EU-Backed ICO Regulation may Come Soon
The approval of a draft proposal for a regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business could see Initial Coin Offerings (ICOs) given a new lease of life across Europe.
ICOs have been doing well in parts of the EU especially in countries like Switzerland and Gilbraltar. Nevertheless, if approved, the proposal put forward by a Member of the European Parliament (MEP) representing the United Kingdom, Ashley Fox, will allow for “a competitive Union framework”as it will permit crowdfunding service providers to raise capital through their platforms using certain cryptocurrencies.
About 40% of ICOs ever conducted globally are based within the European Union, an analysis by venture capital firm Atomico showed at the end of 2017. Most of them were carried out with little or no oversight by any recognized authority. Some turned out bad as a result. The spate of reported cases of fraud and other irregularities through this blockchain-backed crowdfunding mechanism caused several initiatives such as ICO Charter to be suggested by industry insiders with the aim to achieve self-regulation.
Considering the risks to investors as associated with ICOs despite offering innovative ways of funding, the new regulation proposed by Mr. Fox will provide crowdfunding service providers that wish to offer an ICO through their platform with specific additional requirements to comply with. These, however, do not cover private placements, ICOs raising in excess of EUR8 mln or ICOs that do not use a counterparty do not fall within the scope of the specified requirements.
There is the European passport for crowdfunding service providers. Also, in its 2017 report on ‘FinTech: the influence of technology on the future of the financial sector’, the EU Parliament recognised the need for alternative lending and investment channels, such as crowdfunding, to increase access to capital, in particular for SMEs and microenterprises. However, Fox, the Rapporteur believes there is a need to improve the proposal by introducing some changes. One of such is the expansion of ICOs scope.
He describes it as an opportunity to provide regulation for ICOs. The proposal states:
“At present initial coin offerings are operating in an unregulated space and consumers are at risk from fraudulent activity taking place in this market. This Regulation gives the opportunity to ICOs that want to prove their legitimacy to comply with the requirements of this regulation. Whilst this regulation may not provide the solution for regulating the ICO market, it takes a much-needed step towards imposing standards and protections in place for what is an excellent funding stream for tech start-ups.”
ICO regulation welcome
Atomico stated in its prediction for 2018 that startup founders will realise that they can gain an advantage through regulatory compliance. If the draft proposal gets approved, and founders see the regulation as a potential source of competitive advantage, then the projection for European non-tech corporates putting some of their combined $1.5 trillion cash holdings to work wouldn’t be far. There will also be a push to European tech startups’expansion drives. On a global scale, the approval of this regulation for EU countries will also be a pacesetter for several regions to follow including in parts of Asia where ICOs have been banned or suspended in parts due to a lack of regulation.