In order for ICOs to realize their advantages they need to be subject to as little government regulation as possible. If an ICO’s tokens are regulated as securities like shares, then significant cost, restrictions and friction is introduced for all parties at all levels.
As such it is a goal of most ICO fundraisers to avoid government regulation as much as possible.
ICOs and their tokens have different legal status across different jurisdictions. So far opinions and guidance from financial authorities mostly pertain to ICO fundraisers, not investors. ICOs legal statuses can be split into 3 groups
- Jurisdictions where ICOs are banned (or crypto currencies such as bitcoin are banned).
- Jurisdictions which have offered meaningful guidance and/or opinions on ICOs.
- Jurisdictions which have not offered meaningful guidance or opinions on ICOs.
No financial or legal authorities have issued any guidance, opinions, statements, warnings, or anything specifically related to gambling ICOs.
Jurisdictions where ICOs are banned
ICOs are specifically banned in
We may assume ICOs are banned in jurisdictions where cryptos such as bitcoin are banned, those being
Jurisdictions which have offered guidance or opinions on ICOs
- Australia (details below).
- Hong Kong
- United Arab Emirates
- United States of America (details below).
Generally, the guidance is that not all ICOs will be regulated in the same way. ICOs will be regulated in the same way as existing financial instruments with which they share important characteristics. If an ICO’s token resembles a share, then it will be regulated like a share, if an ICO’s token resembles an in-game currency, then it will be regulated like an in-game currency, and so on.
Generally, consensus is that if the token carries something like ownership rights and/or pays something like dividends then it is a financial instrument that falls under existing financial laws like securities and investment contracts.
If the token does not carry ownership or dividend rights and can be used on the platform as an app-coin, then it most likely does not fall under financial laws. However, if it can be easily exchanged for other things of monetary value, then the token would be regulated in the same way as cryptos like bitcoin.
Even if the token did not fall under laws relating to currencies it may still fall under general law and consumer laws regarding the offering of products or services.
USA Securities and Exchange Commission
Whether the US Securities and Exchange Commission (SEC) regulates an ICO token as a security depends on the “Howey Test”.
The Howey Test is a test created by the Supreme Court to determine whether transactions qualify as investment contracts. If so they are considered securities and subject to cumbersome disclosure, registration and other requirements. Under the Howey Test, a transaction is an investment contract if
- It is an investment of money.
- There is an expectation of profits from the investment.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
“Money” is used in the broadest possible sense of the word.
The SEC’s Initial Coin Offerings Investor Bulletin can be found here. Substantial details and background can be found in “Securities Law Framework for Blockchain Tokens” by Coinbase, Coin Center, Union Square Ventures and Consensys.
Australia Securities and Investment Commission
The Australia Securities and Investment Commission (ASIC) has taken a similar approach to their US counterparts.
The highest regulatory burden is placed on managed investment schemes (MIS) which can be identified along similar lines to the Howey test. ASIC guidelines are notable in that they emphasize that even if an ICO is not a MIS, investment contract, share, et cetera, then there are still other laws that may apply, all the way down to “misleading or deceptive conduct in trade or commerce”.
United Kingdom Financial Conduct Authority
It is predicted that the UK will follow a similar approach to the USA and Australia and those jurisdictions listed in the “Jurisdictions which have offered guidance and/or opinions on ICOs” section.
It is more of a warning to investors than an opinion or guidance for ICO fund-raisers. However, it does emphasize that the structure of an ICO determines its interaction with current UK financial laws. This is the essence of the USA and Australian financial authority’s guidance.