107031, г. Москва,
ул. Большая Дмитровка 12/1, стр. 3
ул. Большая Дмитровка 12/1, стр. 3
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Blockchain Alert || September, Vol.1
On 10 August 2018, the Committee on Economic and Monetary Affairs of the European Parliament (the Committee) adopted its draft position with respect to proposal for a regulation on European Crowdfunding Service Providers (ECSP) for Business (the Draft Report).
The Draft Report introduced the concept of initial coin offerings (ICOs) within the proposed framework for regulating crowdfunding service providers, or CSPs. ‘Initial coin offering or ICO’ is determined as «raising funds from the public in a dematerialised way using coins or tokens that are put for sale for a limited time by a business or an individual in exchange for fiat or virtual currencies».
While it may be viewed as a positive sign towards recognition of ICOs as mechanism for raising capital, the amendments proposed by the Draft Report will need to be further clarified to determine exactly what ICO structures will be covered by new regulation. On one hand, the Draft Report admitted that CSPs themselves may raise financing through ICO. On the other hand, it expressly provided that ICO which do not use a counterparty (aka intermediary) do not fall within the scope of new regulation.
We, therefore, can now determine at least two ways to conduct ICO: first way is to issue tokens itself and second way is where CSP is providing the platform for other companies to raise financing via ICO. For the latter, CSP is required to have authorisation under new regulation. For this reason, the Draft Report clarified and extended the list of services that require authorisation as CSP to include, inter alia, «the facilitation of offerings where the service provider acts as an intermediary between an entity issuing tokens via an ICO using a counterparty and investors». Importantly, the Draft Report provided for recognition of the CSPs established in third country to operate in the EU, provided certain criteria are met, allowing CSP to operate on cross-border basis.
The Committee suggested to exempt any crowdfunding offer raising amount below EUR 8mln (compared to initially proposed EUR 1 mln) from obligation to publish a prospectus under the Prospectus Regulation. The Draft Report made it clear that private placements, ICO in excess of 8 mln or ICOs that do not use a counterparty do not fall within the scope of new regulation. However, It is not clear whether this threshold should apply to ICO when CSP is issuing itself.
The link to the Draft Report can be found here.
While it may be viewed as a positive sign towards recognition of ICOs as mechanism for raising capital, the amendments proposed by the Draft Report will need to be further clarified to determine exactly what ICO structures will be covered by new regulation. On one hand, the Draft Report admitted that CSPs themselves may raise financing through ICO. On the other hand, it expressly provided that ICO which do not use a counterparty (aka intermediary) do not fall within the scope of new regulation.
We, therefore, can now determine at least two ways to conduct ICO: first way is to issue tokens itself and second way is where CSP is providing the platform for other companies to raise financing via ICO. For the latter, CSP is required to have authorisation under new regulation. For this reason, the Draft Report clarified and extended the list of services that require authorisation as CSP to include, inter alia, «the facilitation of offerings where the service provider acts as an intermediary between an entity issuing tokens via an ICO using a counterparty and investors». Importantly, the Draft Report provided for recognition of the CSPs established in third country to operate in the EU, provided certain criteria are met, allowing CSP to operate on cross-border basis.
The Committee suggested to exempt any crowdfunding offer raising amount below EUR 8mln (compared to initially proposed EUR 1 mln) from obligation to publish a prospectus under the Prospectus Regulation. The Draft Report made it clear that private placements, ICO in excess of 8 mln or ICOs that do not use a counterparty do not fall within the scope of new regulation. However, It is not clear whether this threshold should apply to ICO when CSP is issuing itself.
The link to the Draft Report can be found here.
The new EU regulation suggested to introduce the concept of crowdfunding service providers (CSPs) to determine the status of and authorisation requirements for CSPs as well as to regulate crowdfunding offers, including, as proposed by the Draft Report, ICOs.
In our opinion, the major challenges to be addressed in new regulation would be (a) ensuring the neutrality of CSP on its platform; and (b) shaping the activity of CSP in a way it does not go beyond the scope of the new regulation.
The Draft Report allowed recognition of the CSPs established in third country to operate in the EU, provided certain criteria a met.
In our opinion, the major challenges to be addressed in new regulation would be (a) ensuring the neutrality of CSP on its platform; and (b) shaping the activity of CSP in a way it does not go beyond the scope of the new regulation.
The Draft Report allowed recognition of the CSPs established in third country to operate in the EU, provided certain criteria a met.
A US self-regulatory body for financial industry players, FINRA, warns investors about ICOs
On 16 August 2018, Financial Industry Regulatory Authority (FINRA) issued investor alert regarding investing in digital assets via participation in initial coins offerings (the Alert). FINRA is a US self-regulatory organisation that regulates brokerage firms and exchange markets. Unlike most of warnings or guidelines regarding initial coin offerings (ICOs) issued by regulators in various jurisdictions, the Alert does not constitute an attempt to give any qualification of the activities involving crypto assets but rather a recommendation to investors about potential risks associated with dealing in cryptocurrencies and other crypto coins and tokens.
There are also few points to note for the companies issuing crypto.
There are also few points to note for the companies issuing crypto.
- First, FINRA recommendations extend to investment of real money onlyThus, investment made in the form of cryptocurrency should not be subject to considerations raised in the Alert.
- Second, while FINRA acknowledged great potential of initial coin offerings (ICOs), cryptocurrencies and the technologies that power them for legitimate innovation in capital raising and financial markets, it considers the following to be major risks associated with investing via ICO:(a) misleading and incomplete disclosure, (b) high probability of fraud and theft, © existence of unregulated and unregistered online trading platforms, (d) inability to delivery future tokens on trigger events, (e) incorrect qualification of token as security or utility; and (f) inability to conduct the valuation of the ICO properly. In addition, according to FINRA, «guarantees, unregistered products, claims of overly consistent returns, complex strategies, missing documentation, account discrepancies and pushy salespeople (...) are red flags of potential fraud.»
- Regulatory risks are ones of the major obstacles for further development of crypto industry in generalFrom start, existing regulations have not been designed to function effectively in blockchain and crypto environment: they do not take into account specifics in which blockchain industry players operate. Thus, as the industry grows and evolves, those regulations will need to be adjusted, specified or complemented to address above mentioned concerns.
The link to the ICO Investor Alert can be found here.
Malta continues to take lead on introducing new regulatory regime for crypto
Malta Financial Service Authority, the MFSA, has now published consultations papers in relation to all three chapters of the proposed virtual financial assets rulebook (the VFA Rulebook). The VFA Rulebook will implement Virtual Financial Assets Act, 2018 (the VFA Act).
The latest consultation paper was issued on 31 August 2018 with other two adopted earlier in July and August 2018.
It has already been noted in press that the proposed registration and licensing regime has not been favoured by the industry. Having reviewed the draft VFA Rulebook, we see that the primary reason for that is complexity and overregulation as MFSA intends to approach blockchain industry players in almost the same way as investment firms are regulated by MiFi Act (implements MiFID II in Malta).
The link to all all three chapters of the proposed VFA Rulebook as well as the VFA Act itself can be found here.
The latest consultation paper was issued on 31 August 2018 with other two adopted earlier in July and August 2018.
It has already been noted in press that the proposed registration and licensing regime has not been favoured by the industry. Having reviewed the draft VFA Rulebook, we see that the primary reason for that is complexity and overregulation as MFSA intends to approach blockchain industry players in almost the same way as investment firms are regulated by MiFi Act (implements MiFID II in Malta).
The link to all all three chapters of the proposed VFA Rulebook as well as the VFA Act itself can be found here.
Malta does its best to become the «Blockchain Island». Step by step with a very good speed Malta is producing various consultation papers and law drafts, including consultation document on a proposed regulatory framework for collective investment schemes and investment in cryptocurrencies released in October 2017, discussion paper on initial coin offerings, virtual currencies and related service providers issued by the MFSA in November 2017, etc.
In June 2018, the Maltese Parliament approved Malta Digital Innovation Authority Act, Innovative Technology Arrangements and Services Act and Virtual Financial Assets Act unanimously. These acts are not yet in force though, awaiting publication by the regulator.
In June 2018, the Maltese Parliament approved Malta Digital Innovation Authority Act, Innovative Technology Arrangements and Services Act and Virtual Financial Assets Act unanimously. These acts are not yet in force though, awaiting publication by the regulator.
South Korea is in talks to re-open the opportunity to ICO in the country
Despite the express prohibition of initial coin offerings (ICO), the South Korea remains one of the largest jurisdictions by volume of investments into crypto economy. In order to prevent large outflows of capital from the country, it has been recently proposed to reconsider the existing approach toward crypto and ICOs. While some political forces suggested to create an ICO hub in the province of Jeju, others believe that the best solution would be to start regulating the industry. Situation may change by the end of the year.
Legal Review
Crypto and Blockchain Multi-Jurisdictional Analysis — Part 1: Overview of Regulatory Regime in Singapore.
Singapore is widely viewed as fintech hub that strategically aims at becoming Smart Financial Centre and the first Smart Nation. Singapore is the 3rd largest ICO market in the world.
The Monetary Authority of Singapore (MAS) supervises the conduct of business in relation to various finance activities. MAS also supports the development of fintech ecosystem by various initiatives such as: Fintech and Innovation Group (FTIG) (responsible for formulating regulatory policies), Financial Sector Technology and Innovation Scheme (FSTI) and others.
Singapore is the early advocate of blockchain technology and crypto. In October 2017, Deputy Prime Minister stressed that «MAS does not and cannot regulate all products that people put their money in thinking that they will appreciate in value». It means that Singapore will let the crypto market grow with minimal intervention, provided that the market does not qualify as regulated market and, hence, falls under existing financial markets and securities regulations.
There is no specific regulation or guidelines in relation to use of distributed ledger technology in Singapore so far. MAS does not regulate virtual currencies per se, it regulates activities involving the use of virtual currencies that fall under MAS’s regulatory ambit.
The Monetary Authority of Singapore (MAS) supervises the conduct of business in relation to various finance activities. MAS also supports the development of fintech ecosystem by various initiatives such as: Fintech and Innovation Group (FTIG) (responsible for formulating regulatory policies), Financial Sector Technology and Innovation Scheme (FSTI) and others.
Singapore is the early advocate of blockchain technology and crypto. In October 2017, Deputy Prime Minister stressed that «MAS does not and cannot regulate all products that people put their money in thinking that they will appreciate in value». It means that Singapore will let the crypto market grow with minimal intervention, provided that the market does not qualify as regulated market and, hence, falls under existing financial markets and securities regulations.
There is no specific regulation or guidelines in relation to use of distributed ledger technology in Singapore so far. MAS does not regulate virtual currencies per se, it regulates activities involving the use of virtual currencies that fall under MAS’s regulatory ambit.
Crowdfunding and ICOs
There is also no specific regulation applicable to crowdfunding. Fundraising from the public through equity-based crowdfunding is regulated by the MAS under the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA). Therefore, such activity might constitute a regulated activity that requires a licence, but much will depend on the precise business model. The SFA and the FAA contain extraterritorial rules of licensing provisions and can be applied to entities which carry out their activity wholly outside Singapore (or partially in and partially outside Singapore) if such activities would have substantial or reasonably foreseeable effect in Singapore.
In August 2017, MAS issued a statement confirming that offer or issue of digital tokens in Singapore will be regulated by MAS, if the digital tokens fall within the definition of «securities» regulated under the security laws.
In November 2017, MAS issued the Guide on Digital Token Offerings (the Guide). In the Guide MAS reinforce its position that offers or issues of digital tokens may be regulated by MAS if digital tokens are capital markets products under the SFA. In the Guide MAS observed that one or more of the following types of intermediaries typically facilitate digital tokens offers or issues of digital tokens:
In November 2017, MAS issued the Guide on Digital Token Offerings (the Guide). In the Guide MAS reinforce its position that offers or issues of digital tokens may be regulated by MAS if digital tokens are capital markets products under the SFA. In the Guide MAS observed that one or more of the following types of intermediaries typically facilitate digital tokens offers or issues of digital tokens:
- a person who operates a platform on which one or more offerors of digital tokens may make primary offers or issues of digital tokens («primary platform»);
- a person who provides financial advice in respect of any digital tokens;
- a person who operates a platform at which digital tokens are traded («trading platform»).
A person who operates a primary platform in Singapore in relation to digital tokens which constitute any type of capital markets products must hold a capital markets services licence for that regulated activity, unless otherwise exempted.
A person who provides any financial advice in Singapore in respect of any digital token that is an investment product, must be authorised to do so in respect of that type of financial advisory service by a financial adviser’s licence, or be an exempt financial adviser.
A company which establishes or operates a trading platform in Singapore in relation to digital tokens which constitute securities or futures contracts is subject to approval by MAS as an approved exchange (AE) or recognised by MAS as a recognised market operator (RMO) under the SFA. In May 2018, MAS issued Consultation Paper «Review of the Recognized Market Operator Regime», where MAS has recognized the emergence of new business models in trading platforms, including trading facilities that make use of blockchain technology, or platforms that allow peer-to-peer trading without the involvement of intermediaries and confirm its reviewing the regulatory framework for market operators to ensure that it continues to meet the demands of the changing landscape. To this end, MAS is proposing to expand the current RMO regime from a single tier to three separate tiers that would better match regulatory requirements to the risks posed by different types of market operators.
A person who provides any financial advice in Singapore in respect of any digital token that is an investment product, must be authorised to do so in respect of that type of financial advisory service by a financial adviser’s licence, or be an exempt financial adviser.
A company which establishes or operates a trading platform in Singapore in relation to digital tokens which constitute securities or futures contracts is subject to approval by MAS as an approved exchange (AE) or recognised by MAS as a recognised market operator (RMO) under the SFA. In May 2018, MAS issued Consultation Paper «Review of the Recognized Market Operator Regime», where MAS has recognized the emergence of new business models in trading platforms, including trading facilities that make use of blockchain technology, or platforms that allow peer-to-peer trading without the involvement of intermediaries and confirm its reviewing the regulatory framework for market operators to ensure that it continues to meet the demands of the changing landscape. To this end, MAS is proposing to expand the current RMO regime from a single tier to three separate tiers that would better match regulatory requirements to the risks posed by different types of market operators.
Fintech regulatory sandbox
In November 2016, MAS published guidelines on the regulatory sandbox (which is designed to include crypto business). Any firm that is looking to apply technology in an innovative way or to provide new financial services that are or are likely to be regulated by MAS can apply for the regulatory sandbox.
Fintech businesses may enjoy, if they qualify, sandbox regime such as relaxation of specific legal and regulatory requirements under control of the MAS. The period of time is limited and usually does not exceed three months. MAS expects that interested firms would have done their due diligence, such as testing the proposed financial service in a laboratory environment and knowing the legal and regulatory requirements for deploying the proposed financial service, prior to submitting an application. There are no administrate charges for submitting a sandbox application. However, in practice MAS charges fees. At the end of the sandbox period, the legal and regulatory requirements relaxed by MAS will expire, and the sandbox entity must exit from the sandbox. In the event that the sandbox entity requires an extension of the sandbox period, the sandbox entity should apply to MAS at least 1 month before the expiration of the sandbox period and provide reasons to support the application for extension. MAS will review the application and approval will be granted on a case-by-case basis. MAS’ decision on the application for extension is final.
Proposed crypto-specific regulation
In November 2017, MAS issued a consultation paper proposing the Payment Services Bill (the Bill). The Bill will expand the scope of regulated payment activities to include virtual currency services. Companies carrying out virtual currency services including buying or selling virtual currency would be required to be licensed.
Virtual currency is defined as any digital representation of value that is not denominated in any fiat currency and is accepted by the public as a medium of exchange, to pay for goods or services, or discharge a debt. MAS will introduce AML/CFT requirements to be imposed on virtual currency intermediaries that deal in or facilitate the exchange of virtual currencies for real currencies:
(i) dealing in virtual currency, which is the buying or selling virtual currency. This involves the exchange of virtual currency for fiat currency (e.g. Bitcoin for USD, or USD for Ether) or another virtual currency (e.g. Bitcoin for Ether); and
(ii) facilitating the exchange of virtual currency. This involves establishing or operating a virtual currency exchange where participants of the exchange may use such a platform to exchange or trade virtual currency.
(i) dealing in virtual currency, which is the buying or selling virtual currency. This involves the exchange of virtual currency for fiat currency (e.g. Bitcoin for USD, or USD for Ether) or another virtual currency (e.g. Bitcoin for Ether); and
(ii) facilitating the exchange of virtual currency. This involves establishing or operating a virtual currency exchange where participants of the exchange may use such a platform to exchange or trade virtual currency.
The virtual currency service provider must process funds or virtual currency. The Bill proposes to introduce the licencing framework for the payment service licence holders engaged in funds or virtual currency processing activity provided that operations model envisioned the acceptance of funds or virtual currency into possession. Thus, business model of every virtual currency service provider will need to be analyzed on case-by-case basis to determine to which extent these requirements would be applicable to such virtual currency service provider. The Bill has not been proposed to Singapore lawmaker yet and it may take time until it is finally introduced.