Legal Status of ICO
Tags: Universa Analytics, Universa Education, Universa, Blockchain

Today, most ICO projects define themselves as program tokens with the pre-sale. From a legal point of view it is very similar to selling an early access online game. The project’s authors use the terms “donation” and “mass sale” instead of “ICO,” so that they don’t fall under the category of stock trading companies.

It is extremely important to determine the legal status of ICO, for if there is none, large investors and funds from the real sector of the economy will not be particularly interested in blockchain start-ups. Without adequate legal framework, crypto-economy remains unattractive for large capital and lacks significant development potential.

On the other hand, there are those in favor of the idea that no regulation is even better for the industry development, since the authorities will not interfere in projects receiving investments. However, there is a downside — in the absence of laws regulating the between investors and token sellers, the ICO niche becomes an attractive environment for a huge number of scammers ready to profit from those who dream of making money on the increasing price of the tokens they purchased.

The legal framework for resolving conflicts

Since the vast majority of state regulators find it hard to adapt quickly to the developing sector of ICO, the ICO industry tries to solve its own problems independently. In the world of crypto currency, there started to emerge organizations positioning themselves as the arbitrators to resolve disputes between the ICO participants.

A mediator can be someone trusted by both parties — both the ICO and investors. The mediator becomes a smart contract participant and monitors the execution of the arbitrator’s decisions. Being a legal basis for resolving disputes, arbitrators employ their own subjective notions about parties’ rightfulness, the content of the white paper, and the terms of the user agreement.

To increase investor’s trust and strengthen their own reputation, arbitrators post online the history of all decisions made on disputes between the organizers of the ICO and investors, so that anyone can take a look at such organization’s vision, as well as its beliefs on justice.

Another method of protecting investors’ assets when investing in ICO is a decentralized escrow, which means depositing funds on a third party’s account. This approach helps to avoid many risks regarding doubts whether the ICO-project organizers are honest and whether they are able to guarantee the necessary security.

Decentralized escrow allows investors to make decisions on the token distribution, continuing or terminating the project’s financing by a majority of votes. The possibility of making such decisions is regulated by the project’s legal paperwork, the planned schedule and the author’s obligations.

Progressive countries

Applicability of the product, extensive marketing campaign, professional team and well prepared documentation are still not enough for a successful ICO. One more vital aspect is choice of jurisdiction.

The most progressive and favorable towards cryptocurrency and ICO jurisdictions today are Singapore, Hong Kong, Switzerland, US and Scotland. The registration procedure to obtain the status of legal entity for ICO and tax legislation in these countries are the most favorable for blockchain startups.

The example of Vitalik Buterin’s Ethereum shows how favorable Switzerland is to cryptocurrency companies. Here was established Crypto Valley (similar to the American Silicon Valley). The Government of Switzerland is well disposed to blockchain startups due to their contribution to the economy and development of the region. Advantageous conditions for development of new financial products are the major reason for many crypto companies to move to Switzerland.

Singapore offers for the price of 7–10 thousand dollars an opportunity to obtain the status of legal entity in a progressive and technologically advanced country where the Government is not just well-disposed but rather favorable to blockchain startups. Another advantageous feature of this jurisdiction is quite an easy way to withdraw the funds raised during ICO. Hong Kong is a less expensive alternative to Singapore but with a bit stricter tax regulation.

Being a motherland of startups the United States are an excellent jurisdiction for ICO but exclusively for the US residents. Non-residents who want to launch a startup in this jurisdiction will face serious risks and expenses as well as will become a subject to close scrutiny on the part of SEC. Besides, the legal and economic status of ICO is not clearly defined in the US, which results in several cases when tokens were equated with stocks that triggered respective consequences.

Despite Switzerland being a positive example, the rest countries members of the European Union are not the best option for blockchain startups. One of the problems is the law on data protection according to which financial companies are obliged to delete information on all transactions processed by a client from the database upon request. Since one of the distinguishing features of blockchain technology is that no information can be deleted, it can be interpreted as a violation of the above-mentioned law.

Anyway a choice of the most favorable jurisdiction is just one of the steps towards risk mitigation. What is even more essential for holding ICO is to develop a detailed plan for tokens usage so as to minimize the risk of tokens being equated with securities.

Expert Opinions

“The world’s jurisdictions fight for promising projects on distributed ledger technologies,” says Igor Matyuhin a member of the Expert Council on Legislative Support of Fintech Development in Russia at Blockchain & Bitcoin Conference Russia. “Japan has benefited from accepting cryptocurrency, whereas in Russia the Ministry of Home Affairs is opposing it”, he added. Such statement signals that sentiments in favor of crypto and ICO friendly regulations are appearing in the Russian Government.

Michael Corbat the president of Citigroup is sure that popularity of Bitcoin will lead to introduction of government regulated cryptocurrencies. He thinks that startup friendly jurisdictions such as Singapore or Switzerland will remain an exception to the general rule, and in the nearest future we will witness a surge in national digital currencies. Meanwhile, Citibank is already testing its own cryptocurrency Citicoin and cooperating with Nasdaq in the implementation of blockchain technologies into stock trading.

The Israeli Ministry of Finance has established a working group on integration of cryptocurrency within the legal framework. As a part of the group’s working activity an entrepreneur Moshe Hogeg had a meeting with the minister Moshe Kahlon. The issues discussed during the meeting were concerned with bitcoin regulation and integration of cryptocurrency within the national legal framework. Hogeg believes, “Lack of legislation complicates digital currency operation, which has an adverse impact on national economy, particularly amid the Tel Aviv court order which allows banks to refuse to provide services for companies dealing with cryptocurrencies”.

The general tendency is that in most countries there are appearing officials with a progressive view on ICO and cryptocurrency, which is definitely a positive trend.

The future of ICO

With the global cryptocurrency market capitalization having already reached hundreds billion dollars, governments of different countries have started to realize the economic importance of companies dealing with cryptocurrency. Moreover, even the most inconvincible sceptics are less and less willing to question the benefits and prospects of blockchain technologies.

Most experts agree that very soon such terms as ‘distributed ledger technology’, ‘smart contract’, ‘cryptocurrency’ and ‘token’ will be clearly defined in most developed countries which will make it possible to settle all arguments and conflicts within the legal framework. All these factors make a strong case in favor of a bright future for startups developing new financial products on blockchain technology.