Crowdfunding and Jurisdiction: Tokenizing the World by ICO
By: Jon Avidor
The crypto industry has caused yet another crack in the regulatory foundation of the global landscape- this time, it’s regarding digital assets and initial coin offerings (“ICOs”). ICOs are a relatively new method of fundraising utilized by start-ups and seen as a quick way to gain capital. The surge of start-ups relying on ICOs over the past two years has sent lawmakers scrambling to address the ICO regulatory framework and its other inherent risks. However, regulators are divided on how to best regulate ICOs while also protecting investors.
The EU’s European Parliament Committee on Economic and Monetary Affairs (“Committee”) is the latest regulator to tack itself to the growing list of jurisdictions attempting to define the legal treatment of ICOs. The Committee is currently drafting new crowdfunding regulations for ICOs. Many consider this a good first step towards legitimizing ICOs and hope that this regulation will serve as proof for mitigating any potential fraud or cyber security risks for ICO investors.
ICO regulatory framework provides not only more clarity for potential investors, but it also impacts where a start-up company may choose to incorporate its business. A jurisdiction with specific ICO regulation, such as Malta and Singapore, is more likely to attract crypto-based start-up companies looking to conduct ICOs as these companies can confidently rely on ICO-specific rules and regulations in those jurisdictions.
As jurisdictions continue to regulate the crypto space, there is still a lack of overall uniformity regarding ICO regulations. According to a recent PwC report, the U.S. views ICOs as traded securities, while the EU classifies its tokens into three subsets—asset, payment, and utility tokens—which gives the buyer direct access to a product or service, as opposed to an investment.
It is yet to be determined if a worldwide consensus on ICO regulations is necessary, but ICOs could potentially morph into something similar to, if not the same as, traditional financial system currently in place, such as raising funds through venture capital or corporate debt. For now, the only universal consensus among regulators is that ICOs potentially pose a threat to both financial and economic risks, and thus, some form of regulation is required.
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We would like to thank our intern, Jaclyn Wishnia for her contribution to this article.
