Exponential growth has been the status quo for the ICO market for the last few years, ballooning from a mere handful of them in 2016 to over 1,200 this year. For the most part, the marketplace has been largely unregulated, with all of the risk borne by individual investors who choose to participate.
Unfortunately, this has proven to be troublesome, with multiple examples of fraud ICOs or underperforming companies that cannot deliver on their promises. In fact, a recently published analysis of the class of 2017 ICOs revealed that 80% turned out to be fraudulent in some way.
Governments and regulatory agencies around the world have taken notice, and have begun to pursue high-profile offenders and craft regulations to keep companies from taking advantage of investors.
Until recently, the ICO market has resembled the early days of the American West, with outlaws, heists, fraud and a complete lack of regulation or law enforcement. Because regulators around the world didn’t really know what to make of ICOs, and because of their overnight success, some bad actors took advantage of the window and unfortunately took significant funds without financial or legal recourse for investors.
In an attempt to quickly close that gap, officials have been scrambling to either block ICOs or craft regulations for them. China and Japan completely banned the practice, and South Korea severely restricted it. Meanwhile, the Securities and Exchange Commission (SEC) in the US was hard at work compiling a report detailing abuses and fraud they have investigated and recommending harsh penalties.
Some governments recognize that ICOs are important to foster blockchain innovation, and with many successful projects that are creating jobs and attracting investment, they don’t want to lose the opportunity to be a hosting country to such new business ventures.
This desire to be a competitive global home base has driven the likes of Japan, South Korea and the EU to soften their stances and remove bans or near-bans that had been in place. China is still holding fast with the ICO and STO ban, but global pressure will likely reach Beijing as well at some point.
What Will Regulations Look Like
That answer will depend entirely on what country you are in, but ICO regulations are already here in some places, giving us a good snapshot of the future of the ICO regulations worldwide.
While there has been no official announcement, Japanese media with ties close to the source have outlined the pending ICO regulations which are about to be released by the Financial Services Agency (FSA). Some of the laws will include:
- Limiting investment amounts to protect individual investors
- Requiring businesses that issue cryptocurrency to be registered with the FSA
- Requiring business operators that conduct ICOs to post their business plans on the Internet
The proposed laws will come before Japan’s regular parliament session in January 2019, and we will be keeping an eye on the news.
Closely watching Japan’s pending regulations, South Korea is considering relaxing their ICO policy as well — from a total ban to more protection for investors. This might allow firms to move forward to raise money provided they color within the lines.
Recently, chairman of Korea’s National Policy Committee Min Byung-doo conceded that the global market for ICOs was too hard to ignore and regulations needed to be a top priority for lawmakers.
“The government cannot dismiss ICO. It needs to allow companies to conduct ICO. ICO has become a new trend in the global market and it is the responsibility and ability of the government to embrace new technologies,”
said the chairman.
Along with many other G20 countries, South Korea has been following Japan’s lead over the past three years. There is speculation that more formal regulations will be released as soon as Japan’s are finalized.
Acknowledging that ICO regulation is outside the scope of the current securities law, the EU has been performing a detailed, company-by-company review of ICO assets. The results of this investigation will inform how the authorities will be creating the new ICO securities law in 2019 and beyond.
While no specific regulations have been proposed officially yet, some of the ideas are the same as what we’ve seen other countries considering — including limiting investment and requiring reporting/regular communication.
While the SEC is pushing for enforcement action, and recently achieved their first guilty plea by an accused fraudulent company executive, a group of lawmakers has written a letter to warn of missed business opportunities if enforcement comes before regulatory clarification.
The letter, written by a group of 11 US Senators, says in part,
“We believe the SEC could do more to clarify its position. Additionally, we are concerned about the use of enforcement actions alone to clarify policy and believe that formal guidance may be an appropriate approach to clearing up legal uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.”
For now, many feel the lack of clarity has pushed some businesses to relocate outside the US.
One of the most welcoming countries for ICOs has been Belarus, who recently introduced a sweeping set of new regulations. They are aimed at creating a stable framework to follow and thus encourage startups to base operations there.
The requirements for ICO services clearly outline roles and responsibilities for all parties involved from companies to individual investors. Belarus has done a good job of recognizing specific challenges brought about by blockchain-based systems and created rules that both encourage and monitor new companies entering the space.
2019 Will Be the Year of ICO Regulation
As you can see, these nations are right on the cusp of releasing new ICO regulations, or have just recently released ones. The aim is to protect investors and keep those who are looking to defraud investors from having that chance. Countries want to encourage innovation while at the same time creating the ICO lawful basis.
Some might see this as a step backward for the open-source and decentralized vision of blockchain-based solutions. Yet, the benefit for investors and the opportunity for more widespread adoption due to increased public trust will only serve to strengthen the blockchain ecosystem and encourage meaningful and promising ICOs.