In 2014, David Zimbeck of blockchain platforms BitBay, BitHalo and BlackHalo, found himself at the end of a stick, manipulated by people who hired him for a company called BitBay, used his name to “pump” BAY, bamboozled thousands of investors and ducked leaving Zimbeck to take the blame.
“It took me months to get out from under the covers,” he told me, “In the blockchain world, there are certain types of people who are sociopaths. Bitcoin has no regulations. They control the supply and push up prices. Some of these people work for governments, some work for banks. They are really bad.”
Welcome to the Age of ICOs that’s super-ripe for regulations.
Current Regulations for ICOs and Altcoins
The blockchain industry challenges governments with market corruption, fraudulence, black market trading, noncompliance with regulatory requirements and misrepresentation of business and/or technology, among other issues. There's a perpetual game of cops and robbers, with cops tracking robbers through methods like Bitcoin IP only for robbers to duck under using Bitcoin variations like Monero. To solicit seeding, traditional IPOs need stuff like due diligence, regulatory requirements, and fiduciary permissions. ICO operators can simply adopt whatever existing laws and regulations they see fit for their own operations. Small wonder, then, that many digital token sales bamboozle their investors, according to Joseph Lubin, co-founder of Ethereum and Brad Garlinghouse, CEO of Ripple.
Most regions follow Germany’s example and urge due diligence before investing in any ICO. Germany’s Federal Financial Supervisory Authority warns:
“Due to the lack of legal requirements and transparency rules, consumers are left on their own when it comes to verifying the identity, reputability, and credit standing of the token provider and understanding and assessing the investment on offer. It can also not be guaranteed that personal data will be protected in accordance with German standards.”
On November 13, 2017, the European Securities and Market Authority declared that ICOs represent a high risk to investors and required firms dealing with ICOs to meet relevant regulatory requirements.
Britain’s Financial Conduct Authority warned that even if the ICO is acting in good faith, investors still stand a good chance of losing their entire investment. “Typically ICO projects are in a very early stage of development and their business models are experimental,” the FCA said.
Some frustrated countries, like China and South Korea, ban crypto coin outright.
Other nations like the U.S., with its Commodity Futures Trading Commission (CFTC), Securities Exchange Commission (SEC), and various Senate Committees in Congress, hammer out ICO regulations on adherence to anti-money laundering/know your customer (AML/KYC) practices, and taxation and securities integrity. There's been a lot of talk, but little progress largely because blockchain is so revolutionary that it takes governments time to study this new chess board and plan their strategies.
Countries that include Israel, Japan, Singapore, Switzerland, the United Kingdom, Thailand, and the Philippines talk about testing and implementing stricter regulations. Hong Kong and Thailand welcome altcoins but leave open the possibility of regulating altcoins thought to be securities.
The Philippines said that blockchain companies offering exchange services are now required to register. Canada, Estonia, and Germany allow their ICOs free play, with most of them warning prospective investors about high-risk. Australia allows and regulates its ICOs.
The United States allows - and heavily regulates its ICOs. Actually, sanctions vary from state to state, from no regulations at all in some states to regulations requiring a license for businesses to engage in altcoin activities. On the federal level, ICOs have to be registered and licensed and ICOs that deal with securities are subject to SEC regulations. Failure to adhere to AML/KYC practices can result in legal action that includes possible seizure of the operation.
Russia, in contrast, practices a laissez-faire attitude but says it will regulate ICOs and altcoins “sometime” in the future. The Kremlin issued five orders in October 2017, on miner registration and taxation, securities laws for ICOs, and the use of altcoins to create a “single payment space” in the Eurasian Economic Union to oppose the Eurozone.
So what does the future of ICO regulations look like?
For Estonia, Canada, Australia, Germany, and America, it will be more of the same with the emphasis on enforcing current regulations. Countries like Israel, Japan, Singapore, Switzerland, the United Kingdom, Thailand, and the Philippines intend to monitor their ICOs and altcoins, scrutinize and tax ICO-based securities and profits, impose additional oversight, and strengthen AML/KYC protections among other sanctions. The future will be a process of testing ICOs and altcoins in the country’s particular “regulatory sandbox”. Most regions may follow Australia’s example and allow these fintech startups to operate without being fully licensed.
The European Union, to the extreme, talks of modeling the United States to impose heavy regulations that include sanctions like those imposed in Wyoming, which requires 25 percent of the value of all exchanges transmitted in or to Wyoming to be held in escrow.
One wonders whether Japan will ban altcoins as China and North Korea did. For all the country's nonchalance, there are rumors of some strict ICO and altcoin crackdown on the schedule.
In the UAE, regulations are due to appear sometime this year, with differing approaches likely to be taken in different centers. In Dubai, hub of cryptocurrency development, the Central Bank proclaimed that “virtual currencies are currently under review…and new regulations will be issued as appropriate”, while in Abu Dhabi, the Financial Services Regulatory Authority (FSRA) is considering a case-by-case approach.
Last but not least, Norway and the Isle of Man patronize ICOs by promising regulations that will establish and protect their legal status. Countries like these may well turn out to become havens for crypto activities and for ICOs thanks to their proactive legislation.
Ultimately, our ICO world is more than ready for some good old-fashioned scrubbing. “What is happening right now,” says Terrence Yang, founder of angel investment firm, Yang Ventures, “is totally unsustainable. Some people are selling shit coins, I mean altcoins, and putting in zero dollars in what is basically a form of pyramid scheme.”
Regulation is coming hard and fast for all types of ICOs, and in particular for ICOs whose tokens resemble securities.
“Some jurisdiction,” says Joseph Wang, Chief Scientist at Bitquant Research Laboratories, “is going to get it right, and they’ll become the center for ICO issuance. I’m hoping that it ends up being Hong Kong, but right now it looks like Switzerland is going to be in the lead, but it could easily be Dubai, Singapore, Malta, or Cyprus or some combination of the above. The trick is to have regulations so that people can easily issue ICOs while being tight enough so that people don’t obviously get scammed.”