June 4, 2018
It’s been a year or so since Blockchain became a word that does not raise eyebrows anymore for regulators. But whilst they started to get acquainted with this new technology, new challenges come from digital financial assets, such as bitcoins and other types of tokens, and Initial Coin Offerings (ICOs) that are booming due to the underlying blockchain technology. The Crypto industry also needs clarity as public confidence can only be built on consumer and investor protection.
Recently, the OECD gathered regulators from over 60 jurisdictions to discuss opportunities and challenges that Digital Financial Assets bring. The business model implied by underlying blockchain technology is truly global, therefore the regulators wish to overcome the challenge of the geo-politics of jurisdictive power.
The taxonomy of digital financial assets and the way different types of tokens could be categorised is at the top of regulators’ minds. It is the starting point for the regulatory puzzle. However, so far there is no uniform agreement on vocabulary (is it crypto or digital assets), or on how to define functions and types of tokens. For instance, some workshop participants proposed classifying digital financial assets into three categories: (i) payment tokens (mainly used as a means of payment and has a functionality of virtual currency); (ii) asset and financial tokens (used for raising capital and are like financial securities) and (iii) utility or consumer tokens (fundamentally designed to service a specific need or grant a right to a specific good).
Others argued that as long as a token represents some kind of risk bearing, it should be seen as an investment product. For instance, if a token proposes to invest into a future movie and promises that a token holder will get a right to five tickets to the movie once it is produced, there is still a risk that this movie will never be created. However, not all regulators agree with such division; some like IOSCO (International Organization of Securities Commissions) argue that it is impossible to categorise tokens, and it is much more important to consider the real economic activity lying behind each individual token.
ICOs represent regulatory challenges, as well. An ICO process is quite opaque. There is a lack of clarity of who is fundraising, where they are located, and under what governing law they operate. This is as challenging for the regulators as well as for businesses. Therefore, the Swiss Crypto Valley success, with the Swiss regulators’ guidelines allowing for a boost to the ICO market in Switzerland, is a clear indicator that providing regulatory clarity is a very important step if a jurisdiction wishes to attract more of the crypto-business. France is also planning to jump on the ICOs’ train. In a few months’ time, France will propose a new ICOs regime. The French regulator intends to suggest an optional “label of approval” regime which would allow the French authority to give a “quality certificate” for a future ICO. The quality stamp would be given based on a set of conditions like clear identification of issuer, buyers, information about the token, price or a way to determine it, etc.
The EU is looking for SMEs financing sources and if the ICOs can be used for this. However, according to ESMA representatives currently up to 80 percent of ICOs are either scams or would be very likely to fail due to a “bad” underlying business project. Therefore, it is not that simple to declare that the ICOs are good and safe investment assets, which would make them be eligible for UCITS funds to invest in.
While answers on how to deal with a token or an ICO seem to be becoming clearer in regulators’ minds, a great number of unanswered questions remain: How to address the primary and secondary markets? How to address fraud and money laundering? What type of information do tax administrations need to know? Where is this information held? If it is on blockchain, which jurisdiction? Should regulators be able to use product intervention powers, like ESMA has in the EU? Etc…
It seems that unlike the early days of the internet, global dialogue is in place this time. So, watch the space – the new crypto-regulation wave is coming soon…