Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
Introduction
Writers: Scott Nelson, Sweetbridge. Rutger van Zuidam, DutchChain
The aim of this document is to assist the process of aligning stakeholders in moving forward on and building
support for a regulatory framework for ​“responsible ICOs”​, based in the Netherlands.
Stakeholders that have been invited to co-write, read and provide feedback are listed at the bottom of this
document.

Overview
ICO’s (Initial Coin Offerings) represent a rapidly growing global crowd funding method that currently operates
in an uncertain regulatory environment globally. A clear and thoughtful regulatory environment for ICOs could
propel the Netherlands into a global leadership position. A positive and safe structure for ICOs would attract
significant external investment, acquire talent and companies and technology development.
The current ICO market is only accessible for investors that own crypto currency. The biggest opportunity is to
unlock the fiat currency market and enable anyone to invest, regardless of their currency. The current crypto
market cap is about € 180 billion, which is a fraction of the amount of available Euros.
A clear ICO regulatory structure could do for the Netherlands what venture capital did for Silicon Valley.
Additionally, The Netherlands could be the first country to enable fiat money to participate in ICOs.

Funding Unique Strengths, leveraging country competence globally
The Netherlands possesses several unique attributes that if funded proactively could propel it into a more
significant leadership position globally. These attributes are the technical sophistication of its people, logistics
experience, tradition of trade and finance, international network, trust position, international peace and justice,
science, history in public private partnerships and the level of blockchain activity focused on government
services, commerce and supply chains.
Model to fuel the industry, when this regulatory framework is in place:
- Corporates and governments are excellent clients and co-creation partners for startups
- The best (international) entrepreneurs & teams incorporate in The Netherlands and co-create the best
solutions.
- Regulatory clarity, guidance and enforcement
- Enable new influx of capital, spent in The Netherlands.
- Build from The Netherlands, for the internet, for the world to use.

Attributes of an ICO and Tokens (cryptocurrencies)

Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
Tokens sold in an ICO are frequently tradable on secondary market exchanges. These exchanges make these
tokens liquid (tradable) and they are most commonly traded for each other but can also be traded for fiat
currency. Unlike stock, tokens can typically be exchanged within hours or days of their original issuance,
unless restricted otherwise. Since the blockchain is a decentralized ledger there is no requirement for an
intermediary to keep track of their ownership, this is automatically done by the blockchain.
The stock exchange is invented in The Netherlands to finance corporations. The world now seeks a properly
regulated place to finance international ecosystems, which are typically funded by ICOs.

More than funding tools
Most of the highest funded tokens used their ICO as more than a funding tool. Where blockchain solutions
typically serve ecosystems that involve numerous stakeholders that all have their own interested in the system,
a distributed solution for ownership and funding is required. The best token economic designs create network
effects that encourage adoption and use of a network as the ecosystem grows. These solve the chicken and
egg problem with building a network effect business that serve ecosystems.

Four types of crypto-currencies/tokens used in ICOs
There are an infinite variety of tokens that can be created on the blockchain. However, all of the tokens that
have been used to raise more than a million dollars fall into one or more of the four categories below. The best
performing financially have not been tokens that act like securities but commodity tokens used to transfer
value. In fact, the top 14 cryptocurrencies which represent 89% of the market cap are all commodity tokens.
Securities

Commodity Tokens

Utility / Licenses

Worker / Points

Participation in the
value increase
(profit) generated
from the operation of
an entity.

A store of value or a
representation of a real
world asset such as fiat
currency or a
commodity like gold.

A token that enables
owners to do something
that non-owners can’t such
as receive a discount or use
a system

A token for the payment of
goods or services that is
consumed when used such
as a voucher or airline
points

Similar to stocks or
bonds

Similar to commodities
or currency

Similar to a software license
or membership fee

Similar to a pre-paid card for
a store

Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
Regulatory Framework by Token Type
A regulatory framework needs to exist that takes a suitable approach for each token type. When tokens
represent multiple types all requirements for the corresponding types could be merged to create the list of
requirements.
Most of the regulations that support a “responsible ICO” are already in place. The aim here is to explore, with
all stakeholders, what needs to be changed, so that responsible ICOs can actually happen here in The
Netherlands. The following input mostly consists of suggestions and open thoughts.
INPUT FROM MinFin, AFM, DNB needed

Type

Proposed Regulatory Framework

Security Tokens

The main principle is that anyone should be able to invest a certain amount their
accumulated wealth/ capital in projects they believe have a sound future, given any risk
profile. The key is that trust can be build in the network by peers, cumulative (tier 1,2,3
etc).
Existing security framework could apply with minor modifications, for example:
1) Technically Sophisticated Investors,
2) Proportional Income Investing
3) New due diligence requirements.

Commodity
Tokens

Tokens that represent a real world commodity should have proper custodial licensing
for any commodities held on behalf of users. Tokens that represent digital commodities
(e.g. a token economically pegged to the value of a commodity but not directly
redeemable for the commodity) should require a combination of security audits of the
smart contracts and crypto-economic audits of the incentive and value structure by
industry recognized auditors.

Utility / License
Tokens

Utility and license tokens have an intrinsic value for the user. They operate much like a
software license or a membership agreement.
There should be some relationship between the token sales and the total value to
users. For example, tokens sales might be limited to the intrinsic value of the tokens as
measured by V * 5 * G (where V = the annual intrinsic value of all tokens actively used
in the system and G = the Growth Factor). This would encourage projects to have
multiple releases of tokens in a slow drip as they prove/increase the value of their
tokens and their growth rate.
New projects that don’t yet have valid numbers for V or R could be allowed to raise
money based on projections with X% of funds raised stored in escrow until values for V

Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
and R can be demonstrated to be in line with projections or a release is approved by a
vote of 51% of project contributors.
Worker / Point
Tokens

If the worker token is directly exchangeable for fiat currency, existing money
transmission rules should apply. If the token is not exchangeable for fiat currency by the
project directly but only goods or services no special rules should apply.
Sale of Worker tokens in advance of their use should be restricted. For example, to the
projected 5 year maximum needed supply U * 5 * G (where U = the annual usage and
G = the growth factor). New projects that don’t have actual numbers could be required
to post projections with a setup of milestones based on monthly use of worker tokens in
the system (e.g. 100K tokens/mo, 200K tokens/mo, etc.). x% of funds raised could be
placed in escrow. Every time the project achieve a milestone the percentage that
milestone represents of the total number of milestones could be released. A release
could also be allowed if approved by a vote of 51% of project contributors.

Security tokens additional requirements
Technically Sophisticated Investor
Technically sophisticated investors are investors that have work in the field of the investment or have a
degree in the area of the investment. Security Token investors should provide evidence of competency
in the field of the investment if they don’t meet sophisticated investment rules.

Proportional Income Investment
Proportional income investments are investments that are minor in light of the income of the investor.
Anyone should be allowed to invest up to X% of his or her income or X% of his or her total amount of
capital in ICO within the Dutch process. Any adult should be allowed to invest at least 100 euros.

Due Diligence
Projects seeking to accept investments from unsophisticated investors could be required to have at
least X% of their initial raise from professional investment firms who perform due diligence on the
project. In order to qualify, initial investments must proceed at a price that is close to ICO price (e.g. no
less than 40% of VWAP (volume-weighted average price) in the first 6 months of crowdfounding and no
less than 70% of the initial price at outset) and must impose sufficient transfer restrictions on early
investors (e.g. no less than 6-12 months longer than ICO participants).

Disclosures
All token projects should be required to disclose tokens and other payment structures for all project
contributors and advisors. Due diligence providers, advisors and key employees should have a token vesting
plan that transfers control of tokens over at least a 3 year period. Spending of ICO funds must be sufficiently
restricted to that defined in the original ICO documents (a.k.a. “Project whitepaper”) and any material changes

Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
to ICO fund spending must undergo public review and approval by token holders. All projects should be
required to have a public comment form where questions can be asked and answers provided.
The price paid or value of services received for any token sale in the project's history should be fully disclosed.

Preventing Manipulation of Tokens (Speculation)
To prevent manipulation of the tokens price by pump and dump strategies, projects should be required to use
at least 10% of their total tokens for treasury activities that reduce speculation. Funds raised from these tokens
should be maintained in a separate treasury used only for this purpose. If the project feels the price of its
tokens is too high it should be allowed to sell tokens and if tokens are being dumped it should be allowed to
buy its tokens with its treasury funds. Projects should be allowed to contract with an outside entity to perform
this service.

Exemptions
Any project should be allowed to go file for an exemption to the normal requirements. For example, a utility
token project that wants to raise more than the network Value * 5 * Growth Factor should be able to ask for an
exemption. Exemptions would be granted on the merits of the argument. Projects would be required to propose
alternative requirements along with the reasons for the exemption request.

Growth factor
Growth factor would be based on average 3 year growth rates and published in a table such as the one below.
Growth Rate

Qtr 1

Qtr 2

Qtr 3

Qtr 4

Qtr 5

Qtr 6

Qtr 7

Qtr 8

Qtr 9 Qtr 10 Qtr 11 Qtr 12 Factor

1%

100

101

102

103

104

105

106

107

108

109

110

112

1.12

3%

100

103

106

109

113

116

119

123

127

130

134

138

1.38

5%

100

105

110

116

122

128

134

141

148

155

163

171

1.71

10%

100

110

121

133

146

161

177

195

214

236

259

285

2.85

15%

100

115

132

152

175

201

231

266

306

352

405

465

4.65

20%

100

120

144

173

207

249

299

358

430

516

619

743

7.43

25%

100

125

156

195

244

305

381

477

596

745

931

1,164

11.64

Presales
Presale or pledges of tokens prior to the launch of the product in a usable form should be restricted to project:
contributors, employees, consultants, advisors, service providers and any investors meeting the requirements
for securities investors above.

KYC / AML Compliance
All projects should be KYC / AML compliant

Input for a​ Regulatory Structure for ICO’s in The Netherlands - Draft
Extra topics to be discussed with AFM/ DNB:
Governance
● Board competence
● KYC/ AML
● Sandboxing

Input for this document:
Invited to co-write, read and provide feedback
Ministry of Finance, Ministry of Economic Affairs, Ministry of Economic Affairs, Dutch Blockchain Coalition,
AFM, DNB, Mattereum, Coinfund.io, Deloitte, RUG, UVA, StartupDelta.