Daily Management Review

Regulators are trying to damp down excitement around the ICO


In July, the famous American professional boxer Floyd Mayweather wrote in Instagram: "I'm going to earn a terrific amount of money on August 2 with Stox’s ICO." This was, in fact, the first advertising campaign for the "initial placement of coins," in which cryptographic coins, or tokens, with the participation of a star are issued.

As a result, Stox managed to attract about $ 30 million, some of which, apparently, settled in Mayweather's pocket. Other American celebrities, including socialite Paris Hilton, soon followed the example of the boxer and supported the new ICO.

However, this source of easy money is likely to end: On November 1, the State Securities and Stock Market Commission (SEC) warned that such advertising campaigns are illegal if celebrities do not disclose what kind of reward they receive for it.

Public statements about support and the SEC's attempt to regulate them are one of the last episodes of the mania around tokens. Actually unknown a year ago, ICO today is much more popular than the initial public offering of shares (IPO), the traditional way of financial support for a company.

Over the past 12 months, about $ 3.3 billion were raised within the framework of 200 ICOs, says Coinschedule analytical firm. This surge became one of the reasons for the rush around bitcoin, which cost on November 2 reached a record $ 7500. However, this week the bitcoin rate fell to $ 5,500.

As a former employee of the securities market watchdog in New York noted, "regulators have never seen a new financial product spread with such speed and intensity."

Not surprisingly, regulators are trying to intervene. China and South Korea, where ICO became part of the local culture of gambling, have already banned the procedure. Many regulators in Western countries have made it clear that they are considering at least a few cryptographic coins (or tokens) distributed within the ICO as securities, which means that all applicable securities laws apply to them.

The SEC Commission, the most influential among the world's oversight bodies, recently announced that such placements should be registered (or an application for an exception should be filed). However, these steps do not solve the problems for regulators, the British magazine The Economist believes.

It's still unclear what a token is. Technically, the answer to this question is quite apparent, at least for those who are familiar with crypto-currencies. Tokens are virtual substitutes for coins distributed within the ICO framework. Subsequently, tokens can be exchanged for new cryptonyms. In other words, the ICO of crypto-currencies is a preliminary sale of a crypto-currency at a price that should increase substantially in the future. The ICO issuer can store tokens and use the funds to develop a project.

But from the legal point of view, everything is much more complicated. According to the SEC, the technology is not so important in this case: when tokens are used to attract money, they become securities.

Meanwhile, ICO leaders insist that although tokens are originally used to raise funds, they also often have a specific role in the projects they finance, and therefore should be treated differently.

In order to avoid strict regulation, issuers are attracting a large number of lawyers to create complex schemes. One of the most popular concept in America was SAFT (Simple Agreement for Future Tokens) - in fact, options to buy tokens instead of tokens themselves.

The second open question is the place that tokens can take in the rules of regulators. Being fragments of code, they can take the form of any financial product. "They turn all asset classes into one," says Lex Sokolin of the consulting firm Autonomous Research. This will create legal problems, especially in America, where different classes of assets are regulated by different institutions.

It is a little easier in other countries. Many crypto companies are based in the Swiss city of Zug, where they can save on taxes, and tokens, most likely, will not be considered securities. In January, "the structure of distributed registry technology will be launched in Gibraltar, although it is not formally considered as an ICO." China remains a large unknown territory, which, despite the official ban of ICO, is interested in everything related to crypto-currencies, so long as it can control them.

And, finally, the third issue is regulation of ICO-funded organizations. The search for optimal solutions is vitally important: many of these organizations consider themselves to be a new type of companies. Since the founders, employees and users have tokens, they are equally interested: they all want to expand the network, as this will increase the cost of the tokens.

These organizations will be "decentralized", which means that no group will have exclusive responsibility and will be managed - at least in part - by "smart contracts".

ICO, no doubt, has become a real challenge for regulators. Supervisors will have to work hard to make the crypto currency, the existence of which can no longer be ignored, has become a full-fledged part of the financial sector.

source: economist.com