Regulation and Future of ICOs

ICOs brought with them a new revolution of how people invest in cryptocurrencies. While a majority of traders still holds Bitcoins and top cryptocurrencies, a large number of investors now invest their money in new cryptocurrency projects. However, this is not without challenges. Governments all around the world have been competing to regulate the ICO industry, sometimes hurting it badly.

Why Regulate the Industry?

When the first ICO was held in 2013, few people thought the initial coin offering industry would grow. In 2015, Ethereum held one of the highest grossing ICOs of all time, and startups began to approach the financial model in a different way. The new financial model provided startups with several benefits:

  • The ability to raise funds online and easily
  • Funding a new project without issuing company shares
  • Involving investors from all over the world while paying little or no taxes
  • Creating awareness about an upcoming ICOs

Perhaps because of the ease of starting an ICO project and the few regulations involved in the process, some people started taking advantage. Scam ICOs increased. Nearly every month between 2015 and 2017, a scam ICO exited the stage with investors’ money intact. Onecoin, one of the most recent scam ICO, allegedly went down with more than $350 million worth of investors’ money.

In 2017, countries around the world started issuing tough warnings about investing in ICOs.  Some countries started taxing the industry, enforcing regulatory measures and taking action on those who disobeyed.

Timeline of ICO Regulations

The US

On July 25th, the US Securities and Exchange Commission warned US investors of exercising caution when dealing with ICOs. SEC further stated that they interpreted some ICOs to be securities and startups had to comply with strict regulations in the country.

Following the statement, ICOs seeking incorporation in the US reduced. In the following weeks, SEC began toughening their rules again. In early 2018, SEC enforced ‘Reg D’ rule which allows startups to only sell tokens to investors after conducting anti-money laundering procedures on them. Consequently, the number of startups offering investment opportunities to US citizens has reduced. The new SEC rules all pay attention to the type of investors a company works with, which negatively affects them.

Today, US-based startups are taking advantage of an SEC rule which allows startups to crowdfund not more than $50 million with slightly fewer regulations rules. Some of the best ICOs today are being launched thanks to this fact.

Canada

Barely one month after the US warned local investors about ICOs, Canada issued a statement regarding their stance on the industry. Like the US, Canada viewed some ICOs to be securities. However, ICOs would be regulated on a case by case basis. Canada also stipulated the consequences of any startup failing to follow the set-out rules. Fortunately, the country went ahead to offer clear guideline that should be followed for an ICO to involve Canadian citizens.

China & Hong Kong

In early September 2017, the Chinese government implemented a blanket ban on ICOs in the country. In a statement issued jointly by major government agencies, China made it clear that no ICO would be held in the country henceforth. In their statement, the country cited a high number of scam ICOs as reason enough to ban all ICOs in the country.

China’s ICO ban had a damning effect on investors in the country. For starters, countries that had only started accepting ICO funds were forced to make refunds. Secondly, trading on cryptocurrency markets went down by 39%, with exchanges delisting some tokens.

A day after China placed a ban on ICOs; Hong Kong made a statement reinforcing the need to regulate the industry. However, Hong Kong did not offer a total ban like China. Hong Kong’s statement clarified that only particular type of startups would be regulated and exchanges where such tokens were traded.

Thailand

On September 14, 2017, the Republic of Thailand issued a heart-warming message to ICO startup, noting the potential benefits of the industry. At the time, Thailand viewed ICOs as an answer to startups’ funding need. Thai’s SEC also issued a warning about scam ICOs.

lately, however, Thailand has changed its stance on ICOs. The country is approaching the financial set up with more caution. The Thailand government has already stated that they will soon regulate ICOs and cryptocurrencies in the country. With new regulations, Thai-based startups will be subjected to a 15% capital gains tax and another 7% VAT (value added tax).

South Korea

25 days after China banned ICOs; South Korea made a similar move. Like China, South Korea blamed a rise in scam startups for enforcing a total ban on initial coin offerings. The country’s law affected lots of startups in the country, especially noting that South Korea is a major market player in the industry.

With new reports from South Korea, however, it seems like the country could ease their rules on ICOs. This follows the realization that many South Koreans still invest in foreign ICOs. South Korean Financial Service Commission chairman recently reported that his country’s government had plans to advance blockchain technologies in the country. South Korea also planned to partner with Japan and China to help prevent money laundering through ICOs.

The Eurozone

European countries generally have lax regulations against ICO startups. Countries in the EU tend to welcome ICOs as long as they follow anti-money laundering regulations and local banking and taxation rules. However, some countries are more ICO friendly compared to others. Switzerland, for example, cooperates with genuine ICOs to ensure they succeed as much as possible. Lithuania, Estonia, and Gibraltar also have less-strict rules aimed at attracting legitimate ICOs into the country.

Some countries like Germany, however, have strict regulations. Startups planning to hold an ICO in the country have to pass several rules before being allowed to involve German investors. Other countries such as Italy and France have measures in place to ensure each startup follows a set of rules and regulations before being allowed to hold an ICO.  

Singapore

As one of the most popular ICO hubs, Singapore doesn’t have tight rules regarding ICO startups. However, Singapore has clear and specific guidelines for starting an ICO in the country. The country’s initial ICO assessment was to regulate those startups that appeared as equities. In March 2018, however, Singapore Monetary Authorities started offering contrasting statements about the country’s plans to regulate digital assets.

What’s the Future of ICOs?

So far, China, North Korea, and India are the only countries where ICOs are totally prohibited. However, considering that there are 197 countries in the world, most of which enforce little to no ICO regulations, the industry has a higher chance of succeeding in the future. Some countries have also proven they have intent to offer ICO startups ideal environment for doing business.

Top ICO Friendly Countries

 

  • Singapore- the country is home to more than 10 of the top 100 most successful ICOs
  • Switzerland- the European nation boasts of an estimated 16.9% of the most successful ICOs
  • Estonia- allow startups to set up a business and comply with local regulations without even visiting the country physically
  • Gibraltar- though the country has plans to regulate ICOs, it has helped many startups hold successful ICOs
  • The US- offers fairly strict regulations to startups but is also home to the largest ICO market

ICO Outlook in 5 Years

In the last six months, there have been plenty of meetings held in regards to ICOs. The G20 countries have already met severally, and they have plans to regulate cryptocurrencies in July 2018. In late March 2018, leaders from Great 20 countries held a meeting in Argentina, the main theme being ICOs and technology in general.

According to reports, the leaders disagreed on how to approach ICO and blockchain startups. While some countries were of the opinion of regulating ICOs, some countries disliked the idea of “endorsing the industry. However, the July deadline was set to ensure there was a clear regulatory framework for blockchain startups. So, what will be the effect of an acknowledged and regulated ICO industry?

Fewer Scams

As it’s noted with the presence of regulations worldwide, there are few scam ICOs where governments make it harder for them to exist. While regulating blockchains won’t be received kindly by everyone, it will at least keep in check startups holding ICOs. The US and most of Europe have already proven that scam ICOs can be eliminated by cooperating with startups.

Institutional Investors will Increase

By acknowledging the potential in ICO startups, G20 countries and the world by extension will give the industry the much-needed legitimacy. Governments working together with startups to tap into the benefits of the industry may not be a bad thing after all. With the industry gaining recognition, institutional investors will play a bigger role in funding startups.

This can already be witnessed in ICOs held by companies like Telegram. While Telegram’s ICO has already raised more than $850 million, most of the funds come from institutional investors.

Higher Startup Success Rate

As the ICO industry gains acceptance and more serious startups replace scams, investors will begin to experience higher ROI. It’s highly likely that in the coming years, only the most serious startups will gain meaningful funding. This will help streamline the industry and help investors to invest in the most likely to succeed companies.

Conclusion

All signs point to a legal but regulated ICO industry in the future. At present, countries are regularly enforcing measures to regulate the industry, but lots of startups are able to run ICOs without seeking registration and certification. That may change in the future and investors will only invest in registered and certified companies.

This is a sponsored press release and does not necessarily reflect the opinions or views held by any employees of The Merkle. This is not investment, trading, or gambling advice. Always conduct your own independent research.