ICOs and the regulation

The main focus is the question of the difficult and important issue of regulation. How are ICOs legally classified and regulated around the world? Overview We have a look in United States, Switzerland, Germany, Australia, China and South Korea.

For all who issue or deal with shares, there is a securities trading act with 13 sections or 51 paragraphs. In countries such as the USA, the SEC also has a supervisory authority, which is specifically designed to regulate trade in securities.

If ICOs are now looking to become the new stock issue, and token on a block-based basis to compete with the traditional securities, it is obvious that the regulation and regulation will not simply accept this development. If the ICO trend has a lasting impact on the financing of start-ups and companies, regulation will soon be unavoidable.

So far, however, ICOs are still humming in a legal gray zone. At least partially and in some places. We look at how the global ICO regulation is ordered.

USA: Hard regulation

In the USA, the regulation is already one step further. Following the failure of the DAO, the US Securities and Exchange Commission (SEC), the US stock exchange regulation, has launched an investigation. The results have been available since July. It also raised the question of whether the DAO tokens, which together amounted to more than 150 million dollars at that time, should be regulated as securities.

The SEC explains in its report that blockchain tokens can fall under the national laws on securities trading. However, this depends on the circumstances. In the case of the DAO tokens, the SEC considers these circumstances to be met: Your issue was an investment contract. Someone invests money - the SEC expressly estimates ethers as money - and expects a profit in the form of "dividends, other regular payments or increased Value of the investment ". Since the DAO was in principle a decentralized investment company in which the token owners were to benefit from the returns, the conditions were met to make the token securities.

According to the SEC on its website, this report confirms that "the issuers of securities based on blockchain technology must register the offering and sale of such securities unless there is a valid exception." Anyone who violates these rules, and unauthorized by ICO Token is therefore punishable. The SEC even goes one step further: "Those who participate in an unregistered offer can be held liable for violations of the Securities Act."

Some publishers of tokens want to miss the permission requirement in the US by declaring the tokens as a utility token, that is, tokens that have a usage value and are therefore a product rather than securities. However, with this definition one goes into a gray zone, in which the supervision can judge less the letter than the intention. It may be possible to escape the obligatory notification. But it represents a great risk.

While the SEC has not launched any further investigation into the German startup Slock.it, which was presumably behind the DAO, it has accused an organizer of other ICOs . But it was not so much a question of circumventing the obligation of permission, but rather of naked deception. The businessman Maksim Zaslavskiy has issued tokens that were supposedly covered by real estate and diamonds.

According to the SEC, however, the enterprises were purely Potemkish villages. Neither the employees mentioned in the advertising for the ICO nor the advertised properties and diamonds were real.

As well as welcome to the fact that supervisory investors protect the ICOs against fraud, the hard line of the SEC is a reason for many ICOs to make an arc around the USA. Some start-ups are trying to meet the possible financial supervision requirements, for example through KYC measures. Most of them, however, exclude US residents from the ICO - which in practice is not really feasible.

Switzerland: Probably regulated

The Swiss Financial Supervisory Authority FINMA issued a statement on ICOs a few days ago. According to the text, the supervisory authorities had "noted a marked increase in Initial Coin Offerings carried out in Switzerland". Therefore, it now clarifies whether and under which circumstances ICOs violate the supervisory regulation.

As a matter of principle, it is permissible in Switzerland to accept unregulated money "for its own purposes without the intermediary of a platform or a home", if there is no obligation to repay, no cash is spent and no secondary trading takes place.” can be activated.

If the issued token represents a payment, the money laundering network is used. This is applied not only to the publishers but also to the secondary dealers such as brokers or stock exchanges. If the issued token creates a liability of the operator against the participants, the provisions of banking law apply. If on the other hand, the issued tokens are to be defined as an "effect" - which includes derivatives such as commodity-based index papers - they can trigger an authorization obligation as an effects trader. If, finally, ICO's assets are managed externally, "there may be points of contact with collective investment schemes."

All in all, FINMA considers it quite likely that an ICO will activate the regulation. "Due to the fact that ICOs or token generating events are in some cases very close to the content of the traditional financial market, it is likely that different ICO models fall within the scope of at least one of the aforementioned financial market laws." Due to the many different ICO models, FINMA but only in individual cases.

Germany: unclear situation

In the EU, there is as yet no regulation on ICOs, nor is there any comment from an EU financial regulator on ICOs. Accordingly, it can be assumed that ICOs move in a legal gray zone and are similarly assessed by the authorities as crypto scripts. In detail, concrete regulation is likely to depend on the assessment of national supervisory authorities and the national financial market laws.

In Germany, the situation is not quite uncomplicated. ICOs are unregulated in themselves, but there are, of course, so many exceptions that you never know exactly.

The token that was issued at an ICO could be viewed as a virtual currency, which means that the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is subject to regulatory supervision. These tokens would thus be defined and regulated as financial instruments. It is not necessary to accept them as a substitute for money, to pay with them, to buy them, or to sell or to mine. However, there are cases where virtual currencies trigger an authorization requirement, such as when operating exchanges or mining pools.

For ICO tokens, it is also in some cases that such laws as the German Investment Act (VermAnlG), the Securities Trading Act (WpHG) or the German Payment Services Supervision Act (ZAG) can apply. Whether and under what circumstances is a delicate, difficult to answer the question. The law firm WinHeller explains on the law firm blog that the ICO tokens if they are estimated as virtual currencies, should not be largely regulated:

“The mere sale of these instruments does not constitute a banking transaction or a financial service so that an authorization exemption pursuant to the KWG ceases. Likewise, no regulation under the German Payment Services Supervision Act (ZAG) is applicable since no amounts of government money or electronic money are transferred. In addition, virtual currencies do not meet the definitions of the Securities Trading Act, so that the offering of tokens within the scope of an ICO is not subject to a prospectus requirement under the Securities Prospectus Act.”

However, other regulations may apply: "However, regulation under the German Investment Act (VermAnlG), which may result in a prospectus obligation for a public token offer. The decisive factor is how the tokens offered in an ICO are designed. "

The most important difference is whether a token is simply a bearer token, or whether it has other characteristics, such as the token's earnings, such as profit sharing or voting rights. For example, the tokens could be defined as legal assets "if distributions to tokens based on the results of the issuing company are made according to established rules." You could say that the properties that make a token exciting can trigger the regulation.
The lawyers concluded that it is a misconception that ICOs are "an unregulated option for quick capital procurement". However, depending on the nature of the ICO, exemptions may be granted in the securities trading activities, which can be used to circumvent the strict requirements for shares in whole or in part. However, this depends on the detail.

Australia: regulated

The Australian stock exchange supervisor ASIC recently published a detailed statement on ICOs. In this, she explains the circumstances under which an ICO can fall under which laws. "In Australia, the legal status of an ICO is governed by the circumstances of the ICO, such as how it is structured and how it operates, and what rights are attached to the coins (or tokens) sold by the ICO."

There are some cases where the ICO falls under the general and consumer law. In other cases, however, the corporate law also extends to them. The ASIC explains when this can happen. For example, an ICO can be a managed investment scheme (MIS) where investors are entitled to a company's profits, their deposits are consolidated to finance the company and have a kind of voting rights. A classic example would be if someone organized an ICO to buy a property and spread the rental income to investors. An ICO can be considered an MIS even if the issued tokens are a kind of voucher for a service - they are often - as long as the value of this service depends on how the management uses the invested deposits.

Furthermore, an ICO can be a "share". This is a legal claim against the company, which usually refers to property, profits or decisions. According to the ASIC, the issued tokens can be a share if a company - or a company that appears like a company - is financed by the ICO. However, the nature of the rights associated with the token is decisive. As long as these resemble the rights usually attached to shares - for example, because they grant a partial ownership, choice rights or profit participation - it is obvious that the token is also shares. In this case, the publisher must prepare a prospectus.

Finally, the tokens issued at an ICO can still be a derivative. For the sake of simplicity, the ASIC defines a derivative at this point as "a product that derives its value from another 'thing', usually called a 'subordinate instrument' or a 'reference object'." Securities, a securities index, the price of a currency or a commodity. Such tokens, like derivatives, must be registered with the supervisor.

China: prohibit

In China, as already reported, ICOs were completely banned. It is neither permitted to issue or trade with ICO Token. Whether the ownership of tokens is also prohibited is not quite clear.

South Korea: Ban ICO fundraising, but not ICO trading

Supervision recently also banned ICOs. However, she does not go as far as the Chinese wardens. The FSC has announced, according to Coindesk, "to ban all kinds of financing methods through the blockchain," regardless of the specific technical design. ICOs as a method of project financing are considered exaggerated speculative and constitute a violation of capital market laws. The FSC announces that they will punish them with hard penalties.

However, South Korea appears to ban ICO fundraising, but not ICO trading. It remains to be seen whether South Korea will remain on this way, or whether the Chinese path will be increasingly acute in the wake of announced general access to crypt-ferry companies.

Overall: regulation on the advance

If you look at the previous regulation, the direction of the march seems clear: ICOs are either prohibited because they violate the financial market laws, or they are inserted into them. The stay in an unregulated area, which is so far marked by ICOs, does not seem to be long-lasting. Even Switzerland, actually one of the countries with the world's easiest financial regulation, estimates ICOs as very likely regulated. The fact that the EU states are more liberal here and continue to not apply specific regulation to ICOs is probably less the result of the slower pace of the bureaucratic mills. It should only be a matter of time before they catch up.

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