Regulating ICOs – Benefits of Effective Regulation


Although the ICO space is not currently highly regulated, there is always the looming notion of new laws being created to cover this growing phenomenon.  The lack of a legal frameworks has led to a few scams in the space. Wild price fluctuations and news of thefts and scams have focused attention on regulation, even from cryptocurrency industry insiders themselves. In the US and the UK, bank participation in cryptocurrencies is minimal.

Getting regulation right is the key to making ICOs and the enterprises they support succeed. Given the range of activities that are possible with ICOs, there are plenty of grey areas to sort out. Around the world, governments are experimenting with ways to deal with this phenomenon in the hope of realising the promise of blockchain technology, without squelching it.

The advantage of regulation would be to bring cryptocurrencies into mainstream finance and facilitate the real development of blockchain technology and its applications. Other issues are related to consumer protection and facilitating efficient capital raising for companies.

Effective regulation gives legitimacy, and what is lacking now in cryptocurrency markets is that kind of legitimacy and trust. Regulation helps us distinguish between legitimate ICOs and scams and Ponzi schemes. Regulation will hopefully also discourage bad actors from entering the market. The current lack of regulation, therefore, works to the detriment of legitimate ICO issuers.

Legal Issues with ICOs

The Nature of the Token

Firstly, you need to consider whether your ICO and token are regarded as a security or any other scheme that would fall under the provisions of any jurisdictional-specific regulations.

AML and KYC Procedures

Secondly, regardless of the legal status of the ICO or token, you also need to decide how you will tackle AML and counter-terrorism financing concerns through stringent due diligence and KYC procedures.

Each jurisdiction has different requirements regarding this, and you need to consider them seriously and in depth.

ICO’s Terms and Conditions

You also need to consider to what the terms and conditions of your ICO will be, and also how they will satisfy the above requirements as well.

Regardless of what jurisdiction you will be operating in, your terms and conditions need to be comprehensive and transparent to avoid you getting into hot water at a later date

What is happening around the World

Initially in Hong Kong cryptocurrencies were regarded not as legal tender, money or currencies, but as “virtual commodities”, which were not subject to regulation, provided the cryptocurrency in question does not have the characteristics of a “security”.  In September 2017, the SFC issued a statement outlining possible circumstances in which a cryptocurrency could be considered a security. In these cases, an ICO may require SFC authorisation as a security offering and only SFC-regulated platforms will be allowed to trade the tokens.

The Russian Ministry of Finance published a draft of a federal law on 25th January 2018 that would legalise cryptocurrencies and allow their trading on licensed exchanges. However, Russia will not recognise cryptocurrencies as a legal means of payment – only the rouble constitutes legal tender. Russia plans to allow regulated ICOs, where only registered businesses and registered entrepreneurs will be permitted to conduct an ICO. Like China, Russia is reported to be considering the introduction its own national cryptocurrency – dubbed the “crypto rouble” – which would be legal tender in Russia.

Gibraltar has set up a principles-based model for light-touch flexible regulation. However, the Gibraltar Financial Services Commission said recently it might resort to a system of “authorised sponsors” to handle regulatory issues related to ICOs.

In the US, the Commodity Futures Trading Commission (CFTC) has already permitted two exchanges to offer Bitcoin futures. While Bitcoin is well past the ‘initial’ stage, it does indicate that the CFTC believes that it has jurisdiction over working digital currencies and considers them commodities.

Why Malta?

Malta has understood that there is great potential in the field of blockchain and cryptocurrencies. It has also recognised that there are certain risks which one should be aware of and that both Malta as a reputable international jurisdiction as well as those investors putting their faith in such a technology and application thereof need to be protected. To this effect the Maltese Parliament on the 4th of July, 2018 issued three Acts of Law, which include

the Malta Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act.

Malta is effectively the first country in the world to regulate Disturbed Ledger Technology and crypto related assets in a holistic manner, taking into consideration both the technological aspect as well as financial regulation realities.  The aim of such approach is to give legal certainty to such an innovative sector, hopefully setting the gold standard from which an international and harmonised framework will be put into place.

In the meantime, the Malta Financial Services Authority has been issuing a number of consultation documents, related to Virtual Financial Assets, Virtual Financial Asset Agent, the Financial Instrument Test and attainment of a Higher Degree of Investor Protection under the Virtual Financial Assets Act.

The MFSA has adopted a principles-based approach to regulation supplemented by guidance, rather than detailed rules, thus encouraging technological innovation. Such guidance reflects the high-level principles enshrined in existing local (and EU) financial services legislation in relation to the provision of investment services, financial markets and market abuse.

The guidance provided by the MFSA caters for the entire DLT ecosystem, including hybrid models, and ensures utmost technology neutrality in an ever-evolving sector.

It is envisaged that such laws, rules, regulations and frameworks will attract the right players to Malta, with the potential that such niche industry could soon even surpass the success of Malta’s iGaming industry, when Malta was at the forefront if iGaming legislation.

There is little doubt that these types of technology are going to have as much impact on our lives as the internet did, and that in years to come they will have entirely and revolutionised the way in which we conduct business, handle finances, and function in our day to day lives.

About the Author

This article has been authored by Nicholas Warren –  Senior Manager Financial Services and Blockchain. He holds over 16 years of consultancy experience to international clients on the various possibilities presented by Malta as a Financial Services Centre.

For more information please do not hesitate to contact our Fintech Team at [email protected] or +356 2557 2557.