Amidst current plans to recognise cryptocurrencies such as Bitcoin and Ethereum, the members of the Russian working group assessing the risks of cryptocurrencies in Russia have turned their attention to the possibility of amending civil law to allow ICOs to be held in the Russian Federation. The bill will attempt to ‘define the nature of cryptocurrencies and their status, as well as basic principles for the cryptomarket operation.’
Elina Sidorenko, head of the Russian working group of cryptocurrency risk assessment, opines that, ‘the government should develop legislative mechanisms for contract verification, user identification, and protection of token holders rights.’ Facilitating ICOs and the usage of cryptocurrencies can help secure the crypto scene and develop safer practices, reducing the risk of nefarious projects.
This news follows on from Big Four Deloitte CIS and Russian blockchain solutions firm Waves partnering up to provide ‘comprehensive ICO services.’ Waves is keen to exploit this strategic partnership to shape the crypto-regulatory world. This serves to show that there is potential for cryptocurrency icons to reshape the legislative environment in their image. Such an attempt was made on the other side of the battle by the Ontario Securities Commission (OSC), who staged a Hackathon to survey the crypto community and gauge the next steps for regulation.
Ultimately, regulating crypto practices will help the Russian tech scene to raise capital more safely. With clearly defined rules and processes for ICOs, the companies will be protected from vexatious claims resulting from disgruntled investors, and investors themselves will receive clear guidance on their rights. What’s more, should a listing requirement be enacted, this will help the ICO scene mature, protecting both sides. Withal, having a framework will certainly catapult the Russian tech scene, facilitating safe access to funds whilst also eliminating false projects.
The rapid rise of the Initial Coin Offering (ICO) has driven an investment craze. Somewhat of a lovechild between an Initial Public Offering (IPO) and crowdfunding, an ICO allows a company to raise capital by selling its yet to be released cryptocurrency in the form of tokens (often likened to shares in an IPO). With no current regulatory opinion on ICOs, the hidden dangers of the process are left completely free to ravage unsuspecting or risky investors. From Ponzi scheme potential to fraud, ICOs could have hidden threats lurking under the false promise of rapid, ridiculous, returns.
Alluring Success Stories
The unregulated nature of an ICO lends itself well to companies and small start-ups wanting to avoid the tenuous, overbearing and restrictive regulations of IPOs. Tokens do not represent a share of the equity of a business; and they do not confer ownership, meaning a CEO or investor does not need to reduce his ownership of the company. The freedom that ICOs currently present enables small start-ups to seek much-needed capital.
From May 2017, there were around 20 offerings a month, and one particular ICO, for a new web browser, Brave, generated close to $35m in under 30 seconds. Thus far in 2017, companies have raised $180m in ICOs. The assiduous investor can make a hefty return, should they strike lucky.
However, as the saying goes, ‘A hero is only as good as his villain,’ and ICOs have some nefarious individuals that wear the ICO mask.
Villains, Viscounts and OneCoin
An infamous example of a Ponzi scheme posing as an ICO is OneCoin. The cryptocoin was attributed such a label due to the business model and the way in which the business was established. The operation prompted a wide range of responses, from the Hungarian Central Bank issuing a warning that OneCoin was, in fact, a pyramid scheme, to several investors in China being arrested and assets totalling 200m RMB ($30.8m) being seized.
There are several components to OneCoin’s business. The first component is an easy to understand recruitment drive, affiliated with a pyramid scheme and compensation structure. Users joining OneCoin are given compensation for the recruitment of other users and so forth.
The more one recruits, the more they receive and thus, the more users who join, the more value the Coin is worth. The new users must purchase into the pyramid by taking on one or more ‘packages,’ which contain OneCoin tokens, which can only be used on the internal market. Conspicuously, the details of the scheme and the way in which the compensation works, including exchange, are not detailed on the OneCoin site.
A second component is the OneCoin exchange, serving as the sole portal for users to spend their tokens. These tokens, however, are difficult to exchange for other currencies and thus serve merely to evaluate how many users are in circulation. Simply put, as long as no user can exchange their tokens, OneCoin holds all the money. A slowdown in users is offset by ‘splits,’ where tokens multiply to drive down the value of each token. The only winner, in this case, is OneCoin, who hold real currency.
This should serve as an example in favour of regulation.
Market Leaders in Cryptocurrency
A report published by fintech analyst and research firm Autonomous NEXT, entitled ‘Token Mania,’ analyses recent trends in cryptocurrencies and assesses the current legal frameworks for facilitating cryptocurrencies around the world. The report lists Switzerland and Singapore as two of the more developed in regulation, with the former declaring cryptocurrencies assets rather than securities, with firms not requiring any specific approval or license.
Further, the UK, like Singapore, has a sandbox where cryptocurrency practices can be nurtured. This also serves as an observation exercise, allowing regulatory bodies to watch and examine current practices, enabling data collection and research on how to approach regulation.
Other nations are proving to be either resistant or difficult. The US for example not only has a federal level regulatory body, but each of the 50 different states can set their own rules. As a result of the complexity in striking a balance, there is less room to explore and experiment with the cryptocurrencies.
Comparatively, China appears to be open to the cryptocurrency scene, particularly with reports that it is developing its own and the fact that is responsible for over 60% of the Bitcoin networks collective hash rate. In fact, a sandbox may be available in the future as the government seeks to solve several domestic issues, including the fact that there are millions of citizens without access to standard bank services resulting from poor infrastructure.
Further, heavy cross-border charges could prompt a more open cryptocurrency scene in efforts to alleviate some of this. Moreover, there is the opportunity to go in the opposite direction and conduct tax efforts on the transactions, with regulation being the gateway to such an operation.
Lastly, with the transparency and easily traceable nature of cryptocurrencies, using such a system could help eliminate corruption, whilst also strengthening the position of the Communist Party of China economically, as the government would have access to large amounts of data, in real time, enabling the targeting of economic policies and tweaking of broad strategy. Of course, a government controlled cryptocurrency eliminates the ‘decentralised’ trait, a key reason for the development of blockchain technology.
Whilst one must wait with bated breath to see what the Russian regulators cook up, it will be interesting to see whether a soft or hard approach it adopted. Further, the regulation could be a gateway to other rules, from taxation to domestic adoption. Moreover, how the crypto scene reacts will also be interesting, particularly as more fintech firms see ICOs as a golden route to funds, thus the firms are likely to still be shopping for a jurisdiction to call home, with Switzerland currently being the most attractive.