Dunny Medina is the head of capital markets and securities at Oziel Law, a business and technology law firm based in Toronto, Canada.
There are certain seismic disruptions to the natural order that force governments around the word to pay attention and react quicker than the tools of governance ordinarily allow.
Epidemics, terrorism, nuclear energy, world war and now…blockchain technology. Specifically, initial coin offerings (ICOs) are making governments itchy.
If you are trying to keep up, you will be very busy and very confused. Each week seems to bring another pronouncement from yet another country. Big or small, everyone has something to say. We’ve heard from behind the veiled curtain of mega-states like Russia and China, and we’ve heard from the neighborly nations like Canada and the Isle of Man.
The message is far from clear. While many nations can stand united on challenges like melting ice caps, they’re a bit more baffled with crypto.
So, how does a government react when faced with this new class of disruption? We have identified at least five approaches by global governments to ICOs.
The 'forbidden city' approach
On one extreme, we have the “forbidden city” approach currently championed by the People’s Bank of China: a blanket ban on ICOs and exchanges.
As many observers have noted, this approach is likely a stopgap measure that allows a government to be unequivocal (all token sales are illegal) until it can properly assess the situation and decide what to do.
The 'in the works' approach
tools, graphs, measure
Some governments, in the face of change, choose to be progressive and open to innovation. They come out and say: we recognize that this is different, so we need to have special legislation, and we are working on it.
In some cases, this may be optics alone. Russiaflip-flopped in the past few months on its stance on ICOs, but the latest comes right from the top: President Vladimir Putin has ordered that legislation be implemented on ICOs to bring them in line with traditional securities financings (e.g., initial public offerings of stock).
In other cases, it may be an earnest attempt to put forth clear legislation. The governments of Isle of Man and Gibraltar seem to have a repurposing or revised framework of existing legislation in development.
It’s not clear how workable any such legislation will be, but it’s in the works, so that’s progress.
The 'warning' approach
red light, warning
The U.S., Australia and Japan are all prime examples of reasonable democracies for which the “warning” approach is not an unreasonable reaction.
When faced with a complicated and disruptive development, one should not be hasty. Don’t crack down, but also don’t go full-steam ahead. The safer approach is to fall back on existing legislation and issue statements which amount to warnings, rather than clear-cut guidelines.
To paraphrase, here’s the gist of these statements: Be careful. ICOs are risky and dangerous. It’s possible that a token, depending on the circumstances, might not be a security, but it probably is. If the token resembles a security, again on a case-by-case basis, then you need to follow existing securities regulation for an ICO.
Not very remarkable. Not very helpful.
In the face of this kind of uncertainty from the government, the market reaction has been understandably human and predictable.
Some companies do whatever they want (and will ask for forgiveness later).
Other companies choose to be good citizens (and ask for permission or self-regulate by following the existing securities rules as best as possible, such as accredited investor-only ICOs).
The 'sandbox' approach
Sandbox
Rather than sticking their heads in the sand, some countries have invited fintechs to come play in their sandbox.
A regulatory "sandbox," in theory, invites companies to work with the regulators, with the promise of a temporary free pass on some of the more complex and costly aspects of securities regulations.
Sounds promising, although some innovators worry that they are getting lured into a gingerbread house.
The Canadian regulatory sandbox is one of the more active global sandboxes, and it has come out with some definitive results. It’s a live laboratory currently running a few regulatory experiments with ICOs, token crowdfunding platforms and crypto investment funds.
Most recently, the Canadian regulators put out a decision on the TokenFunder ICO, which may win the award for the most clearly laid out guideline on how to run a compliant security ICO.
This latest guinea pig decision sets out how to offer tokens to both high-net-worth and retail investors under an ICO, the requirement for additional know-your-client (KYC) and other onboarding procedures, and the acceptability of a template form for a detailed white paper (by using an existing disclosure document in Canada known as an Offering Memorandum).
While the Canadian sandbox decisions can be applauded for the clarity of the message, some are put off by the content of the message. When it comes to running a compliant ICO, there are plenty of hoops to jump through. Sandbox notwithstanding.
The 'jack-of-all-trades' approach
tools, hardware
And then there is Switzerland. The blockchain situation here is a bit baffling.
A refreshing laissez-faire mentality to crypto seems to be in the Swiss mountain air, but the reality (as usual) is a bit murkier.
At one point in the summer, some commentators had mentioned that the token vs. security debate was much more clear-cut under Swiss law, such that token sales were not regulated. Smells a little funky.
The reality may be that it’s only unregulated because the Swiss haven’t regulated it yet; they’re working on it.
And then, on September 27, Switzerland’s Financial Market Supervisory Authority (FINMA) announced that it is investigating ICO procedures, indicating that these transactions may come under existing regulatory legislation. The old "warnings" approach.
The way forward
Summing up, ICO regulation globally is in a confused state of flux, but amid the grey static we can spot some slivers of consistency. The general trend is toward recognition: recognition that ICOs have a place in the market, that existing legal frameworks may not quite work efficiently, and that progress will, therefore, need collaboration between government and industry.
All signs point to 2018 being the year of regulation, where new and clearer legal frameworks for ICOs will be put forward. Which country will lead the way?
The one that happily marries the real need for investor protection with the equally real need for broader public participation in ICOs.
