ICO and law: How is the issue of tokens regulated


ICO and law

ICOs, or initial token offers, have become insanely popular, and in parallel, the cryptocurrency community continues to argue about the need to regulate crowdfunding campaigns for the safety of investors. One thing is certain – ICOs have turned from exotic into the usual way of attracting financing for new projects, and they cannot be ignored.

 Big money – big losses

There are already many examples of successful ICOs. The first was the Mastercoin project (now called Omni), which raised $ 5 million in 2013. The most famous was Vitalik Buterin’s Ethereum – he raised $ 18 million, but then, thanks to the growth in cryptocurrency rates, the funds raised increased several times (now Ethereum’s capitalization is more than $ 50 billion).

There are sad examples, these are primarily DAO and Tezos. DAO could be the first decentralized venture capital fund, and $ 150 million was raised for this idea. The fund began to work, but it turned out that the technical side was not thought out enough, and the hacker managed to steal about $ 60 million.

As part of the Tezos project, which in July 2017 raised more than $ 400 million during the ICO, it was planned to create a blockchain for smart contracts, but for a long time it has stood still due to internal disputes.

Today, regulators in many countries around the world are working to create a single set of laws for crowdfunding and ICO procedures, including the responsibility of developers in case of failure.

How do they regulate ICOs in different countries


The United States is the forerunner of regulation in this area. In 2012, the JOBS law appeared, which allowed American companies at the initial stage of development to attract investments according to a simplified scheme – now any US citizen could participate in the crowdfunding campaign. For its part, the young company must publish information about the founders, the financial condition of the project, a detailed business plan, etc., and after the ICO, report on the costs to both investors and the Securities and Exchange Commission (SEC).

However, the number of defrauded investors began to grow exponentially, and in the summer of 2017, the United States tightened control over the ICO and announced that this procedure was equivalent to an IPO, i.e. the initial public offering of traditional shares. ICOs are now subject to federal securities laws, and the SEC is responsible for regulating them. These federal laws apply to those who want to sell securities, whether it is a traditional or decentralized company, and whether it sells them for dollars or for cryptocurrency.

China and South Korea

China was the first country to outlaw ICOs – in September 2017, the Chinese authorities demanded that ongoing ICO projects be completed and the funds returned to investors.

The ban was associated with more frequent cases of fraud and financial pyramids, moreover, crypto exchanges were banned. Following China, the Financial Services Commission of South Korea (FSC) in September 2017 banned all ICO projects, highlighting the risks of fraud associated with them, and promised to apply strict sanctions to any company or person issuing a new cryptocurrency.

In addition, the FSC claims that existing cryptocurrency trading should be strictly regulated. However, at present, the authorities are actively discussing the lifting of the ban on ICOs – officials are beginning to understand that blockchain startups have great potential to attract foreign direct investment into the country.


Singapore actively supports blockchain projects that raise funds through the ICO mechanism. In the summer of 2017, the Singapore Monetary Authority (MAS) announced that issued tokens would be equated with securities. In addition, the MAS has published a manual indicating which laws are subject to this procedure.

A security token (for example, stocks, debt instruments and shares in a collective investment fund) must be regulated by the MAS in accordance with the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA). At the same time, if the value of issued tokens is less than $ 3.75 million, project registration is not required.

 Europe: UK, Germany, France

In September 2017, the British Financial Supervisory Authority (FCA) began a discussion on the regulation of ICOs, noting that most issued tokens fit into the existing legal framework. In addition, the FCA warned of the possible risks associated with investing and conducting an ICO, advising everyone to read the materials that describe the pros and cons of distributed registry technology and its compliance with current legal standards.

However, regulators are sure that cryptocurrencies do not directly threaten the country’s financial system. In November 2017, the German Federal Financial Supervisory Authority (BaFin) commented on the risks associated with ICOs, warning potential investors that they could lose their money. On the other hand, BaFin does not offer to tighten control over the ICO and promises to issue a guide for investors.

In October 2017, the French Financial Supervisory Authority (AMF) published a document describing the ICO and associated risks. In addition, it conducted a legal analysis explaining both the current situation and three possible scenarios for the development of regulation.


The Japan Financial Services Agency (FSA) issued an official statement that ICOs in Japan may be regulated by several applicable laws – depending on the structure of the ICOs, it may be subject to the payment service requirements law or the regulation of financial instruments and exchanges.

FSA later published a guide to selling ICO tokens to Japanese citizens. According to this document, some ICOs may be subject to the rules for inter-fund transactions, for example, when the sale of tokens can lead to profit in the form of cryptocurrency.


Currently, the ICO market in Russia is not legally regulated, but the government is taking steps to solve this problem – as follows from official statements, the law defining the ICO procedure will enter into force on July 1, 2018, after which the ICO organizers will have to publish information about the beneficiaries And their location, as well as the rights of token holders.

Users who do not have the status of a qualified investor will be able to invest no more than 50 thousand rubles during one ICO, but the document does not impose any restrictions on the amounts that can be attracted through this mechanism.


As we already know, in some countries an ICO is equated with an IPO, in some it is considered a form of crowdfunding, while still others have not developed appropriate legislation.

But can we say that an ICO is the same as an IPO? Yes, these procedures are similar, but they are also significantly different, and you should not equate them to each other.

An IPO is a method of financing when the issuer’s securities are first available for purchase. A company can begin this procedure only if it has a finished product, and if its activities comply with all the requirements established by the regulator. In this case, the investor has the opportunity to understand the company’s business, evaluate its previous successes and assess the growth potential, taking into account real economic indicators.

ICO is a way of raising funds for the development of a project, with the first product being released is a token. During the ICO, investors receive tokens in exchange for their funds, and then you can sell them on the exchange or get some other advantages with them, including income. Most often, developers do not offer a finished product during the ICO, but raise funds for its creation and development. Thus, ICO and IPO are very different – both in purpose and in device.

There is another important difference: in the framework of the IPO, the founders create a company and sell its shares to investors, who can then receive dividends. In the case of an ICO, investors do not receive shares in the company, they only receive a token, which can become cheaper or more expensive depending on the success of the project. As part of an IPO, investors invest in a real working business, and in the case of an ICO, they are more likely to fund a certain idea.


As long as there are no international rules for regulating ICOs, this mechanism cannot be compared with IPOs, since there is no common understanding of what it is. Nevertheless, it is obvious that a new mechanism is being formed, which costs the business much cheaper than an IPO and gives the opportunity to participate not only to large corporations, but to ordinary people. In addition, the token that the investor receives may be more functional than the stock. Thus, ICO is a new tool that can become an alternative to IPO, but is not its equivalent.

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