Legal Challenges of Initial Coin Offerings

Initial Coin Offerings (ICO) is a term intentionally mirroring Initial Public Offerings (IPO). There is an interest from regulators on the American, European and Asian continents around developing ICOs. So we find out, that it has become a venture capital-raising tool for start-ups developing projects and applications on the blockchain.

ICOs are recognized as an alternative way to raise crowdfunds, that have came outside the traditional financial sector and blockchain based financial projects. Some projects manage to collect millions in a very short period of time. Regulators have started to study ICOs, due to the fact, that there is a lack of regulation and risks for investors. Regulators have limited themselves to warning consumers about how dangerous ICOs are and concluded that regular financial law might be applicable on a case by case basis. The position of regulators is, thus, diverging and it is not certain that the solutions found in one jurisdiction can be transposed to another.

There is two major purposes for ICOs: one is that it can be used to put a new virtual currency in circulation, the second is to finance a project. . Depending on these two aims, the regulatory implications of ICOs might differ. As well as being a financing method, an ICO also creates a completely new ecosystem.

Even though there is no such thing as a legal vacuum or a regulation-free zone, as some defenders of cryptocurrencies and ICOs might want to think, two main problems arise when it comes to regulation. It is first necessary to characterize the tokens in order to apply a set of predetermined rules; this is already challenging given the diverging rights attached to tokens and their different uses. A token can be structured as a security, as a loan, as a voucher or simply as a currency. Secondly, once the relevant rules are determined, the conflict of laws and jurisdictions question kicks in. Here again, given the virtuality of cryptocurrencies and the blockchain, problems will arise.

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