First draft legislation regulating initial coin offerings
It should come as no surprise to attentive readers of this blog that the European Union may take up the regulation of ICOs as a method of obtaining funds through the public distribution of digital tokens (or coins).
So far, we have only been confronted with market speculation on this issue, and the Commission itself has not signalled a willingness to take any legislative steps in the imminent future (see e.g. FinTech action plan published in March 2018).
Hence the news that the European Parliament is working on the ICO regulation is somewhat surprising. However, it is not a new draft act, but a proposal to add a few provisions to the Crowdfunding Regulation, mentioned by Adam Polanowski here. This proposal appeared at a rather early stage of the EU legislative procedure, in the work of the Committee on Economic and Monetary Affairs (ECON). Although it is currently difficult to predict the final wording of the provisions, it is worth looking at some aspects of the draft proposal.
A proposal to regulate ICOs
The original draft regulation proposed a fundamental definition of “crowdfunding services.” The committee report proposes to extend this concept to include, among other things, “the facilitation of offerings where the service provider acts as an intermediary between an entity issuing tokens via an ICO using a counterparty and investors.” Acceptance of such a proposal would mean that ICOs could be the subject of services provided by crowdfunding service providers.
Meanwhile, ECON has defined “ICO” to mean “raising funds from the public in a dematerialised way using coins or tokens that are put for sale for a limited time by a business or an individual in exchange for fiat or virtual currencies.”
Other proposed provisions state that the regulation would “only apply to the primary selling of coins or tokens” and would not apply to “private placement of coins or tokens.”
Do we need such provisions?
We might wonder how the proposed regulations fit in the existing EU capital market rules. Unfortunately, ECON’s draft report proposes very general rules and vague definitions. There is not even a definition of “coins or tokens,” which means that we do not know exactly what these terms mean, or, for example, what is the relationship between “coins and tokens” and securities. This is just one example of uncertainties associated with the proposed rules.
Interestingly, the proposal foresees that the regulation will not apply to crowdfunding service providers who facilitate raising capital through their platforms via ICOs of tokens that do not use a counterparty. However, it is not entirely clear what “ICOs that do not use a counterparty” means.
The proposed regulations are an interesting attempt to weave an ICO thread into the crowdfunding regulations now being developed. However, it seems that the proposed regulations still need proper refinement.
Jacek Czarnecki
