South Korea joined China in banning ICOs, prohibiting domestic companies and start-ups from participating in them, despite South Korea seeing a recent surge in crypto activity, including domestic exchange Bithumb, exceeding a trading volume of 104,113 bitcoin, or $427m in recent days. Predicated on protecting the people from overt scams and the overly speculative nature of the investments, South Korea’s financial regulator has instigated an “intensive crackdown… with stern penalties,” for those who continue to participate in ICOs. Interestingly, such news comes a day after Australia’s Securities Regulator issued formal guidance for ICOs, providing some information on what needs to be included in an ICOs release information and how such procedures should be conducted.
Such information looks to whether the ICO could be considered managed investment scheme and indicates that ICO white papers are legally required not to issue misleading or deceptive statements. This should not be seen as an attempt to “regulate” ICOs, but simply as a means to initiate such a process, bringing legislation to the attention of companies and helping them understand their obligations.
By extending existing law to the new technology, Australia’s regulator is seeking to strike a balance between the cryptomarket and investors, without implementing a ban, as evidenced by the guidance document, “ASIC recognises that ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors. An ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws.”
Summarily, the guidance document outlines that tokens offered during the ICO may trigger particular licensing and disclosure requirements, such as those found under the Corporations Act, should the tokens represent financial products. Furthermore, additional consumer protections apply on the basis of the information contained within ICO materials, especially white papers, in that Australian consumer law prohibits misleading or deceptive conduct. Such measures call for greater care to be taken when using promotional materials so as to not deceive investors.
The Guidelines also outline indicators that will be considered in determining the nature of the token. Similar to the US’ Howey Test, the guidelines highlight that: “if the ICO involves investors contributing assets, including digital currency, in a common enterprise to obtain a financial benefit or interest in property but without those investors having day-to-day involvement in the operation of the common enterprise, then this may be classed as a managed investment scheme.” It is clear that the guidelines wanted to cast a broad net, as ASIC has also noted that the rights attaching to tokens are to be interpreted widely, so as to ensure that ICOs do fall within current legal climates.
“If the ICO involves investors contributing assets, including digital currency, in a common enterprise to obtain a financial benefit or interest in property but without those investors having day-to-day involvement in the operation of the common enterprise, then this may be classed as a managed investment scheme.”
It is clear that the guidelines wanted to cast a broad net, as ASIC has also noted that the rights attaching to tokens are to be interpreted widely, so as to ensure that ICOs do fall within current legal climates.
Lastly, ASIC has recommended that companies seeking to use ICOs do so under the guidance of the Innovation Hub’s informal assistance, generating some indication of ASIC’s willingness to engage with proposed coin offerors.
Old World Blues
Several criticisms can be made of the move to draw ICOs within the range of current legislation, including scrutinising old laws being applied to new innovations. However, it should be seen as a positive. Making companies aware that ICOs are not untouchable is the first step in a healthy regulation process. It is hoped that a lengthy consultation will take place with thought leaders in the cryptomarket.
However, ICOs have prompted large responses from players in older financial institutions, including Venture Capital. One professional actor who has taken an interest in this wave of financial technology are Lawyers. The rise of blockchain and smart contracts has optimised legal practice and presents a powerful opportunity to expand existing practices and create new ones. Primarily, it is a new market for legal services. Lying in between old world legal advice and new world technology, blockchain, ICOs and cryptocurrencies are surrounded by regulatory shadows that are hitherto now, not thoroughly demarcated. Legal support is especially needed in ICOs, where the demand for legal help is driven by the legal uncertainty, regulatory crackdowns and the need to be seen as legitimate.
Furthermore, the current regulatory atmosphere appears to be either a ban or a case-by-case approach. For lawyers this means more work as ICOs will not have a definitive classification, and, as shown by the Australian Guidance Document, they can touch several regulatory issues as to their actual nature. For entrepreneurs, this presents financial burden, uncertainty and can encourage a sheltered investing attitude, potentially offsetting innovation by stifling risk-taking.
Regulation and Law: Make or Break
Yet, it is not simply what the new technology can do for lawyers that is an interesting question. How can lawyers future proof ICOs and help foster innovation?
The law is a powerful tool for shaping environments and creating incubatory atmospheres. Legal standards need to be developed to do more than simply protect investors; a healthy legal environment provides structure and rigidity, along with certainty, to the operations of ICOs. Unfortunately, the law always lags behind innovation, playing more of an overseeing role than a driving force in developing technology. Due to this, it is key that lawyers form standards and come to consensuses on ICOs to relieve pressure on said entrepreneurs.
This extends beyond simply having good practices at one firm, it includes a willingness to work together, sharing best practices, educating the industry on new ICOs, methods and technologies. To that end, actively asking and answering questions that would be missed by entrepreneurs is key to seeking to bridge knowledge gaps and representing the best interests of development.
Moreover, lawyers have a key role in forming regulation. Representing the interests on behalf of the cryptomarket towards regulatory bodies may become a role of lawyers in the future, especially if harmful legislation is levied against ICOs and coins. As Jacek Czarnecki, general counsel at Neufund, suggests:
“This goes well beyond lobbying activity and should rather be perceived as community development work.”
Journalistic oversight of regulatory bodies, with the effective use of dialogue channels, is necessary to achieve this, from forming industry groups who cooperate to form policy proposals to greater connections with clients and companies within the cryptosphere, lawyers will be called upon to play a larger role in the coming years.
A key message in the guidance document was the principle of promoting investor trust and confidence. It is hard to cultivate trust when the market presents high volatility, little regulation and the chance of regulatory oversight closing operations. As a result, ICOs should seek to demonstrate transparency to attract and secure investors.
For example, describing your ICO as a crowd-funding when it does not pertain to one nor apply the applicable legal regulations in running a crowd-funding platform, would certainly draw negative attention. One method for increasing trust would be for companies to open dialogue with investors by laying all their cards on the table and being as clear as possible. From having a detailed strategy to outlining timelines in a whitepaper, having transparency permeate all operations of the ICO is key to promoting investor trust. The bans were enacted on the basis of protecting people from nefarious activities, thus having clear goals and genuine expectations is necessary.
Avoiding hyperbolic language and relying on real statistics can prevent inflated expectations and claims of misrepresentation or fraud. Lawyers should seek to highlight the benefits of the ICO whilst promoting the business strategy behind the call for funding, again whilst simultaneously urging caution. Self-regulating will show genuine intention to protect the investor and avoid unwanted attention from regulators.
Certainly, ASIC’s regulatory guidance is a milestone towards establishing regulatory certainty for ICOs and ensuring the necessary legal protections exist for both sides. Such a move will prove influential in legitimising tokens, perhaps even drawing more support from Venture Capitalists. This willingness to issue guidelines should be welcomed and promoted; striking a balance between protecting people and protecting innovation.
The role of lawyers and others within the crypto community has thus shifted, now such players will need to issue journalistic review of the rules, engage with regulators and use ASIC and other guidelines as persuasive to moving forward. Whilst the guidelines rely on existing laws to police ICO usage, the willingness to extend provisions to include them shows there is hope for strong, positive regulation. In a time of great uncertainty, small victories make the rewards all the sweeter.
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