We have written about initial coin offerings several times, both here on the blog and in our 2016 report on blockchain, smart contracts and DAO. ICOs continue to grow at an impressive rate, with projects raising funding of several billion dollars through ICOs in 2017.
As I have written in earlier articles, to determine the legal regulations applicable to a given ICO, the key issue is the legal status of the token (more about tokens here). The most common issue in practice is whether a token is a security or another financial instrument. This issue was touched on in the many warnings and statements published in recent months by financial regulators in numerous jurisdictions around the world.
In November 2017 two such statements (aimed at investors and firms organising ICOs) were issued by the European Securities and Markets Authority. Authorities in several EU member states, including the Polish Financial Supervision Authority, followed the ESMA in issuing similar communiqués.
These statements by the ESMA were the first clear voice on this issue by EU institutions (it was not mentioned in the ESMA’s report on blockchain in February 2017). If we assume continued dynamic growth in ICOs, also among European businesses, we can also expect further steps to be taken by EU authorities.
Directions for regulations
Of course we cannot be sure that regulations governing ICOs will necessarily be enacted. But it must be remembered that this area is growing very rapidly. Even if it is decided for now not to enact specific regulations, that may change in the future. The related issue of crowdfunding provides a good example. In May 2016 the European Commission concluded that there was no need to regulate crowdfunding at the EU level, but in October 2017 began its re-examination of this issue by publishing an inception impact assessment for a legislative proposal to regulate crowdfunding and peer-to-peer finance.
As ICOs are directly tied to services of a financial nature, this is an area particularly susceptible to new regulations. It is clear that ICOs and token-related services will be subject to existing financial regulations if they meet the conditions set forth there. Thus the application of regulations governing payment services or electronic money cannot be excluded, nor, when a token has the nature of a financial instrument, regulations requiring the publication of a prospectus and regulations governing trading in financial instruments, alternative investment fund managers, and anti-money laundering. The ESMA’s position leaves no doubt on this score.
The situation is difficult in regard to utility tokens, which essentially do not fall within the purview of financial regulations. Their use will be subject to general provisions such as those governing electronic services, consumer protection, and data protection. These provisions apply across all sectors and businesses operating under a range of technologies.
An ICO directive?
But for now there are no regulations governing utility tokens and shares in their acquisition (initial coin offerings). EU regulations in this area may be anticipated in the future, and this scenario has been confirmed off the record by officials from EU institutions. There are already market initiatives underway seeking to develop standards for organisers of ICOs in which utility tokens are distributed. An example is the European Council for ICO Self-Regulation, which held its first event in December 2017.
In recent months the growth of interest on the part of public institutions in various countries in the topic of blockchain, including ICOs and tokens, has begun to catch up with the rate of growth in the development of this technology. Thus it cannot be ruled out that proposals for new regulations will appear earlier than expected.
Jacek Czarnecki