Is the world round or flat? Neither. The world is in fact an Excel spreadsheet. Really? No, but something similar.
In a few short years the emergence of Blockchain technology, a continuous list of records in its simplest description, has revolutionised businesses across the globe.
Thus it’s no surprise that 2018 has brought intense global regulatory scrutiny and new legislation that has shaken crypto exchanges and Initial Coin Offering (ICO) launches.
But what does this mean for the ICO investor? And how will it impact on future trends of investment in the ICO market?
From its inception in July 2013, the ICO market quickly soared to reach $70 million dollars in 2016 and just a few months later it was worth an eye-watering $5.5 billion, according to Coindesk.
ICOs have made no small splash onto the world stage, causing dramatic digital disruption that has led the World Economic Forum to predict that 10% of the world’s GDP could be stored on Blockchain by 2025.
Financial services company IHS Markit forecasts that by 2030 the market could be worth $2 trillion.
The staggering surge of investment and interest in ICOs has driven regulators and governments into a flurry to map out the road to regulation with consumer protection high on their priority list.
Halfway into 2018, we’ll take a look at where ICOs stand with global regulators and explore how this investment vehicle will evolve in future as it rapidly moves to mainstream.
Thomas Levene, Founder of Best Blockchain Solutions consultancy, explains:
“The first ever ICO was held by Mastercoin in July 2013 and ICO’s only really gained popularity as an investment vehicle in 2017, which makes them a comparatively recent capital fund raising phenomenon compared to traditional Initial Public Offerings (IPOs).
“With a totally new way for startups to raise capital, regulations and best policy practices have needed to evolve and catch up. With this being said there has been a lag between the space where proper regulations are implemented and ICO’s are conducted.”
The Association of Chartered Certified Accountants (ACCA) says regulators have taken three main different approaches to ICO regulation so far:
- ICOs are captured by existing regulations, meaning no new legislation is needed.
- ICOs are outside existing regulations, thus requiring new laws to be created to govern them.
- ICOs need to be banned outright without any further thought.
“The ICO landscape and investor profile is changing. In the past, potentially anyone with internet connection and crypto currency funds held within a private crypto wallet could participate in an ICO with relative anonymity,” says Levene.
“More recently, a regulatory trend has occurred which puts increasing emphasis on KYC (Know Your Customer) and regulatory compliance within any given country.
“Furthermore, as ICOs are global vehicles for raising capital, some countries have taken a hard-lined approach to stop scam projects by banning ICOs outright. Well, at least until they have compiled the regulations and best practices and guidelines to regulate them properly.
China took a hardline approach by blocking the trading of cryptocurrencies and banning all sales of new digital tokens in September of 2017. Last year the Chinese government cracked down heavily to stop exchanges and ICO websites and place a halt on mining of cryptocurrencies.
“But it would be a misunderstanding that the Chinese government is throwing the baby out with the bathwater,” says Dr. Chuanman You, an expert in FinTech Regulations based in Tel Aviv University. “On the contrary, the government has committed great resources in developing and utilising blockchain, the technology behind Bitcoin and other cryptocurrencies.”
Recently in May 2018, Chinese President XI Jinping acknowledged openly that blockchain is part of a technological revolution.
“A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain is accelerating breakthrough applications,” said President Xi Jinping.
He also highlighted a desire to place China on the map as a global centre of science and innovation stating the country should focus on technological development.
And despite the official ban on ICO sales and bitcoin trading, the country remains a hub for blockchain development activity.
China’s neighbors, South Korea, a country which fueled the 2017 bitcoin craze, have taken a similar strict stance
In January, new legislation required all cryptocurrency traders to reveal their identity and use real-name bank accounts.
Now their actions appear to be vindicated. Cryptocurrency exchange Coinrail has just been hacked with an estimated loss of around $40 million in virtual coins.
But Levene points out that “South Korea is now set to reopen ICOs after considering how best to regulate them. This thoughtful regulation is good for investors and start ups alike as they know where they stand.”
One of the largest markets for cryptocurrency, Japan, has required crypto exchanges to be registered with the Japanese Financial Services Agency and the new money has become legal tender in April this year.
Meanwhile, the Reserve Bank of India has banned all central banks from dealing in cryptocurrencies.
While these developments may cause bumps in the road for investors in cryptos and ICOs they are signs of progress as they improve regulatory clarity. They’re also signs of global and widespread recognition that blockchain and a new way to raise funds has permanently made its mark on the world.
“Other countries have taken a more progressive and open approach to encourage and support innovation while still protecting investors. The lag between implementing supportive regulations and ICO innovation seems to be shrinking” adds Levene.
The Canadian Government has just announced draft regulations for virtual currencies: implementation of this legislation could result in a huge loss of $60 million for businesses dealing in cryptocurrency.
The regulation of Cryptocurrencies and ICO in the U.S. features a multi-faceted approach, adds Dr. Chuanman You: “A wide range of regulatory agencies have pronounced Cryptocurrencies with different legal natures according to their regulatory inertia.
“For example, the I.R.S. has characterized Bitcoin as a convertible virtual currency, which constitutes a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” While the Commodity Futures Trading Commission has concluded that Bitcoin and other virtual currencies were included in the definition of commodities.”
In March 2018 the U.S. Securities and Exchange Commission (SEC) indicated its intention to apply securities law to cryptocurrency.
In Europe, the picture is even more intriguing. In the UK the Treasury Committee launched an inquiry in February into the use of Digital Currencies.
In addition, the Financial Conduct Authority plans to investigate the conduct of over 20 firms involved in cryptocurrencies.
At the end of June 2018, the Financial Action Task Force (FATF), comprising of 37 countries, the European Commission and the Gulf Cooperation Council will meet to discuss cryptocurrency regulation.
“Regarding regulations, there is also the issue as to whether ICOs fall into the utility tokens category such as Bitcoin or the security tokens category,” explains Levene.
“However, regulatory clarity is improving every month across the world. For example, a senior U.S. regulator from the Securities and Exchange Commission has stated that Ethereum “in its present state” is not a security under law and will not be regulated as a security.”
“As time goes by regulations will become increasingly crystallised as governments and regulatory boards within those governments can agree upon best regulatory practices for ICO’s. Usually this means taking on board how other governments are tackling the regulation issue,” he says.
Whatever the outcome of current regulatory discussions and investigations, the European Blockchain Partnership declaration agreed by 25 countries in April this year represents a further milestone of collaboration in blockchain regulation.
The European Commission states: “close cooperation between Member States can help avoid fragmented approaches and can ensure interoperability and wider deployment of blockchain-based services.
“The Partnership will contribute to the creation of an enabling environment, in full compliance with EU laws and with clear governance models that will help services using blockchain flourish across Europe.”
Mariya Gabriel, Commissioner for Digital Economy and Society, adds that “in the future, all public services will use blockchain technology.”
These events are all signs that the ICO market is on its way to mainstream adoption. And at a breakneck speed.
But how might the uncertainties of this fast-changing regulatory environment impact on ICO use in the near-term future?
“As the ICO market becomes more mainstream and investors more discerning, we are witnessing some changes in actually who is investing in ICOs. In the past ICOs tended to be funded through groups of individuals, retail investors, innovators and crypto enthusiasts and speculators,” says Levene.
“Now there is a trend for more traditional Venture Capital and investment funds and investment consortiums to be involved who have bigger buying power than the average individual investor.
“Regulatory compliance within the U.S. only allows accredited investors with net worth’s of over $250k to invest in ICOs, but this limits smaller investors. This trend is set to continue,” he says.
Another emerging trend, Levene says, is that clearer best practices will be implemented across the whole ICO space and these will benefit both ICO project owners and investors.
“For example, smart contract auditing best practices with stamps of approval given for the integrity of the smart contracts within ICOs and their code, may add trust and credibility to the ICO project.
“This can be likened to the Veri sign on a website to ensure its authenticity.
“Smart contract auditing companies, like Quantstamp, are already providing this kind of service and it’s set to continue and add peace of mind for all parties concerned.”