On September 4, 2017 seven Chinese financial regulators officially banned all ICOs within the People’s Republic of China, demanding that the proceeds from all past ICOs be refunded to investors or face being “severely punished according to the law”. This action by Chinese regulators resulted in large sell-offs for most cryptocurrencies. Prior to the Chinese ban, ICOs had raised nearly $400 million from about 100,000 Chinese investors. A week later, however, a Chinese financial official stated on Chinese national television that the ban on ICOs is only temporary until ICO regulatory policies are in place.
In July 2017 the U.S. Securities and Exchange Commission (SEC) indicated that it could have the authority to apply federal securities law to ICOs. The SEC did not state that all blockchain tokens (ICOs) would necessarily be considered securities, but that determination would be made on a case-by-case basis. The SEC action may encourage more mainstream investors to invest in ICOs, although ICOs typically prevent U.S. investor participation to remain out of the jurisdiction of the United States government. The SEC charged Maksim Zaslavskiy for fraud in September 2017 in connection with the ICOs for RECoin and DRC World. The SEC has ruled that celebrity ICO endorsements must disclose the amount of any compensation paid for the endorsement. In December 2017 the SEC issued an Order stating that the utility-token ICO of Munchee Inc. was classified as a security.
International ICOs may need to consider US regulations to avoid falling foul of the SEC in the event of US persons acquiring tokens. There are two choices for the coin Issuer (Company), if they are not seeking a full SEC registration:
- Rule 506(c): the token sale can be broadly solicited to an unlimited number of purchasers so long as the Company meets two conditions (1) All token purchasers in the offering must qualify as Accredited Investors; and (2) The Company must have undertaken reasonable steps to verify that all purchasers are Accredited Investors.
- Regulation S: should the Company choose to exclude US token purchasers they may do so under Regulation S of the Securities Act. Among other requirements, (i) the Company must verify that the token sale is made outside of the US to non-US persons (ii) there are no direct selling efforts made in the US and (iii) the securities or tokens will not be transferred to investors or token purchasers in the US or to US persons for at least one year following the original token sale.
Like most other nations, the UK has issued an investor warning on the unregulated nature of ICOs. The Financial Conduct Authority argues that even if the ICO is acting in good faith, investors still stand a good chance of losing their entire investment. “Typically ICO projects are in a very early stage of development and their business models are experimental,” the FCA said.
The UK recognizes altcoins as “private currency,” similar to “Disney Dollars” at Disney properties. Currently, ICO operators are free to interpret existing laws and regulations as they see fit for their own properties. However, the UK is testing out ICOs and altcoins in its “regulatory sandbox”; new regulations may be released soon.
In October 2017, the Government of Gibraltar published regulation establishing a framework for regulated DLT (Distributed Ledger Technology) companies to become effective on January 1, 2018. This regulation encompasses ICOs and subjects them to financial controls and standards
The Financial Services Agency is looking at regulations that may help to strengthen AML/KYC protections for altcoins.
There is open fear that a potential crackdown on altcoins may be on the horizon, with the Financial Services Agency following international trends by issuing an investor warning on ICOs.
As of October 2017, the Autorité des marchés financiers (AMF) was working on regulations governing the use of blockchain technology in capital raising transactions.
The Securities and Futures Commission released a statement in September 2017 explaining that tokens may constitute securities for purposes of the Securities and Futures Ordinance, in which case dealing in such tokens would be a regulated activity under Hong Kong law.
In November, the Monetary Authority of Singapore offered a guide on Digital Token Offerings, which indicates how altcoins should be treated under current securities laws. The new guidance dictates that any ICO or altcoin that are “capital market products” under the Securities and Futures Act can be regulated under the MAS. This includes altcoins that either infer an ownership interest in a corporation or product, debt, or a share in an investment scheme.
The Korean Financial Services Commission prohibited ICOs in September 2017 and promised “stern penalties” for violations.
The Securities and Exchange Commission has released a statement paper, welcoming the use of altcoins, but leaving open the possibility of regulating altcoins thought to be securities.
In October 2017, the Financial Markets Authority (FMA) released guidelines on the current regulatory environment in regards to ICOs.
In December 2017, Arc Fiduciary Ltd, based in Jersey, launched the Arc Reserve Currency an asset-backed cryptocurrency based on the Ethereum blockchain, working closely with the Jersey Financial Services Regulator to achieve a workable regulatory solution for the ICO. The Arc Reserve Currency does not have a continuing regulatory status beyond being classified as a debt security, but it is a notable example of how cryptocurrency operators are increasingly working with regulators to improve the investment landscape for holders of cryptocurrencies.
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