Global Regulatory Update for Cryptocurrency and Initial Coin Offerings

By David Sofge, Alejandro Landa Thierry, Jose Zapata, Jennifer Connors, Josias Dewey, Rebecca Leon
Holland & Knight LLP

May 8, 2018

HIGHLIGHTS:

The rapid proliferation of technological advancements in global financial markets has caused regulators in several countries to increase their scrutiny of investments in, and implications of, cryptocurrencies.
This client alert provides selected examples of countries that have recently 1) addressed the regulation of ICOs, 2) warned investors of certain risks related to ICOs, or 3) announced new laws providing for the regulation of cryptocurrency.

The rapid proliferation of technological advancements in global financial markets has caused regulators in several countries to increase their scrutiny of investments in, and implications of, cryptocurrencies. Regulatory responses vary, with focus ranging from the potential destabilizing effect of decentralized currencies, to the dangers posed by unregulated initial coin offerings (ICOs). Many regulators are still grappling with the vast number of issues raised by cryptocurrencies and not all countries have developed guidance or a framework for ICOs, but many have issued advisories for potential entrepreneurs or investors.

This client alert provides selected examples of countries that have recently 1) addressed the regulation of ICOs, 2) warned investors of certain risks related to ICOs, or 3) announced new laws providing for the regulation of cryptocurrency.

North America

United States: As previously indicated in a recent client alert, several U.S. regulators have increased their focus on both cryptocurrency and ICOs. (See Holland & Knight alerts, "Understanding the Regulatory Concerns of Cryptocurrency Exchange Registration," April 30, 2018.) Notably, recent statements by the U.S. Securities and Exchange Commission (SEC) express their view that such offerings implicate federal securities laws. Recent events have highlighted this position, with the SEC taking active enforcement measures to halt fraudulent unregistered ICOs.
Canada: In March 2018, the Ontario Securities Commission (OSC) published its Statement of Priorities, which includes the identification of "regulatory gaps arising from cryptocurrency, initial coin and similar offerings." The Statement of Priorities also indicated that the OSC plans on publishing more detailed guidance in the future.

Asia

Singapore: In February 2018, the Monetary Authority of Singapore (MAS) issued a statementdiscussing the recent ban of cryptocurrency in China and detailing the risks of investing in cryptocurrency and ICOs. Among these risks, the MAS cited money laundering and the potential for investors to lose their money in such investments. In response, MAS pledged to vigilantly monitor cryptocurrency and ICO transactions, and refer any violations to enforcement agencies.
Hong Kong: The Securities and Futures Commission (SFC) published an alert to investors in February 2018 detailing recent enforcement actions and other important issues relating to ICOs. In the alert, the SFC indicated that it sent letters to cryptocurrency exchanges and issuers in Hong Kong, or with connections to Hong Kong, warning them that they should not trade cryptocurrencies which are "securities" without a license and indicated that it will continue to police ICOs. More recently, the SFC urged public caution regarding ICOs, indicating that many such offerings were frauds.
Japan: In March 2016, the Japanese government proposed a series of bills recognizing cryptocurrencies as legal tender, in turn causing exchanges and cryptocurrency trading to flourish within the country. As the ecosystem has developed, a self-regulatory body has been formed and a government-backed research group has put forth rules to define and regulate ICOs.

Europe

United Kingdom: The U.K. position has been that evaluation of ICOs must be done on a case-by-case basis, although it has made clear that ICOs have significant risk factors. Most recently, the Financial Conduct Authority (FCA) published a statement regarding cryptocurrency derivatives, requiring firms offering such products to be authorized by the FCA.
Malta: In a bold move to attract cryptocurrency pioneers, Malta's Financial Services Authority (MFSA) is drafting a comprehensive framework covering cryptocurrency exchanges. The rules will cover how brokerages, exchanges, asset managers and traders operate, providing legal certainty to market participants. Moreover, in a consultation paper published in April 2018, the MFSA set out a proposed financial instrument test that would determine when ICOs are securities.
Switzerland: The Swiss Financial Market Supervisory Authority (FINMA) published guidelines indicating that it will regulate some ICOs and distinguishing among types of tokens, including payment tokens, utility tokens, asset tokens and hybrids.

Latin America and the Caribbean

Ecuador: In an attempt to control the proliferation of cryptocurrency transactions, in 2014, the Ecuadorian government backed and launched its own cryptocurrency, dinero electronico, which failed to gain any widespread adoption. Today, competing cryptocurrencies continue to be used throughout the country although the Central Bank of Ecuador has indicated to the public that "bitcoin is not a legal currency and is not authorized as a means of payment of goods and services [in Ecuador]."
Chile: Crypto-trading services at Buda, CryptoMKT and OrionX exchanges in Chile were haltedin April 2018 after 10 Chilean banks abruptly cut off banking to the firms. A Chilean anti-monopoly court has ordered Chilean banks Estado de Chile and Itau Corpbanco to restore account services to the Buda cryptocurrency exchange, at least until a lawsuit brought against the banks by Buda is resolved in court.
Colombia: In December 2017, the Central Bank in Colombia, in accordance with the Financial Superintendency of Colombia, issued an opinion providing that nocryptocurrency has been recognized as a currency in Colombia and that no financial or stock market entity that acts as an exchange market intermediary in Colombia has been authorized to issue or sell cryptocurrencies. The opinion further provided that entities under the surveillance of the Financial Superintendency are not authorized to guard, invest, intermediate or operate platforms that carry out operations with cryptocurrencies, and must continue to apply adequate and sufficient measures in order to prevent anti-money laundering (AML) violations. This published opinion closely followed statements by the Superintendency of Corporations in Colombia, which also warned investors about the risks of investing in cryptocurrency schemes.
Mexico: In March 2018, Mexico adopted its law to regulate the financial technology institutions (FinTech Law). The FinTech Law regulates the organization, operation, functioning and authorization of companies that offer alternative means of access to finance and investment, the issuance and management of electronic payment funds and the exchange of cryptocurrency. However, the FinTech law does not provide specific regulation for ICOs.
Cayman Islands: In April 2018, the Cayman Islands Monetary Authority (CIMA) issued an advisory warningon the potential risks of ICOs and all forms of virtual currency. The advisory warned investors to thoroughly research virtual currencies, digital coins, tokens and the issuing entities. This advisory cited several "red flags" such as claims of endorsement by CIMA, limited information surrounding the ICO and aggressive marketing tactics.
Curaçao and Dutch St. Maarten: While the Central Bank has issued a noticewarning investors about the lack of regulation of cryptocurrencies, nevertheless, such ventures continue to gain traction. In December 2017, Curacao officially licensed a casino to operate based on the Ethereum protocol. In February 2018, the first cryptocurrency investment fund was approved for listing on the Dutch Caribbean Securities Exchange.