The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published two complementary assessments of the regulatory coverage of crypto-assets under existing EU legislation and also set out their advice to the European Commission on potential policy initiatives in the future.Read More
The Securities and Markets Stakeholder Group (SMSG) of the European Securities and Markets Authority (ESMA) has published a report on initial coin offerings (ICOs) and crypto assets. The goal of the report is to give advice to ESMA on steps it can take to contain the risks of ICOs and crypto assets (on top of existing regulation). The report mainly focuses on risks for investors as the SMSG states that there are no obvious market stability risks yet in this respect.
The first part of the report defines relevant concepts including crypto asset, virtual currency, cryptocurrency, token and ICO. There is taxonomy of crypto assets including payment tokens, utility tokens, asset tokens and hyrbids. The report also includes an overview of recent ICOs and of existing regulations of crypto assets, ICOs and sandboxes in 36 jurisdictions, including the European Union member states and Switzerland. The SMSG gives specific recommendations to ESMA on potential regulatory changes.
In recent months, there has been a noticeable shift by token issuers away from initial coin offerings (ICOs) towards security token offerings (STOs) largely driven in part to a recent bottoming out of the retail market (including Bitcoin and Ethereum) and softening demand from retail investors for ICOs.
This trend appears to have resulted from retail investors having come to realize the inherent limitations that ICOs possess, namely the fact that tokens issued in connection with an ICO generally only have “utility” and not much inherent value. Additionally, we are now also starting to see more interest from sophisticated and/or accredited investors and funds, who also tend to prefer “security” tokens instead of “utility tokens” when looking to make an investment, due to the inherent value that the former possess.
By Anthony R.G. Nolan and Russell E. Deutsch
Recently, Commissioner Brian Quintenz of the US Commodity Futures Trading Commission (CFTC) commented that smart contracts that have the defining features of a swap, future or option are subject to CFTC regulation. The Commissioner posited the hypothetical that, after appropriate analysis, the CFTC has concluded that a particular smart contract, e.g., a binary option executed on a blockchain, is within its jurisdiction. He queried: If that contract is executed in violation of CFTC regulations, then against whom should the CFTC bring enforcement action?
By Dan S. Cohen
The Securities and Exchange Commission (“SEC” or “Commission”) is ramping up its enforcement efforts in the digital asset industry, expanding its focus to include digital asset brokers and investment companies. On September 11, the Commission issued an order against a digital asset hedge fund and announced a settlement with a self-described “ICO superstore” for violating federal securities laws. The Commission fined Crypto Asset Management LP and its principal for failing to register as an investment company, among other things. According to the SEC, Crypto Asset Management, which trades digital assets exclusively, is an investment company pursuant to the Investment Company Act because it “invest[s], reinvest[s], own[s], hold[s] or trad[es] in securities.”
In a statement issued today, the Australian Securities and Investments Commission (ASIC) revealed that it has prevented five Initial Coin Offerings (ICOs) from raising capital and will be taking further action in respect of one completed ICO. The ICOs have been put on hold and some will be restructured to comply with relevant laws and regulations. ASIC has also issued a final stop order in respect of a Product Disclosure Statement (PDS) issued by Investors Exchange Limited for units in the New Dawn Fund, which proposed to invest in a range of cryptocurrency assets.
On 16 September 2018, the UAE Securities and Commodities Authority’s (SCA) chairman Sultan bin Saeed Al Mansouri announced that the SCA would regulate initial coin offerings (ICOs) and recognise them as securities, as well as introduce controls for trading digital tokens. The statement reads: “In light of the rapid development of the digital tokens market and the response thereto by the regulators in a number of countries worldwide towards regulating the initial coin offerings, the SCA Board of Directors has approved the SCA plan to regulate the ICOs and recognise them as securities”.
One year ago today, the U.S. Securities and Exchange Commission (“SEC”) published the “DAO Report” which concluded that certain tokens issued in an initial coin offering (“ICO”) were securities under the Supreme Court decision SEC v. W.J. Howey Co. The Report stated that whether an ICO is a security offering will depend on the facts and circumstances, including the economic realities of the transaction. Confusion, private lawsuits, SEC enforcement actions, and even criminal prosecutions ensued, but three courts are about to provide clarity.
In the past year, the U.S Securities Exchange Commission (“SEC”) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (“ICO”) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is a security.”
However, on June 14, 2018, William Hinman, the SEC’s Director of the Division of Corporation Finance, stated that, putting aside the fundraising that accompanied the creation of Ether, “current offers and sales of Ether are not securities transactions.” This statement was based on a novel theory of evolving decentralization that may very well have significant ramifications for cryptocurrency and ICO markets.
Please see our latest K&L Gates HUB article for a discussion about the context and implications for Director Hinman’s conclusions surrounding Ether. It also analyses the specific factors he suggests weighing in determining whether a given digital asset is a security.
On 1 May 2018, the Australian Securities and Investments Commission (ASIC) released its revised Information Sheet 225 which provides an updated guidance on initial coin offerings (ICOs). The updated report expands its scope to include guidance dealing with other crypto-currency and digital token (Crypto-Asset) businesses.