Sat, Jun 22, 2024

The official Financial Regulation Journal of SAIFM

The Crypto Valleys: the regulatory battle to become the global hub of ICOs

By Ashlin Perumall, Senior Associate, Baker McKenzie Johannesburg


Zug, the small town in Switzerland with little over 30,000 inhabitants, does not appear the obvious choice for the epicentre of EMEA crypto-investment and ICOs, but this little canton has already attracted attention as a fault line in a much wider battle between several jurisdictions vying to become the global ICO hub.

Referred to as the “Swiss Crypto Valley”, Zug, a town popular for its low tax regime and place of residence for several multinational companies, is fast becoming an example of directed efforts by governments to stake claim to their share of crypto-startup activity.

Switzerland is currently in the midst of the global cryptofinance boom and Swiss-related ICOs are attracting worldwide attention. The Swiss Financial Market Supervisory Authority (FINMA) has already taken a stance to clarify the country’s position towards cryptocurrency. On 29 September 2017, it announced through a press release that it was investigating whether regulatory provisions had been violated in several ICOs. At the same time, it released guidance on the regulatory treatment of ICOs (Guidance 04/2017). It followed up with its ICO Guidelines published on 16 February 2018 (FINMA ICO Guidelines).

ICOs or ‘initial coin offerings’, are already a trending phenomenon in the world of capital raising. Based on the definition used by FINMA, the abbreviation “ICO” is seen as referring to events where a number of investors transfer funds, usually in the form of cryptocurrencies, to an ICO organiser. In return they receive a quantity of blockchain-based tokens, which are created and stored in a decentralised form, either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain.

There is no generally recognised classification of ICOs and the tokens that result from them.

FINMA has therefore based its own categorisation on the underlying economic function of the token and distinguishes the three primary categories: payment tokens, utility tokens, assets tokens and a fourth combination category for “hybrid” tokens. Compliance with Swiss financial market laws must always be ensured for ICOs, based on the applicable categorisation, failing which, an enforcement procedure may be triggered. Additionally, foreign financial market regulations should be considered when conducting an ICO from Switzerland.

Switzerland may be one of the first but is certainly not the only country to take a progressive stance towards the regulation of cryptocurrency. Nearby Liechtenstein, one of the smallest countries in the world, has also taken a friendly approach towards cryptocurrencies with its ‘Blockchain Act’. Also home to favourable tax laws, and consequently more companies than human inhabitants, Liechtenstein owes much of its attractiveness to blockchain companies to the ease of starting one there. In addition, the country’s leading financial institution, Bank Frick, is accepting cryptocurrency directly, doing away with the need for a corporate bank account. The Liechtenstein Financial Market Supervisory Authority has already officially processed over 100 blockchain and cryptocurrency-related enquiries so far.

Gibraltar, another ‘friendly’ jurisdiction has already received over 200 ICO applicants for its Gibraltar Blockchain Exchange (GBX), after it announced last month that it would be treating all ICOs as commercial products.

It appears that even larger financial hubs are jumping on the bandwagon. Bruno Le Maire, the Minister of the Economy and Finance of France has stated that France wants to become “the first major financial centre to propose an ad hoc legislative frame work that will allow companies initiating an ICO to demonstrate their seriousness to potential investors.” Le Maire stated the PACTE, an action plan for the growth of French enterprises, may provide the French securities regulator, the AMF, the ability to approve ICO issuers with a “visa” to sell tokens while publishing a ‘white list’ for investors to know which issuers have received regulatory approval.

However, EMEA certainly has foreign competition. Singapore remains one of the most permissive environments for blockchain businesses and a joint effort between the Monetary Authority of Singapore together with R3, a blockchain technology company, and financial institutions (including Bank of America Merrill Lynch, Citi and Credit Suisse) in a proof of concept project, dubbed ‘Project Ubin’, has reaped numerous benefits in progressing public-private engagement.

In addition to the above, other crypto-friendly countries include Luxembourg, Estonia, Lithuania, Malta and Cayman Islands. Locally, Mauritius, has been engaged with blockchain startup ConsenSys to create a regulatory testing ground, with the intention of promoting the jurisdiction as a so-called ‘Ethereum Island’.

This is in stark contrast with the harsh or confusing regulations of China, South Korea and India, and the guarded approach taken by the USA, and demonstrates a rapidly emerging trend in the approach towards regulation of cryptocurrencies. Whilst some jurisdictions have been wary in their approach, many have seen this as an opportunity to cement roles as go-to hubs for capital raising and as a new way to compete with traditional financial hubs. Notably, amongst these are many smaller countries who have seen regulation, including in the areas of tax and monetary control, as a means to increase their competitiveness against such larger financial hubs. It naturally follows that with almost $8.8 billion globally invested via ICOs since 2016, this serves as a possible new gateway to attract foreign investment by capitalising on the disparity. The other side of the coin is that harsh regulation may push many new and innovative businesses towards friendlier territories and create the potential for perverse structures aimed at avoiding regulation.

South Africa has been open-minded towards regulation with the South African Reserve Bank (SARB) confirming their unregulated status in 2014. However, SARB has been working with blockchain-solutions provider Bankymoon since last year to explore the regulation of blockchain and cryptocurrencies. Many investors in ICOs in friendly jurisdictions see the regulation of ICOs as attractive when even-handed, due to the legitimacy this adds to the industry. The sandbox approach taken with Bankymoon has the stated aim of creating ‘balanced’ regulations. This may allow South Africa, a country with a still recovering foreign investment market, an opportunity to attract investment which would otherwise be cautious of its unpredictable fiat currency and ratings downgrade. Perhaps, even an opportunity to create its own “Cape Crypto Valley”? Only time will tell.

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