Initial Coin Offerings (ICOs) have been taking the world by storm, with a plethora of projects popping up in hopes to grow into something big. Through this, a stream of opportunity has risen for technological innovation to pave the way of the oncoming future. Yet, with it, there have been a string of scams and fraudulent proposals thrown in the mix, leaving governments around the world wondering over the question as to what to do with approaching this sudden disruption.
Although it hasn’t been too long since nations have been flooded by the mass effects of ICO dissemination, there have only been a few countries that have actually taken sure-fire action with where they stand. Whether its embracing the culture entirely like the US or Singapore, standing as an ICO hub representative, or banning any link to it completely like China, there is still a lot of discussion required for remaining nations on what to do moving forward with ICOs.
The Way ICOs Work
For the most part, ICOs follow a general structure in how they work. They usually start with the publishing of a white paper that should elaborate on what the tokens issued would be used for and/or how their technology works, along with what the product or service being funded aims to achieve. From there, a smart contract that is often times based on the Ethereum blockchain is set in order for distribution of tokens. Afterward, for a period of time, cryptocurrency payments in the form of Bitcoin or Ether (or other cryptocurrency) are accepted through the smart contract, and in time, the smart contract generates new tokens that become available for investors. These tokens can be stored or traded through third party platforms and once a project is funded or completed, the investor has the option to keep their tokens, sell them, use them for purchases, and/or trade them in for services (depending on the type of token).
With the process explained above disrupting the conventional methods of finding angel investors or VC firms to fund a desired project, this leaves room for a myriad of ill-intended money grabbers to propose projects that do or show nothing at the end, yet have walked away with millions of dollars in investments. Initial Coin Offering projects are of high-risk, but they can also be of high reward, because if the proposed product does receive full funding, and is executed as effectively as expressed, it could become a successful and lucrative venture. On the other hand, as expressed by several countries in Europe and Asia, the dangers that come with ICOs are that they lack proper frameworks for regulation, which leaves room for criminal cases such as tax evasion, money laundering, and drug trafficking.
ICO Regulations in Europe
- European Union
The European Union has not been completely against the ICO market and cryptocurrency, as within the EU, ICOs have been allowed as long as they abide by KYC/AML regulations. While the European Bank cannot ban Bitcoin or any other cryptocurrency for that matter, the EU stands strong in their idea that stricter regulation laws are necessary, as ICOs are considered ‘high-risk.’ On December, 2017, the European Union along with the UK Treasury were reported to be making plans on cracking down on the bigger rising issues that ICOs would bring to the table: from criminal activities such as drug trafficking and money laundering, to tax evasion. Any cryptocurrency exchange platforms would be held accountable to report suspicious transactions and effectively carry out proper investigation on their customers. This stance was in conjunction with the worry that investors and consumers had too much risk of loss to their investments, whether due to security failures or market manipulation. In the first few months of 2018, the sentiments mentioned above were echoed even further, when the French Finance Minister and a German Bundesbank board member both expressed the need to lay down stricter regulations on ICOs on a global scale. Although this has been the case, in the end of February 2018, the European Commission vice president Valdis Dombrovskis did express some positive outlook on ICOs, stating how he does see a lot of opportunity to raise capital for innovative projects.
- United Kingdom
Throughout the advent of ICOs and cryptocurrencies across the world, the United Kingdom has stood by the same stance as the European Union, believing that ICO projects and cryptocurrency require regulations. This was initially demonstrated by the UK’s Financial Conduct Authority issuing a warning on ICOs in September, 2017, stating that “there is a good chance of losing your whole stake as an investor.” By December, 2017, the UK Treasury and EU were reported to be working on finding a way to tackle the major issues that come with ICOs and cryptos, which are money-laundering, tax evasion, and drug trafficking. Some of the ways they hoped to do this was by bringing about financing regulations to various virtual currency exchange platforms and wallet providers. Riding with the EU, the United Kingdom’s Prime Minister, Theresa May, joined in on the sentiment that ICOs should be met with caution, especially due to the negative ways they could be used by criminals.
Switzerland has never been a stranger to individual rights to banking, and has always held a progressive position when it comes to cryptocurrency. This has been evident from the fact that even the economics minister, Johann Schneider-Ammann, expressed the country’s aim to become a crypto-nation, opening their doors to the benefits ICOs may provide. Standing on par with the US, in January to October, 2017, the Swiss dominated the digital coin offering market, raising about $550 million in ICOs, just $30 million shy from the United States. As the months go on, the country has been becoming a sort of ‘Crypto Valley,’ with an abundance of rich investors and technologists based right in the heart of the alpine nation. This support for ICOs and blockchain technology has been further evident from the fact that, in January, 2018, the Swiss established an ICO working group that would report to the Swiss Federal Council to help improve legal certainties and technology-neutral regulations. However, this is not to say that there isn’t any skepticism against cryptocurrencies, as the government has issued warnings of the risks involved with investing carelessly.
The Netherlands’ financial regulators, Netherlands Authority for Financial Markets (AFM), published a statement to other European supervisors back in November, 2017, outlining the myriad of risks involved in cryptocurrencies and ICOs. In that warning, they mentioned a number of concerns for investors such as the risk of price manipulation. This sentiment was further emphasized in March, 2018, where the Dutch Finance Minister expressed his views on an international necessity to regulate cryptocurrency.
Poland started off 2017 looking at Bitcoin and other cryptocurrencies as a means of trading and stirring up economic activity. In February of that year the Central Statistical Office of Poland came out officially recognizing virtual currency. As stated in December, 2016, “the issuance of electronic currency and purchase and sale of electronic currency via the internet stand classified by official statistics services in Poland.” This statement may have come off as somewhat surprising considering in 2013 the Polish Ministry of Finance was reported to have stated that Bitcoin would never be recognized as a currency. This took a turn once more, where in July of 2017, the Polish National Bank and the Financial Supervision Commission released a statement warning banks and consumers of investing in digital currencies. This was further perpetuated in January, 2018, where concerns of money laundering and tax evasion ignited the government to crackdown on Bitcoin and other cryptocurrencies.
Estonia has remained quite open to the ICO market, with the Estonian Financial Supervisory Authority (EFSA) expressing their viewpoint that tokens would be classified as securities. To think of it as a complete negative would be limiting, as the EFSA has acknowledged that every ICO project “is unique and should be assessed on its own characteristics.”
Luxembourg has been quite vocal on their stance on cryptocurrencies. Back in 2014 the Commission de Surveillance du Secteur Financier (CSSF) noted that they should be seen as real money. From the fact that they could be used as a means to pay for goods and services, the CSSF stated these currencies were no different from electronic money, even if they did not fit the exact definition of electronic money within the EU E-money Directive (2009/110/EC). With that being the case, cryptocurrency should be treated like that of any other currency, and be a candidate for regulation.
Since October 2017, Lithuania has expressed the need for guidance and regulation with ICOs. The Central Bank of Lithuania acknowledged the idea that mass funding from a group of investors that often times were not professional, showed a high level of risk. Deeming cryptocurrencies as highly risky instruments, they believed that with certain cases offerings “should be subject to investment-related legislative requirements and restrictions.” These sentiments have only been an echo to the country’s 2014 stance on cryptocurrency, where they issued a ban for banks and financial institutions in dealing with virtual currencies.
The Nordic countries, or Scandinavia as they are often called (Norway, Denmark, Sweden, Finland), have been quite receptive to ICOs and blockchain technology. Although there are some countries like Norway that are a bit skeptical of Bitcoin, their neighboring countries are ready to accept it. This is evident from the fact that Sweden has recently been set on the track of becoming the leading Scandinavian cashless society.
In March, 2018, Romania was one of the first countries in Europe to establish the first blockchain oriented NGO named United Blockchain Association of Romania. The non-profit was created for the sole purpose of promoting the crypto industry within the country, nurturing interests and common goals related to the development of technological innovative ICO projects. This is an expected step forward from the country, as Romanian Prime Minister had expressed his desires to regulate cryptocurrency back in 2017.
There is some way to go until cryptocurrencies and blockchain technology are completely embraced with open arms in Europe. While many countries on the continent believe that stricter regulations need to be in place (such as the European Union and the United Kingdom), other countries (like Switzerland and the Scandinavian nations) are clearing the way for an open mind, which in turn may help influence their neighboring countries. At the end of the day, it appears we still have to wait and see whether Europe will move toward ICOs or away from them.
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