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September 22, 2020
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The future of ICO in the light of increasing legal restrictions

A few years ago, we witnessed a boom in organizing fundraising in the form of ICO (Initial Coin Offering). The growing interest in this form of using blockchain technology was dictated by the ease with which funds could then be collected for the development of innovative, innovative projects. Token buyers usually receive access to specific services and goods offered by the issuer or its related entities.

Nice “bad” beginning

The dynamic development of this type of crowdfunding soon began to be accompanied by numerous controversies. Sometimes ICO organizers did not provide token holders with access to the functions and services they offered in their White Books (Whitepaper), not to mention the situations where the organizers, after the collection, did not take any of the planned activities, often committing ordinary fraud.

The development of ICO also aroused the interest of supervisory authorities in many countries of the world, due to the possibility of similarities between tokens and the financial instruments in circulation, including securities. Some countries have approached the matter very strictly prohibiting ICO outright. Such activities had a particularly significant impact on the development of the industry due to the fact that bans were imposed by countries with very large populations such as China and Pakistan. Other countries have undertaken a much more subtle response to emerging challenges in this area, trying to regulate this market rationally. We are talking here about countries such as Malta or Liechtenstein. In the case of the first of them, each issue of tokens addressed to Maltese citizens is associated with the need to meet certain obligations towards the national regulator.

In many countries, however, legislators have not created the appropriate legal framework for this type of activity. In such situations, it is often the regulatory authorities that have undertaken the difficulty of assessing blockchain activity in the light of applicable regulations. An example of such a country is Germany, where the BaFin regulator in numerous reports and positions specified when issuing tokens will be associated with the obligation to obtain appropriate permits and licenses. Making such a qualification requires answering the question whether a given token in its characteristics resembles currently regulated instruments.

Qualification of tokens

We distinguish three main types of tokens due to the possibility of their legal qualification: utility, payment and investment. Only in the case of the latter will we usually talk about the need to fulfill the relevant obligations related to financial market supervision. This qualification is based on an analysis of the allowances incorporated in a specific token. Issuers of typically utility tokens have no major cause for concern.

The approach according to which we analyze each token individually, assessing how strong the investment component is in, accompanies many European regulators, including the Polish KNF. It is worth pointing out here that our home supervisory authority is relatively restrained and, apart from the responses given in individual cases, is not very willing to publicly disclose its views on the possibility of recognizing the token as a financial instrument, including a security, depending on the incorporated powers. On the other hand, the PFSA, in casual announcements, primarily warns about the risks associated with ICO, which has already been mentioned above. However, it does not seem to support a too broad interpretation of the provisions on supervised activities that could result in supervision of typically utility tokens or those with an insignificant investment component.

A similar approach accompanies many European regulators. Against this background, it should be pointed out that voices about the death of ICOs are premature. If the issuers of tokens, make sure that their tokens do not take on the form of financial instruments, and on the other hand comply with the provisions of the White Books and comply with consumer protection regulations, they can safely and do not require compliance with market surveillance regulations. financial, organize fundraisers through the ICO.

Skeptics of the development of this form of activity also argue that ICO will be supplanted by STO. Of course, this process may take place to some extent, however, due to the lack of appropriate legal regulations for the next few years, in many countries the legal situation regarding the possibility of tokenizing companies will remain unclear.

Always in case of interpretation doubts, a given entity may apply to the appropriate regulator in order to obtain a position as to the necessity to apply for a proper license, which will help to dispel doubts as to the status of conducted activity.

Author: Paweł Filipek Kijewski, Graś Sp. k.

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