Visible through the lobby window at the Hong Kong Convention and Exhibition Centre are skyscrapers of Hong Kong, and Victoria Harbour. ca. 1980-2000 Hong Kong, China

This article is written by Saksham Chhabra from UPES. In this article, Saksham discusses  Initial Coin offering and its legality in the various jurisdiction.

INTRODUCTION

Initial Coin Offering or ICO is an unregulated process through which funds are raised for a new cryptocurrency( a digital currency in which encryptions are used to regulate the generation of units and regulate the transfer of funds, functioning independently from a central bank) venture which basically states that raising funds which had been decumbent to scams and violations of securities of the law. It helps to provide unprecedented liquidity and efficiency in the capital formation while cutting down on the transaction cost. If the value of the token with time increases or decreases it states that the person who has invested his money has either made a profit or suffered a loss in the capital invested. This type of capital is even raised for a new firm for startups and blocked-chain company raise fund to aid in the development of their projects. Under an ICO some amount of the funds is exchanged for legal tenders or any other such cryptocurrencies in the form of Bitcoin and Ethereum.

EVOLUTION OF INITIAL COIN OFFERING

Bitcoin was first registered in the year 2008 and after which a paper written by Satoshi Nakamoto was published by the title -”Bitcoin: A Peer-to-Peer Electronic Cash system”. In 2009 the bitcoin network actually came into operation with Satoshi Nakamoto leading the head of the bitcoin’s block which had already been awarded 50 bitcoins and since then the ICO has been growing at very fast pace. The first time ever when ICO came into force and its first report was generated were in 2013. The event for raising funds was conducted for a period of one month and the report was conducted by the Mastercoin. The funds that were collected were beyond expectation amounting to approximately 5,000 Bitcoins which amounted to almost 500,000 dollars.

After its first successful launch in the year 2013, since then there has been a huge number of ICOs that have been conducted and these are being conducted now on a daily basis. It has been seen that the ICO has been growing at a very fast pace and in the year 2017, it raised amounts up to 1.25 billion in about 92 ICOs. When we talk about ICO we understand that it is quite identical to the concept of the IPO (INITIAL PUBLIC OFFERING) but when we study both of them we understand that the main difference between the two is that in IPO deals with investors while ICO deals with supporters who are keen to invest their money in new projects similar to crowdfunding event. Thus, ICO in its area and operations is quite vast and huge and is benefiting a lot of new firms and startups and the people in establishing themselves in the wide-open market.

ADVANTAGES OF INITIAL COIN OFFERING:

The advantages of bitcoins in the world economy are as follows:

  • Privacy: Unlike the bank transactions that we do, these transactions are quite private as if money through these transactions are either received or paid then you can only know the address of the individual to where you have sent the money but you will not get to know as to whom that account belongs to even though the transaction which in the case of bank transactions is easily known.
  • Speedy: Bitcoin transactions are very fast and are done at a very quick speed in comparison to banking channels which take a longer time to process. These transactions are done at a very minimal transaction cost which makes it economical as well.
  • Reliable: Bitcoin transactions are quick, efficient, secure and do not contain any consumer sensitive information( personal information) which automatically reduces the chances of fraud, theft and thus it is reliable.
  • Flexibility in Remittance: Remittance through bitcoins is very easy as money can be transferred to any person sitting in any part of the world with ease without any holidays or delay or any intermediaries.

DISADVANTAGES OF INITIAL COIN OFFERING:

The disadvantages of bitcoins in the global market are as follows:

  • Lack of Knowledge: Most of the population of the world is unaware of the process and functioning of bitcoins. Although more and more new companies and firms are coming up in this regard and have started accepting bitcoins but still this has to grow a lot from the network effects in order to gain the benefit.
  • Regulation by the government: the government at any point of time come in the scenario and put a ban on these bitcoins which would automatically lead to the closing down of these firms which lead to the seizing of the wallets which will make it difficult for the people to recover their money from their wallets.
  • Black marketing: Initially bitcoins were used as a mode for money laundering as people who were involved in these activities did not want to reveal their personal information which was a bane for the economy.
  • No Remedial Policy: there is no recourse or remedy for a person who has lost his wallet and there is no alternative way to get it except if you have backed it up with a backup phrase code which will help to recover the wallet. So, this is very risky.

LEGAL STATUS OF INITIAL COIN OFFERING UNDER VARIOUS JURISDICTIONS

The ICO has been a huge success since the time of its inception in the year 2008. ICO has grown tremendously in a very small period of time but the legality of this bitcoin and ethereum is a debatable topic. Bitcoins have been proved as a decentralized cryptocurrency. Thus, when we talk about the currency of a country we understand that it must be having the backing of the government while when we talk about bitcoins they are not backed by any authority. As it is not backed by a legal authority it generally violates the price that is existent in the market which is not good for the economy as a whole. There are very few countries in the world where the working of bitcoins is legal or partially legal, rest in many of the countries the operations and working of the bitcoins are illegal. The legality and illegality of the Bitcoins and Ethereum among various nations, is a big question as its legality and its use which has been discussed as below:

1) LITHUANIA

The Bank of Lithuania looks in the present after the final decisions in the cryptocurrency regulations and it try to generally discourage people to invest in this currency but in cases where the investors or a company wants to use and transact in bitcoins then as per its jurisdiction then the laws that regulate them are the Securities Exchange Board and the Anti Money Laundering policy comes into force .

2) AUSTRALIA

The legal status of bitcoins in Australia has not been defined yet as the government on the topic is silent and speculative. Instead of all the controversies and warning from the bank that there has been a massive outflow of the traditional system into the cryptocurrency system still it emerges as a popular among the people. The Australian government is taking a step closer in making ICO legal for the regulation of which there have been amendments in various laws and certain new laws that have been made which is are passed by the government will automatically give the authority to regulate the Digital Currency Exchanges(where the people trade with bitcoin, Ethereum and other cryptocurrencies) in the hands of AUSTRAC. Which will lead to the mandatory registration of each individual under it and an offence for the unregistered people to provide digital currency exchange services and they have also regarded as a taxable commodity.

3) GERMANY

Seeing to the concept of blockchains many german blockchain Startups want to implement the concept of ICO but there are no specific authority that has been established under the German law. In this regard the question arises before the BUNDESANSTALT FÜR FINANZDIENSTLEISTUNGSAUFSICHT (BAFin) has the power to grant permission regarding the regulation of the ICO by establishing of an authority.

4) EUROPEAN UNION

The ICOs are legally allowed in the country with the view that they have to adhere to the policies and regulations of the government such as the Anti-Money Laundering and the Know Your Customer(KYC). Also the European Securities and Market Authority (ESMA) because the high level of risk that is involved with the ICOs for the investors.

5) UNITED STATES

Under the Rule 506(c)[regulation D] which says that selling tokens to accredited investors in the United States without the tokens being registered with the US Securities and Exchange Commission.this act as an option under the exemption in the case if the attorneys conclude that there is high risk involved in the token. The US virtual currency regulates the working of the bitcoins with proper registration even if it is from the Securities and Exchange Commission.

6) PAKISTAN

The use of bitcoins in Pakistan is legal to the extent by the use of the individual but at its own risk as there is no authority to govern the policy and soon after the Indian Government had declared that they will convert the bitcoins into fiat currency the State Bank of Pakistan banned the use and trade of these bitcoins by the organizations and institutions.

7)NIGERIA:

In a recent announcement by the central bank of Nigeria in March this year it stated its stance on the cryptocurrencies as it is a gamble for the traders by issuing a warning. However, the country is showing its keen interest in adopting it and also introducing a legal policy for its regulation for which the Nigerian lawmakers have urged the regulatory authorities to speed up their efforts so that they can implement a new legal framework for the cryptocurrency.

8) ZIMBABWE

Earlier bitcoins were not permitted in the country by the local government authorities in Zimbabwe but after an amendment last year a Pan-African blockchain got the permission and license through one of its partners by the name Agri Bank to operate within the country. Later on earlier this year in may the director of the Reserve Bank of Zimbabwe announced and banned all the financial institutions to stop using or holding any type of cryptocurrency as to safeguard the integrity of the payment systems.

9) UNITED STATES

The use and exchange of the various initial coin offerings is legal under the jurisdiction of the United States. The authorities that regulate its functioning are the American Securities Exchange Commission and the ICO has also been defined as a security by the securities exchange act and securities act as an investment familiar in instruments and it is being used on a large scale in the nation.

10) MEXICO

Last year the lower house of Congress of Mexico passed the bill related to the cryptocurrency and now it just requires the consent and signatures on the bill by the president Enrique Pena Nieto. The Securities and Exchange Commission is also looking ahead to regulate the cryptocurrency space in the United States for which the government of Mexico is also looking forward to put the digital asset under the ambit of the rule of law. In the coming future with the assent of the president the Ico will become a legal framework in Mexico.

11) COSTA RICA AND NICARAGUA:

In a country like Costa Rica there is a concept of Quasi money under which the cryptocurrency can be placed but the policymakers are still analyzing its implementation. Although the government restricts it in the banking because of the risk involved with the digital currency but is assumed by the certain surveys that soon it will declared as legal by the government. While in Nicaragua the use of bitcoins is not illegal but there are no authority to regulate it.

12) ARGENTINA

Although the cryptocurrency is being used and regulated in Argentina but it has not been declared as the legal tender by the government of the country and it has been granted as the monetary status in the country by the national Constitution.

13) BULGARIA

The legal status of the bitcoins is still uncertain in the jurisdiction but it is gaining momentum and popularity with all its benefits because of which it was regarded to be taxable under various laws and provisions and it is regulated by the Payment Services Laws in the country.

14) CANADA

Bitcoins are treated as legal in the jurisdiction of Canada and they are mainly regarded as “intangible”in the country by the Personal Property Securities Act and is regulated by the Anti-Money Laundering Act.

15) CROATIA

The country declared the cryptocurrency legal in the year 2013 and is regulated by the Terrorist Financing Prevention Act and the Anti-Money Laundering Act.

16) BRAZIL

The Bitcoins in Brazil is not illegal but there is no authority appointed to govern its functioning in the country and still is a debatable topic in the country because of the drawbacks it has with its use,

17) United Kingdom

In the United Kingdom the cryptocurrency is regarded as the a “Foreign Currency” and tax is imposed upon the purchases and is it also subjected to capital gains and it is looked by the Financial Conduct Authority.

18) THAILAND:

Earlier the Initial Coin Offering was banned in the nation but the government changed its decision and removed the ban associated to it in the year 2016 and have given warning to the associated businessmen in the use of the digital currency.

19) TAIWAN

Following the footsteps of Japan, Taiwan has also the government will issue new regulations in the country later this year for the use of the cryptocurrency and its legal use for the betterment of the country.

20) SWITZERLAND

The Swiss government have accepted this type of digital currency as a mode of payment in their banking system and it is required to be within the ambit of the Anti-Money Laundering and CTF acts for better functioning by the Financial Market Supervisory Authority (FINMA).

21) SPAIN

In the country the cryptocurrency is looked as a mean of barter exchange for the people to ease their transactions that otherwise would have been difficult to perform.

22) RUSSIAN FEDERATION

The use of bitcoins etc are legal and it is regulated by the Central Bank of Russian Federation and because of the premature nature of these digital currency the government has declined to further put forth any kind of regulations for ICO.

23) SINGAPORE

The government have although released certain guidelines for the conduct and use of such currency but still there is a lot of uncertainty in the market for which the Monetary Authority of Singapore is looking into the matter and currently it is taxable in its jurisdiction.

24) SWEDEN

In Sweden the use and exchange of bitcoins is legal and it has been exempted under a taxable commodity and it is regulated by the Anti- Money Laundering and the CTF acts by the jurisdiction.

25) SLOVENIA

The increasing popularity in the country of the bitcoins have made the Securities Market Agency to come into picture and look into the regulatory framework for the interests and benefits of the society. The Bank of Slovenia is the regulatory authority of all the ICO transactions and the Prime Minister has also mentioned that they are trying to make Slovenia the blockchain hub of the European Union in the near future.

26)ROMANIA

The government has recognised the cryptocurrency as an opportunity as an advancement in the economy because of the advantages it has with it and but the government at this point does not have any sort regulating authority to govern it, but seeing to the amount these bitcoins carry the policymakers are thinking to construct certain regulating authority to protect the rights and interests of the people in this matter.

27) PHILIPPINES

The government authorities have seen it as a mode of remittance of payment but they even feel that the Anti Money Laundering(AML) and the KYC policy will be required to look into this matter and the companies who are dealing in cryptocurrency are supposed to register themselves.

28) HONG KONG(CHINA)

The jurisdiction in Hong Kong have recognised that some type of this currency can be treated as securities and and the government is looking forward to establish regulations for the same and implement on them as soon as possible.

29) LUXEMBOURG

The regulatory authority for the ICO in the country is called as Commission De Servellance Du Secteur FinanCier (CSSF). The CSSF up till now has not given or implemented any regulations as they have adopted the regulations of the IOSCO and the ESMA as they found them more comprehensive in this aspect.

30) NORWAY

The Central Bank of Norway has taken into consideration has given a broader aspect to the Bitcoins and as it is the regulatory authority for it in the country.

31) JAPAN

The use of bitcoins and other currency is legal in the country and seeing to the overwhelming response by the people. The Financial Services Agency is looking for regulations to improve the policies such as the AML/KYC as the risk involved is quite high.

32) ITALY

The cryptocurrency is legal but there are no specific regulation as to its private use by the people but the country is looking forward towards the future regulations that can be brought into the country.

33) ISRAEL

The country indulges in the use of cryptocurrency now for a long time and the policymakers are trying to become the powerhouse of these industry and expand its operations on a very large scale.

34) FRANCE

The cryptocurrency is legal in France and the policymakers are even planning to create legal framework for the same as much as to make france a big hub for all the other nations and they seek it as an opportunity in this century to become the leader in this aspect despite the risk the digital currency carries along with it.

35) FINLAND

The Financial Supervisory Authority regulates the working of the ICO in the country and looks after its legality in the domain but it also discourages the investors and other business to invest in the such currencies.

36) GIBRALTAR

The Gibraltar Financial Service Commission looks after the regulation of the legal framework in the country for bitcoins. They do not consider the cryptocurrency as a means of security as it is not properly protected by the securities law but it is a taxable commodity in the country.

37) UKRAINE

The use of cryptocurrency like bitcoins is legal and it is regulated by the National Bank of Ukraine has got the power to look after the legal affairs and framework for the same and a proper domain and policies are to be looked for the same at the next financial stability meeting in the month of August later this year.

REGULATORY RESPONSES TO ICO AROUND THE WORLD

DATE JURISDICTION AND REGULATOR RESPONSES
09/2017 Australia (Securities and Investment Commission) State the legality of an ICO depends upon circumstances and in some cases,”the ICO will only be subject of the general law.”
09/2017 Canada (Quebec Autorite des marches financiers) Still exploring the concept of bitcoins and its legality in the country
10/2017 Canada (Ontario Securities Commission) Approve the ICO of TokenFunder even after issuing warning against ICO earlier in the year.
01/2017 China (PBOC and other six regulators) The authority has banned its use in the country.
01/2017 China ( National Internet Finance Association) To warn the people regarding its use and trading.
10/2017 France (Autorite des marches financiers) They are still working on its regulations.
05/2017 German (Financial Supervisory Authority (BaFin)) Still Discussing about ICO and its regulations.
12/2017 Gibraltar (HM government) Publish the Financial Services Regulations 2017 with a bill for an act amend the Financial Services.
05/2017 Hong Kong (Securities and Futures Commission) Still regulating it as per the circumstances as the digital kensa are subjected to Securities law)
10/2017 Japan (Financial Services Agency) Clarify upon the Payment Services act or Financial Instruments Exchange Act may apply based on ICO structure.
10/ 2017 New Zealand (Financial Markets Authority) To release the specified guidelines on the current regulatory environment in respect to ICO.

CONCLUSION:

As we all know that everything in this world has some Pros and Cons with it and we have to deal with both the aspect of it but it is our view as to how we think and what is our approach towards a particular thing. Initial Coin Offering (ICO) is one the things that is a lot of discussion around the globe these days and there are altogether different views and opinions that we keep hearing from different people. Some people say that ICO is a Boon and some people say that it is a Bane but in my personal view, I believe that it is a boon because all the advantages and benefits ICO has as explained above is like so helpful for the development of a nation. Although it has some cons but I believe that those can be easily regulated and tackled and in the process the amount of welfare it will bring to the people is unimaginable. So, I believe it is one’s opinions towards anything but the approach is all that matters and ICO in my regard is a boon for the society at large and for the underdeveloped countries who are still developing will benefit a lot.

REFERENCES:

  1. http://www.livelaw.in/sc-notice-centre-plea-regulate-crypto-currency-read-petition/
  2. https://www.coindesk.com/information/what-is-bitcoin/
  3. https://www.theglobeandmail.com/report-on-business/a-guide-to-bitcoin-what-you-need-to-know-about-thecryptocurrency/article37379137/

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