Are the regulators coming for crypto?
For once, maybe not in Europe.
Initial coin offerings (ICOs), the newest craze this year in the world of cryptocurrencies, are a new form of crowdfunding that allow tech ventures to easily raise cash by issuing and selling their own cryptocurrency tokens.
Usually, those tokens can then be traded on crypto exchanges for other tokens like Bitcoin or held by investors in the hopes of a dividend payout.
“We have already distributed 2.9 billion tokens in our pre-ICO to over 16,000 investors across the world,” said Ruta Cizinauskaite, VP for Marketing at Bankera, a blockchain-based banking service from Lithuania set to hold its ICO in November.
ICOs have raised more than $2.2 billion this year as ventures both on and off the blockchain use the crowdfunding method to connect themselves directly with willing investors, sidestepping traditional venture capital.
“We chose to launch an ICO because it is easier, cheaper, and faster to set up funding channels compared to anl IPO,” said Alexey Nasonov, CEO of Worldcore, a Czech payments company that raised €10 million through the issuance of newly issued “WRC” (short for Worldcore) tokens earlier this year.
While ICOs still pale in comparison to venture capital funding, which totaled $127 billion in 2016, the largely unregulated funding platforms are attracting international attention, though not always of the good kind.
For one, both China and South Korea outright banned ICOs back in September, while the United States’ Securities and Exchange Commission recently began to treat ICO tokens like run-of-the-mill securities and prosecute virtual criminals on the blockchain for securities fraud.
In Europe, however, regulators are proving unusually hands off, and the path seems to be readied for ICOs to be harmonized with financial services law within the near future.
Those follow claims from both Mario Draghi, President of the European Central Bank, and from Germany’s financial markets regulator that it would likely be illegal in Europe to prohibit the sale and distribution of virtual currencies.
In France, which has one of the more developed bitcoin communities in continental Europe, the country’s financial markets authority said last week that ICOs were a legitimate means “for financing early-stage technology ventures.”
“Cryptocurrencies can easily be a medium for everything we want to avoid: tax evasion, money laundering, or terrorist financing. But they are also designed to service entirely legitimate demands, such as rapid, no cost money transfers,” said Robert Ophèle, the new head of France’s Autorité des Marchés Financiers in an interview with Challengers.
The AMF only launched an official public consultation on ICOs at the end of October, suggesting that any next steps on regulation are far off in the future.
Meanwhile, in Switzerland, where four of the six largest ICO raises in the world were conducted through entities domiciled in 'Crypto Valley', the financial conduct authority has said it is completing a consultation on ICOs but likely plans to treat them like other initial public offerings.
“Given the close resemblance, in some respects, between ICOs and conventional financial market transactions, one or more aspects of financial market law may already cover ICO campaigns according to their various models,” it said in a recent statement.
That wait-and-see attitude pales in comparison to the opinions of European regulators just a few years ago, when the European Banking Authority published an 45-page report detailing the many risks posed by virtual currencies and a list of steps to tightly regulate the distribution of cryptocurrency.
Actors in the crypto space in Europe have welcomed the hands-off approach to regulating ICOs but admit that the days of Wild West crypto exchanges are likely numbered.
“As it stands now, cryptocurrencies are classified as nothing more than run-of-the-mill goods in the majority of EU countries, and they are not recognized as currency by the regulators. Next year, most countries in the EU will likely present a legal framework which the crypto-economy will need to adhere to,” said Nasonov of Worldcore. “This is frankly a given for its future development.”
Yet even if they come under stricter regulation by national authorities in the EU, some major venture capital firms are waking up to the music and warning that ICOs are likely here to stay for the near future.
“There is a period of a company’s life when they have to spend a lot of time hawking themselves round VCs to raise money and they have got better things to do. Entrepreneurs don’t like this process, and personally I don’t either,” said Michael Jackson, a partner at Mangrove Capital Parters and the former COO of Skype, in an interview last month with the Financial Times. “Now the boot is on the other foot. Venture capitalists are going to have to enter into the ICO game to prove their own value to companies.”
And that’s music to the ears of early-stage startups, who are eager to have easier access to capital and push on with their latest, greatest business ideas.
“ICOs gather people that really care about the venture, understand it, and help create a community around it that will last beyond the ICO, when we have a fully operating product. And, as we can reach a wider audience who can spread word about the product, it is ultimately more flexible than venture capital financing,” said Cizinauskaite of Bankera.