their banking relationships are going to Liechtenstein. These are hundreds of jobs that have been created, and every job is important.” — Zug Finance Director, Heinz Taennler
Reuter’s reports that the Swiss government and FINMA are working hard to find a solution to provide more clarity on rules that apply to cryptocurrency. Zug’s finance director fears that these cryptocurrency projects may leave the country and emigrate to countries like Liechtenstein, if they cannot access the banking system in Switzerland. This is unfortunately the case for many cryptocurrency projects that are struggling to grow among a resisting, old infrastructure.
Opinions of the “Old World”
Towards the end of 2017, we saw a record high amount of capital raised by ICOs. The majority of successful ICOs in terms of capital raised were based in the United States, with Filecoin ($257m) and Tezos ($232m) being the biggest ICOs to date. Yet this year, as the SEC begins to crack down on initial coin offerings, companies seeking to make use of this funding mechanism are moving off-shore.
While the SEC has added an additional classification of STO (Securities Token Offering), there is a clear interest in preserving the financial status-quo. As of 2018, nearly all ICOs are considered as “securities” under US law. Furthermore, as the SEC becomes more involved with regulating ICOs, foreign offerings are limited to selling only to US accredited investors; essentially, this is the sort of buyer protection the SEC wants to encourage, protecting uninformed investors from scams.
This is just the tip of the iceberg. The SEC has already initiated a slew of crypto investigations, seeking out any illegal activity during token sales, as well as the legality of Simple Agreement for Future Tokens, which may violate securities regulations.
The SEC is taking matters into it’s own hands to protect buyers and prevent scams — naturally that’s a great step in the right direction. It may make it more difficult to invest in global ICOs for US investors, but at least it is a degree of understanding and a framework that entrepreneurs can relate to.
In the EU, parliament is striving to position itself as a leader in blockchain regulation. The goal is to create a unified regulatory framework that brings standardisation in blockchain technology, as well as a comprehensive action plan to foster innovation in the space. However, as it currently stands, regulations may hinder crypto companies seeking to issue an ICO.
First, the relevant EU regulatory frameworks are changing. Many laws are new, evolving or under ongoing reconstruction. To name just a few: MiFID II (the cornerstone piece of legislation for investment services), Prospectus Regulation (PR3) and the new Anti‑Money Laundering Directive. A lot is happening as part of the emerging EU’s Capital Markets Union. — CoinDesk
For example, Prospectus Regulation (PR3) presents an enormous difficulty for European DLT companies to publish white papers that include token economics and ICO details, which automatically become financial prospectuses. The law states that these documents can be sent to a maximum of 150 legal entities per EU country. While the law provides exemption for the issuance of securities with a value below EUR 1m, this still presents a challenge if a firm wishes to display their white paper from a website, where it could be viewed by potentially millions of individuals.
On top of that, GDPR has already been proven to create friction with blockchain technology, where data is ideally immutable. However, as the technology evolves, there will doubtless be a solution for GDPR compliant blockchains.
In general, the question of whether one’s token is a security or utility will influence the way the ICO is ultimately structured. However, in terms of EU regulation, the response is unclear. As if that wasn’t enough, many EU states have their own process for deciphering the token economics.
For example, in Denmark, if the token is discerned to be a utility/commodity, then the tax authorities may have the right to claim VAT on it, depending on the circumstance. If it’s a security, then the local FSA will have to make sure that the ICO follows prospectus rulings and ensure that buyer protections are implemented — all well and good, except they are typically considered on a case by case basis, leaving a large degree in uncertainty in the hands of crypto companies that often cannot afford to wait for slow, bureaucratic processes.
As slow as the EU is in creating universal directives that address ICOs and cryptocurrencies in a comprehensive manner, it seems that they are dedicated to becoming the world’s hub for blockchain. In all fairness, ICOs are not the only way to raise capital for growing startups, but it’s my belief that ICOs will be the future framework for funding — it just needs to go through some framework iterations that financial authorities can get behind.
In conclusion, 2018 is seeing a plethora of new regulations directed towards understanding and classification of cryptocurrencies and ICOs. Efforts by the major financial authorities of the world are either struggling to control the rising tide of illegal token offerings, or banning them outright (China, I’m looking at you).
That being said, countries like Malta, Switzerland, Lithuania, etc. are implementing initiatives to bring rapidly growing companies within their borders; tax breaks, public funding, low entry-barriers for foreign entities, etc. It may be a while before we see the aforementioned companies flock back to their homes, as the promise of complimentary regulations and “crypto havens” are attractive as glimmering, foreign shores.