Australian regulators are grappling to control the “Wild West” world of ICOs, a new blockchain-based funding method that is changing the way new tech companies raise money.
ASIC is set to release a guiding statement on Initial Coin Offerings (ICOs) which have seen many consumers fall victim to scams and unprepared companies tap the market, and follows China’s decision to completely outlaw the controversial funding method.
The Australian regulator will take a light-handed approach that falls in line with the US, through an attempt to fit ICOs within existing regulations and to clamp down on scammers.
ICOs have been around for more than three years, but only came to prominence this year, with an estimated $US1.6 billion being raised through the process in the last 12 months.
An ICO is an alternative to a share market IPO, crowdfunding or venture capital funding round for a startup with a blockchain-based platform or project.
A startup looking to undertake an ICO will first produce a “white paper” and then market itself to potential investors, much in the same way as a company undertaking an IPO.
The company then lists on a cryptocurrency network like Ethereum and offers “tokens” that are unique to its company in exchange for money, usually in the form of a digital currency like bitcoin.
The ICO is typically conducted to raise money for a new project, with the tokens put on offer then used to participate in this project.
Similar to a crowdfunding campaign, an ICO is geared towards supporters and early adopters looking to buy a company’s tokens in the hope that it will become popular and these will increase in value.
The process in many ways falls between the regulation cracks at the moment – it’s the Wild West of startup capital raising, and one that has raised concerns and scams.
The latest funding craze has hit Australia too, with Western Australian blockchain-based energy trading platform PowerLedger becoming the first local company to undertake an ICO.
The startup raised $17 million in just three days through the pre-sale process of its ICO, which the sale of 90 million discounted tokens along with a further 100 million tokens.
ICOs pose a troubling conundrum for regulators around the world, with the issue centring on whether the “tokens” offered in exchange for money constitute “securities”, and whether the method should be regulated or simply outlawed.
InnovationAus.com understands ASIC is on the verge of releasing a guiding statement on ICOs that would closely follow the approach seen in the US and other jurisdictions.
It is believed that AISC is of the view that many ICO fundraising efforts already fall under existing regulations, with many “tokens” constituting shares under ASIC’s definitions, meaning they should be subject to the same reporting obligations and regulations as an IPO.
ASIC is working with Fintech Australia and other advocates to get things right with ICOs, find a balance between protecting investors while not stunting a new technology.
“We don’t think it’s much of a stretch for some companies, where required, to adjust their white paper to effectively meet offer document requirements,” Fintech Australia CEO Danielle Szetho told InnovationAus.com.
“At the end of the day, it’s important for any company that’s seeking to do an ICO to obtain legal advice, and to work with experienced operators.
“Even if an ICO token may not be considered a security or financial product, the tokens and the company itself will still be subject to other fundamental legal principles and laws in our jurisdiction, such as protections against fraud and Australian consumer law.”
ASIC is looking to get on the front foot and provide clear guidelines for Australian investors and blockchain companies on the issue, and is set to release a guiding statement in the coming weeks.
While ASIC’s approach falls in line with the likes of the US, Canada and Hong Kong, it’s in stark contrast to China, which issued a statement that ICOs were illegal in the country. The move stunned blockchain communities around the world, and saw the price of bitcoin plummet by more than 11 percent.
The People’s Bank of China issued a strong regulatory slapdown of ICOs on Tuesday, warning that any Chinese company that tries to undertake an ICO would be “strictly punished”, while those that have already successfully completed one must provide refunds to investors.
South Korea also looks set to go down a similar path, recently saying it planned to “punish” ICOs.
These snap decisions show how hard this new form of fundraising is for regulators around the world, Ms Szetho said.
Sergei Sergienko, founder of ICOPromo and a world-leader in the space, will be working closely with Fintech Australia and ASIC on the issue.
He said it’s important for industry leaders and companies in the space to be open to working with government to find a solution to avoid them going down the same path as China.
“We as an industry want to work with governments and regulators to create a sustainable solution for this great technology, and we are working hard to try and get the scammers out,” Mr Sergienko told InnovationAus.com.
“Partial or flat-out bans on ICOs are a silly measure aimed at curtailing the technology and pace of innovation, created by someone that does not understand the process and the way the whole ecosystem works.”
Mr Sergienko said that the current level of ICOs is unsustainable, and regulations are needed to stamp out the scammers, and those that simply aren’t ready to raise money.
“People are rightfully beginning to understand that the ICO craze is not sustainable. In some cases, people that move quickly are taking advantage of the investors that have no understanding of the process, but came into the space because of crazy returns and hype,” he said.
“Most founders are not trying to scam the system, but many founders are also not equipped to handle the challenges of the real startup world.”
Australian regulators have already shown a readiness to bring digital currencies under its remit, with ASIC currently working to end the double taxation of bitcoin and the like, which will be backdated for the last financial year.
The federal government also recently made a big move in the area, released draft amendments that would bring digital currencies under the remit of Austrac.
If passed by Parliament, this would mean that digital currency exchange platforms will have the same reporting obligations and face the same regulations as big banks.
It marks the first time digital currencies have been regulated by the government, and something that was welcomed by the local community, with many seeing the new obligations as necessary in exchange for the trust and legitimacy they lend.