As Initial Coin Offerings (ICOs) only emerged fairly recently, their entire regulation is one grey area. Despite this uncertainty however, entrepreneurs and companies still jumped onboard, and per Forbes, over $8.8 billion has been invested in these ICOs since the start of 2016. And mind you, these aren’t just small crowd funded projects, these are big ones, with Telegram getting over $1.7 billion. In fact, the three largest IPOs back in January raised a collective amount of $5 billion.
However, with this new form of fundraising comes a new elephant in the room, and this time, it deals with its regulation. Currently, the United States Securities and Exchange Commission (SEC) is in charge of regulating U.S.’s financial market. As such, they are automatically given jurisdiction over ICOs when they’re sold as investment products in the country. Traditionally, the SEC uses the Howey Test to determine if an ICO is a tradable security or not, although this led to an even bigger grey area, especially outside of the country, like Canada, for instance.
As a result, the free ride for ICO’s regulation-free market is quickly slowing down, and regulators are now coming to grips that there should be no Wild West for the crypto space. In fact, based on a new report from the C.D. Howe Institute, smart guidelines should be provided to get the right balance between innovation and investor protection.
A new guideline
Through the new report, authors Thorsten Koeppl and Jeremy Kronick propose a fairly simple test that would determine whether an ICO is needed for the success of a business venture. Per the authors, a business venture needs to develop these three things if they want their ICO to be financially efficient and successful:
- A decentralized platform based on blockchain technology
- A coin that gives digital access to the aforementioned platform, as well as serving as
- A means of payment for users that engage in person-to-person exchanges in order to make a transfer value between both parties
If all of these three points are met, then the ICO should be granted a regulatory relief.
According to Koeppl, “Our proposed test can also create guidelines for the right approach to taxation that is consistent with the value that is added by such financing. Tax rules can be based on the dual roles of the coins, which are both an investment stake and a currency.”
Furthermore, the authors also suggested that regulators in Canadian securities should develop specific regulations for ICOs that pass the test they proposed. This includes less onerous disclosure requirements, restriction of investments to smaller amounts, exemptions from securities dealer registration requirements, and an extended timeframe for these exemptions to be granted. In fact, it’s even likely that this simple test can be actually formalized, and be used as the definitive method of deciding whether an ICO can obtain access to Canada’s Securities Administrators Sandbox.