This profile doesn't exist.
Crypto and regulation come as a package deal these days — whether we’re talking about the development of crypto space and ICOs, regulation is always something that has to be considered before moving forward. Starting from 2017, when China took the plunge and banned crypto exchanges and ICOs, to nowadays when countries are trying to figure out the best policies to protect investors and not to harm innovations at the same time. For investors and founders, the most important thing is the current regulation landscape and how many ICOs actually satisfy the authorities’ requirements?
The first ICO was held in 2013 by Mastercoin, and at the end of that same year Ethereum was proposed by Vitalik Buterin. Ethereum launched its ICO in 2014 and introduced smart contracts, including ERC20, which projects then started to widely use to raise capital. The problems, however, started with DAO. This organization raised about $50 million in 2016 and was hacked soon after. In July 2017, the Security and Exchanges Commission (SEC) announced that DAO should have been considered a security — and a couple months after that, The People’s Bank of China declared ICOs illegal and required them to cease immediately (the ban is still active and 30 ICO projects of Chinese origin had to choose another country for ICO registration in Q3 2018). Though the situation was heating up with regulators starting to tighten the screws, ICOs could not be stopped that easily. The market boomed at the end of 2017, reaching peak in January 2018 when over $2.2 billion were raised through ICOs.
The ICO boom was followed by a downturn in Summer 2018 — and tightening regulations may be one of the reasons for it. During 2018, the shift from retail investors to institutional ones was taking place, and as the recent report by the Autonomous Next shows, venture capital funds invested over $1.6 billion in blockchain projects in August 2018. Funds collected through ICOs, on the other hand, fell 80% from January to September 2018. The number of ICOs that managed to raise over $1 million decreased to 54 in September from 110 in May, and the maximum amount collected in Q3 2018 was just $134 million.
What becomes particularly important under the current market conditions is:
There are proactive countries with favorable regulation and clear guidelines for ICOs, as well as markets with complicated or indefinite positions.
Europe is not in a rush to regulate ICOs — regulators are considering crypto on a case-by-case basis. Bruegel, a European think tank specializing in economics, suggested that the members of the EU could follow their own approach to ICO regulation before ESMA (the European authority responsible for EU’s financial system) will propose a coordinated one for the whole union. Although no laws against ICOs were yet enforced by ESMA, warnings were repeatedly issued to investors. In addition, the regulator has been pretty clear that ICOs globally, including those in the EU, should comply with all KYC and AML laws to be legit.
Some of the European countries are already taking their own steps to control the ICO space:
Switzerland was the most popular hub for ICOs in Europe in Q1-Q3 2018 — the country’s token sales reached $555 million; UK followed with almost $490 million.
The US is still an important market for ICOs — ICObench ranks it as the country with the largest number of ICOs ever conducted (675 projects in total). ICO Rating shows that in Q2 2018, despite all the regulation issues, the US was leading in terms of ICO projects registered there. The question is whether this trend will continue, as there is a high degree of uncertainty here.
The SEC has recently followed up on a series of subpoenas it issued to dozens of projects in the beginning of 2018, being particularly interested in the projects that didn’t ensure only accredited investors participated in fundraising. Debates are continuing as to whether or not ICO tokens should be considered securities and thus be registered with SEC. But a Howey Test is used to determine this. For those selling securities, there are exemptions from regulation that can be used in order to avoid the difficult, expensive, and time consuming process of SEC registration.
There were no ICOs registered with the SEC until March 2018, when the Praetorian Group officially filed to register the PAX coin (waiting for approval). In addition, 18 projects (at least) completed offerings using exemptions from regulation in Q2 2018.
Some of the markets are more proactive in their approach to ICO regulation than others and have legislated or developed methodologies, criteria, or guidelines for assessing ICOs. These include, among others, Gibraltar, Jersey, Malta, Lithuania, the Cayman Islands, and Singapore. Singapore, in particular, became a true crypto hub in 2018, ranked second on ICObench by number of ICOs held. In August 2018, Singapore overtook the US in the ICO count for the first time in history, Elementus shows. ICO Rating’s report proves the significance of Singapore for blockchain development — as of Q3 2018, 46 ICO projects were registered in the country, raising $241 million in total, although only 16 of them actually had origins in Singapore! This means that the migration of ICOs into countries with favorable jurisdictions is taking off.
As we’ve already seen, the regulations differ a lot from country to country. In many of them, there is no precise framework as to how ICOs should be treated — the projects are examined on a case-by-case basis. That is why it’s quite hard to evaluate the share of ICOs that currently do meet all the regulations. However, what we know for sure is that KYC and AML procedures have already become a must for all projects that want to enter the market. Only 21% of 4,780 ICOs published on ICObench met this criteria, and just 10% had a prototype or MVP available. On the other hand, of the 738 ongoing ICOs, 313 satisfy KYC requirements, and 208 have an MVP or prototype. This means that over 70% of ICOs are vulnerable to legal issues.
Choosing a favorable jurisdiction and making sure that you comply with its regulations or exemptions, plus carrying out all KYC and AML procedures, are the necessary steps that must be taken for all projects. However, that’s not the only thing to think about. Once you are done with fundraising and start operating a company in the fintech space, you’ll need a special license for your activities.
Although each company needs a license to operate in this industry, we’ll focus on financial startups here — specifically the banking ones.
The list below proves this statement and features most well-known cryptobanks, which managed to raise over $50 million during their ICO (Bankera, Tenx), were fully licensed by the authorities (Platio) or attracted funding from established VC investors (Wirex).
The companies listed above are notable examples of licensed banking businesses on blockchain. There are other projects not that successful, at least for now. Nebeus hasn’t acquired its banking license yet. It needs the e-money license from FCA to serve a wider audience. Fiinu, which launched an ICO at the end of 2017 and was planning to become a fully licenced bank by Q3 2018, is still on pre-application phase of the Bank of England authorisation. Seba, a Swiss cryptobank, is planning to get its banking license in 2019, so it’s not going be released until then.
Getting a banking license is time consuming and expensive. Those who are fully-licensed or still waiting and have already made substantial progress are the rare ones that will be able to offer financial services legally, as it was initially planned when people invested in them during their ICOs.
Fundraising for blockchain projects is challenging nowadays, as countries are making up their minds about ICOs and tightening regulations. Some of them, including the US, are losing positions to more favorable ICO jurisdictions — such as Singapore or the Cayman Islands, where $241 million and $125 million were raised in Q3 2018, respectively. Proactive members of the European Union are also taking the lead thanks to clarity in ICO guidelines — in Switzerland, token sales reached $556 million in Q1-Q3 2018.
For founders choosing the right jurisdiction that guarantees their project won’t be subject to unexpected shutdown becomes a must. Still, 70% of ICO projects are vulnerable to legal issues simply due to the lack of KYC and AML procedures, as we have already mentioned. Operating legally is the other side of the coin. Even if you make sure your project satisfies all ICO requirements, you still have to think about the licenses to conduct business according to the law. This is, understandably, a question of particular importance for the banking projects responsible for people’s money.
Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.
Create your free account to unlock your custom reading experience.