ICO Regulation – Gibraltar and Russia lead the way, get on the Bandwagon ROTW

Last week, I touched upon divergence in the global regulatory landscape, especially around data privacy. The ICO regulatory landscape is no different in that respect. I have been critical of ICOs in the past (like most others). However, a closer look at them in the last few weeks, has got me thinking. Amidst all the scams, frauds, cyber issues, bubbles and pump and dump that’s happening in this space, I think we are looking at a new economic paradigm.


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Its early days for this industry, and in the last 12 months the growth of ICOs has been staggering. But ICOs lack credibility and even the most faithful enthusiasts of ICOs/DLTs believe regulating this industry would help, and add credibility to ICOs.

Wearing my investor hat on, I believe ICOs are exciting for two reasons:

One, they help convert value being created through an activity into a monetary unit (token/currency) that can be used to transact. As long as there is demand for the services/ activity in focus, the monetary unit appreciates in value too.

Two, a key challenge that investors in early stage firms have is the illiquid nature of the shares. With an ICO (that is credible and regulated), the investor can identify a good early stage investment, and have liquid positions in the tokens. Typically investing in early stage firms have high IRRs (>20%) as it factors in (along with other risks) the illiquid nature of the investment. With an ICO, the IRRs could be high with liquid tokens.

However, having an early stage firm listed on a crypto exchange with any news about them or the market they operate in affecting price action is a challenge to deal with. Especially when these firms lack the ability to deal with the volatility.

However, with so many scams and frauds happening in the ICO market, regulations are a must to get institutional investors interested in this asset class.

A few days back Gibraltar’s Ministry of Commerce and Gibraltar Financial Services Commission announced that they were developing a regulatory framework for tokenised digital assets. A bill is expected to be considered by Parliament in the second quarter of 2018.

Gibraltar’s DLT regulations that came into effect on 1st January 2018, bring a licensing regime to intermediaries using DLT to store or transmit customer assets. However they didn’t extend coverage of the regulatory framework to ICOs. The proposed regulation will ensure that KYC processes are being followed in an ICO to avoid money laundering and terrorist financing activities.

“One of the key aspects of the token regulations is that we will be introducing the concept of regulating authorized sponsors, who will be responsible for assuring compliance with disclosure and financial crime rules”

Sian Jones, a senior adviser to the GFSC.

Russia has also softened its stance on ICOs and in December 2017 announced its plans to prepare regulation for the industry. The intention is to create a regulatory framework that identifies investors through robust KYC processes, but also limit exposure of retail investors to 50,000 Rubles ($885) per ICO.

However, there are varying approaches from regulators to the ICO/Crypto industry. Some key ones are as follows,

China and South Korea have banned ICOs. In September 2017, the PRC banned ICO citing issues with illegal fund raising. South Korea banned ICOs around the same time. But post the hacking of the Youbut exchange in December 2017, South Korea mandated that crypto currency accounts could only be opened on a real name basis.

In the US, ICO regulations vary state to state, where some of them have no regulations at all and in some requiring a license for businesses to engage in crypto activities. But the SEC seem to be viewing cryptos as securities, which is now causing many ICOs to move away from the US.

While Canada and Estonia have accepted ICOs,the EU and the UK are evaluating their stance with a view to regulating them in future. UK, Australia and Canada have offered regulatory sandbox facilities for cryptos to test their proposition.

However, I think over the next 12 months, we will start seeing regulations being announced across various jurisdictions – some quite liberal, some restrictive, but some demonstrating a collaborative regulatory regime. But I believe, pragmatism will prevail in the end and regulation should be good for the industry.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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