Dos and Don’ts of ICO and Cryptocurrencies – Jurisdiction (I)
【Roick Feng, Partner, Zhong Yin Law Firm】
Since the advent of blockchain, the exponential growth experienced in the structure and scope of cryptocurrency and ICO (Initial Coin Offering) and its derivative industries (such as underwriting, consulting, financing, PE, rating, exchanges, credit transactions and derivative products) has surpassed the speed of any miracles (or disasters) which occurred during the past centuries of capitalism. The three distinguishing characteristics of this field are: 1. An impatient market and market players; 2. Tremendous uncertainty; and 3. Overnight changes to what can and cannot be done (for example, often times a competent authority of a nation may suddenly pull a certain ICO case off the shelf, make an official government announcement or impose certain new legislation, resulting in the complete disintegration of what is currently deemed as an appropriate pathway and the rules of the game.)
All three factors above are caused by a common theme: “speed” - the evolution and disintegration of this ecosystem is just simply too fast. The purpose of this series of articles is to share my personal experiences and observations based on different practical perspectives and angles and to share some dos and don’ts of ICOs and cryptocurrencies.
Jurisdictional Considerations for ICO
First and foremost, please choose a good jurisdiction for ICO.
Through a process of elimination, I would definitely not recommend the US and the PRC as the “Official” ICO jurisdiction.
As of 2017, the PRC government has officially banned bitcoin, virtual currency exchanges and ICO activity, as dictated by the Announcement of the People's Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, the Ministry of Industry and Information Technology and Other Departments on Preventing the Financing Risks of Initial Coin Offerings. However, it is a known fact within the cryptocurrency world, that cryptocurrencies continue to be in popular demand due to continued “unofficial” heavy investments made by Chinese Investors in cryptocoins and all sorts of “Chinese” ICO projects.
The US is one among many of the potential origins of the ICO system (regardless of whether you are a believer of Telegram). However, the US Securities and Exchange Commission has already removed numerous ICO cases off the shelf, including some which in its nature were Utility Token ICOs (what the Taiwan SFC refers to as “functional” currencies), such as Munchee. The measures used by the US Competent authority have aggressively progressed from expressing concerns and conducting interviews, issuing cease and desist orders, having courts freeze assets, to direct prosecution of cases deemed as fraudulent offerings (Plexcoin serves as the perfect warning). Apart from this, the US government now requires that all US associated (participants includes US citizens/IP addresses) ICOs to conduct KYC/anti-money laundering processes and to abide by the relevant regulations for Money Transmitter. It was only in the not too distant past, when these requirements were only applicable to cryptocurrency transactions. This represents that only two pathways forward exist for ICOs in the US: If your token is legally defined as a security under US Law (the US utilizes a Howey Test to determine whether a security comes under the Securities and Exchange Act), then the security must be registered with the US SEC. If the token is not a security, then a money transfer operator license is required. Irrespective of which path is taken, strict legal compliance measures must be met and enormous legal compliance costs will arise under the current securities/cash flow regulatory structure.
While in East Asia, Japan has good visibility and a sound regulatory environment, this is associated with reduced flexibility. Furthermore, as Japan has wholeheartedly embraced the development of blockchain and cryptocurrencies, market participants are faced with increased legal compliance costs. In layman’s terms, for an ICO case to be wildly successful in Japan, costs will be exorbitant.
What about the four Asian little dragons (okay… one little dragon and three large ones)?
If a decision is taken to launch an ICO in Korea based on its cryptocurrency transaction volume and the high premium which the Korean investment circle places on cryptocurrencies (up to now, arbitraging remains a very popular “blockchain global trading activity” in Korea – although arbitrage opportunities within different markets are decreasing), I would recommend that you take a breath and calm down. In 2017, the Korean FSS officially banned all ICO and cryptocurrency activities, becoming the second country in Asia with written prohibitions (next only to China). However, as Korea is one of the countries where cryptocurrency transactions are most prevalent (this is can be seen by Bithumb’s transaction volume), there is currently an initiative towards opening up and regulating cryptocurrencies. We shall eagerly await future development in this area.
And, what of Hong Kong, Singapore and Taiwan? To be continued.