Regulation of Initial Coin Offerings: Reconciling US and EU Securities Laws

Abstract

In 2016, when Initial Coin Offerings (ICOs) were first introduced, financial markets, scholars, and entrepreneurs were captivated by the opportunities and challenges the technology offered. ICOs quickly became one of the hottest topics in the financial markets. They typically use blockchain technology to offer so-called "tokens" that can confer various rights to their holders. The amount of money raised via ICOs has reached $27 billion by the end of 2018. Commentators have described the ICO bonanza as a new gold rush. Nevertheless, the legal framework for ICOs remains unclear because traditional securities regulation is designed for classical securities that are traded on a stock exchange. In late 2017, the U.S. Securities and Exchange Commission (SEC) released two statements suggesting that tokens may be subject to U.S. securities regulation if they meet the requirements for an "investment contract" as laid out in the Howey test. However, regulators in Asia and Europe remain quite vague on the issue. In this Article we analyze the legal framework for ICOs in the E.U. It is our view that investment tokens (including hybrid tokens with some investment functions) are "transferable securities" under Directive 2014/65/EU on Markets in Financial Instruments. Although this definition appears to be quite different from the "investment contract" definition under U.S. law, the financial markets law of the E.U., if applied correctly, comes to results that are comparable to the outcomes of the investigations carried out by the U.S. SEC. The result would be a similar framework in two of the most vibrant regions for ICOs. It would be a first step towards a harmonized application of securities laws to ICOs, avoiding regulatory patchwork and a possible "race to the bottom." 

Initial Coin Offerings (ICOs): the importance of human capital

“…Data on ICOs cannot be completely correct and unbiased mainly due to two main reasons: (i) there are not o cial platforms where the ICOs might occur and be registered; (ii) several websites track ICOs but their data relies on manual user entries (Fisch, 2019). Nevertheless, the website CoinSchedule (www.coinschedule.com) is used by several authors and its information can be taken as reliable (Masiak, Block, Masiak, Neuenkirch, & Pielen, 2018;Chiu & Greene, 2019;Maume & Fromberger, 2019;Rohr & Wright, 2019).…”

Russian Legal Framework for Digital Tokens

“…Thus, in Singapore, according to the Securities and Futures Act, a token is considered as a digital expression of a security. The experience of applying the legislation on securities to tokens is also available in other countries [11].…”

Functional Equivalence: An Exploration Through Shortcomings to Solutions

“…The aim was to determine the purposes or functions of these requirements that can be fulfilled using techniques of electronic-commerce in order to have the same level of recognition of electronic records, signatures and contracts as the paper-based ones. 20 As a result of the analysis it was clear that the application of the principle of functional equivalence involves "an examination of the function fulfilled by traditional form requirements ('writing', 'signature', 'original', 'dispatch', and 'receipt') and a determination as to how the same function could be transposed, reproduced or imitated in a dematerialised environment." 21 UNCITRAL approached it as follows:…”

“…51 Similar practise has spun across the globe starting from US also to the Member States of the European Union, where according to research the argumentation is different, but the conclusion that securities law applies is often the same. 52 regulators must not take any comparators lightly and should carefully examine the utility of the technology in order not to create an effect on innovation.…”