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Regulators are suddenly realizing that billions have changed hands as a result of ICOs, and are concerned that small “retail” investors need extra protection
Regulators across the world are waking up to the fact that there is a serious amount of money changing hands during ICOs. The latest to issue a statement about ICOs is the Gibraltar Financial Services Commission (GFSC).
Gibraltar, a British Overseas Territory located south of Spain, is an established international financial centre. Major international finance firms have established a presence there, to benefit from low taxes, access to the EU single market and an established legal system. Casinos and finance firms are the growth engines of Gibraltar. Experts had previously opined that Gibraltar could be a great place to set up Bitcoin-based funds.
With increasing numbers of ICOs, the Gibraltar Financial Services Commission has issued a statement saying that it is putting in place a regulatory framework for companies which use Blockchain (or distributed ledger technology) to store or transfer value. This framework is expected to be in place by January 2018. It has warned investors that ICOs are highly risky and speculative, and investment is best left to professionals who are experienced in assessing that risk.
The SEC in the United States has periodically issued warnings about the risks posed by investing in ICOs. In July 2017, it came out with a clear announcement that ICO tokens may be securities, in which case ICOs would have to follow all the rules and regulations associated with securities offerings.
While it did find that the Ethereum DAO indeed constituted a securities offering, it did not file charges and used this as an opportunity to educate the fledgling industry. China's recent action against ICOs was sudden and abrupt. In September 2017, China banned all ICOs, classifying them as illegal fundraising. China also asked all organizations and individuals to return money raised through ICOs.
The ICO mania exploded in 2017. From around $250Mn raised through ICOs in 2016, the amount of money raised in ICOs in year-to-date has exceeded $1.5 bln (and there are still three months left in 2017). The ICO mania started in the first few months of 2017, when divisions within the Bitcoin community about scaling resulted in investors looking elsewhere. A deluge of money was poured into altcoins, resulting in their valuations reaching stratospheric levels.
This resulted in many companies planning ICOs, issuing tokens to fund their development. Since these tokens tend to jump in price when they get listed on exchanges, investors treated ICOs as speculative vehicles and companies have been able to raise millions of dollars in a matter of minutes.
Before the ICO boom, early stage companies had few options but to turn to venture capitalists (VCs) to raise funds. This resulted in a system of checks and balances, since VCs did their own due diligence about the viability of a company's business model. VC involvement also imposed discipline by limiting the way these companies could use the funds raised. With the advent of ICOs, companies have a quicker and easier option to raise money.
Unfortunately, any company with a whitepaper and a half-baked business model has also been able to raise significant sums through ICOs. Hence regulators have tried to step in before individual investors lose money in fraudulent ICOs. A balance has to be found, where only select investors such as high net worth individuals (the SEC calls them “accredited investors”) can invest in ICOs. Even then, ICOs should be required to meet basic disclosure requirements. Reasonable solutions must be found that don’t strangle the newborn ICO industry, but that don’t allow too much harm to come to individual investors.
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