Tony Conaghan and Claire Slunecko

Regulation of Initial Coin Offerings (ICOs)

Tony Conaghan and Claire Slunecko

26 September 2018

IT

We introduced Initial Coin Offerings (ICOs) in this post.

Unsurprisingly, billions of dollars being poured into ICOs over the past few years, and concerns over scams and consumer protection, have been the impetus for increased government attention and calls for regulation of ICOs and cryptocurrency.

One difficulty with the regulation of ICOs is the unique, hybrid nature of coins or tokens and the uncertainty around whether ICOs constitute securities, and therefore are subject to securities laws.

Generally, where a token entitles the holder to share in the revenue of the company, it is likely to be classed as a financial product (“security” token). Many ICOs may fall within this category.

Comparatively, tokens that are solely redeemable for a good or service offered by the company may not be classed as a financial product and subject to securities laws (“utility” tokens).

Australia

In May 2018, ASIC updated its guidance on the regulation of ICOs and cryptocurrency, emphasising that ICOs may be financial products and require disclosure documents under the Corporations Act 2001 (Cth). 1

Additionally, this year ASIC received delegated powers from the ACCC to take action against companies for misleading and deceptive conduct in marketing or offering ICOs.2

Since April 2018, ASIC has acted to stop at least five proposed ICOs due to lack of proper investor protections. Additionally, it is ‘taking further action’ in respect of an ICO that has already been completed.3

Generally, however, in relation to cryptocurrency, the Australian government has focused on striking a balance between developing an effective regulatory system, while ensuring Australia is positioned to encourage growth and take advantage of digital currencies, including ICOs.4

A 2014 GST ruling by the Australian Taxation Office (ATO) which subjected any sale or purchase of Bitcoin (or any digital currency) to GST was withdrawn by the Government (effective from 1 July 2017) on recommendation by the Senate that digital currency should be treated as money, and therefore not subject to GST.5

Recently, the ASX approved the first token issue by a listed company, YPB Group Ltd (ASX:YBP), which launched in August 2018.

Europe

Earlier this month, the European Commission Vice-President said that “crypto-assets are here to stay” and ICOs “have the potential to emerge as a viable form of alternative financing“.6

On 29 August 2018, the European Parliament convened to discuss a draft report on proposed regulation of ICOs, which is hoped to assist and ‘legitimize’ the market.7 The proposal would form part of a broader crowdfunding regulatory framework.

The draft report proposes that the Regulation:

  • allow crowdfunding platforms to accept cryptocurrencies and offer ICOs (if requirements under the Regulation are met); and
  • set a maximum funding limit for an ICO of around AUD$13 million; and
  • only apply to the primary selling of coins or tokens, and not to private placements.8

The draft report states that the Regulation would take a much-needed step towards imposing standards for ICOs and putting protections in place for what is an “excellent funding stream for tech start-ups“.9 However, it also stated that the Regulation may not provide a complete solution to the ICO market.10

Due to the disruptive and fast-moving nature of the technology behind cryptocurrencies, the wait-and-see approach to regulation has been propounded as likely to be the most successful, and that many problems in the industry may in fact be solved through innovation rather than regulation.11

 

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References 

1 ASIC, Initial coin offerings and crypto-currency, Information Sheet 225 (INFO 225), May 2018, https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-currency/#when

2 ASIC, 18-122MR ASIC takes action on misleading or deceptive conduct in ICOs, 1 May 2018, https://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-122mr-asic-takes-action-on-misleading-or-deceptive-conduct-in-icos/

3 ASIC, 18-274MR ASIC acts against misleading Initial Coin Offerings and crypto-asset funds targeted at retail investors, 20 September 2018, https://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-274mr-asic-acts-against-misleading-initial-coin-offerings-and-crypto-asset-funds-targeted-at-retail-investors/

4 Commonwealth of Australia, Senate Economics References Committee Report, Digital currency – game change or bit player, August 2015, [1.2]

5 Commonwealth of Australia, Australian Government response to the Senate Economics References Committee Report: Digital currency – game change or bit player, 6 May 2016, 4; Commonwealth of Australia, Senate Economics References Committee Report, Digital currency – game change or bit player, August 2015, p 35 [Chapter 4 tax treatment of digital currencies]

6 European Commission, Remarks by Vice-President Dombrovskis at the informal ECOFIN press conference in Vienna, 7 September 2018, http://europa.eu/rapid/press-release_SPEECH-18-5716_en.htm

7 CoinDesk,  EU Lawmakers Weigh ‘Standard’ for ICOs Under Crowdfunding Rules, September 2018m https://www.coindesk.com/the-european-parliament-wants-to-make-icos-more-accessible/

8 A Fox, European Parliament, Committee on Economic and Monetary Affairs, Draft Report on the proposal for a regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business, 10 August 2018, http://www.europarl.europa.eu/sides/getDoc.do?type=COMPARL&reference=PE-626.662&format=PDF&language=EN&secondRef=02

9 Ibid, p 80.

10 Ibid.

11 Commonwealth of Australia, Senate, Official Committee Hansard, Digital currency, 14 March 2015, p 6 [Andreas Antonopoulos].