ICO in search of jurisdiction

Some continue to call the ICO a bubble, and their organizers are a bunch of scammers who want to “play some air with the hamsters” and do not predict anything good for the crypto market in 2018, asserting that trust in altcoins will inevitably collapse at times. Others advocate deep libertarian ideas of crypto-anarchism, convincing that this way of attracting investment for technology-based and truly explosive projects will turn the world upside down, since it knows no national, linguistic, or jurisdictional boundaries.

But no matter how anyone relates to the crowdsale phenomenon, it should be recognized that ICO is a unique phenomenon of the modern digital world, a tool for raising funds, according to which future project tokens are sold for current, liquid virtual cryptocurrency values ​​like BTC, LTE or ETH.
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At the same time, the phenomenon is very adventurous and carries many risks of losing its own cryptocoins and currencies. So how to choose the ideal jurisdiction for an ICO and what you should pay attention to investors will talk in this article.

Where is the best? In Russia or abroad?

The mere mention of ICO undoubtedly makes many national financial market regulators start and turn around, because despite some interest in this kind of universal tool for the domestic economy of the country, nobody really knows what to do with it. Some regulators, such as the recently-launched Dubai DFSA (UAE), warn investors about the risks associated with investing coins in the ICO, and even provide tools to verify companies, as well as the ability to subscribe to scam notifications and potentially fraudulent market practices.

And even in Japan, which has introduced cryptocurrencies into a completely legal turnover, the regulator does not allow any arbitrary crowdsale activity, but sets strict, but very transparent rules for its conduct. So the Japanese regulator, represented by the Financial Services Agency (FSA), warns about the risk of high volatility of the cryptocurrency market and about the risk of high potential for fraud. The agency notes that, although start-ups usually provide white paper in which they describe their own projects, the final product may never see the light. Depending on the business model of the project and the pattern of structuring the token, the ICO may be subject to either the requirements of the law on payment services or the law on financial instruments and exchanges.

In the very near future we will undoubtedly see the formation of a special rule-making in this sphere in all countries of the world, based on the standards already recognized by the community, but with some national peculiarities in different jurisdictions.

However, today, crowdsales and the turnover of tokens that do not have any special regulation in most countries (and only sometimes, the non-binding position of the regulator) attract, as we know, the increasing attention of regulators of the world economic giants, including SEC (USA) and FSA (UK), which closely followed today’s new ambitious ICOs, and quite clearly explained that the activities on the market for digital uncertified securities will be tightly regulated, and tokens issued on ICO that do not meet the triple test will be considered valuable securities on a par with stocks in the traditional entry of companies on the stock exchange. With all the ensuing consequences, including possible accusations of violating US law, money laundering and participation in the financing of terrorism (in this part of the US law, it is worth recalling, is of a cross-border nature). And in a fairly short period of time, we saw how the Americans moved from words to deeds, rapidly taking up the crypto-keys and accusing two Russians of fraud: Zaslavsky with the DRC World and Recoin projects and Vinnik with BTC-e.

The Russian authorities have not yet decided on the approach, although they do not hide the desire to regulate the new market. It is already becoming obvious that the best solution for Russia in the current conditions of macroeconomics and Western sanctions would be the “frog jump”, the essence of which is to skip over one technological stage and develop the next one, to which all countries and all participants will sooner or later come. process. In this regard, ICO / ITO is becoming a good modern financial instrument on the market that can seriously shift the economy. Understand this at the highest level of the country's leadership. This was the reason for the announcement by the State Duma of a competition to carry out an expert-analytical study analyzing the cryptocurrency produced on the basis of the blockchain and the use of the ICO tool.

The fact that the State Duma announces a competition for research on ICO regulation is already a good sign that makes us think positively. After all, we all know very well how, over the past 5 years, laws have been passed on the Internet, without any regard for public opinion, industry position and expert opinion. Obviously, the turnover of cryptographic tokens could be banned just as easily and quickly with a sweeping stroke of the pen, as it was recently forbidden to use LinkedIn, Pornhub and anonymizers, and then it would plunge into the underground of the Russian digital economy. But not banned. The bill of the Ministry of Finance, apparently, forever went to the basket. The procurement documentation for the State Duma tender states that the analysis of the latest financial technologies is necessary in order “not to destroy the spread of promising financial technologies under the influence of strict regulation, to avoid the appearance of bubbles on their basis that could compromise them”. This is good news.

But on the other hand, we clearly see another trend. The prosecution authorities uncompromisingly regard bitcoin and other cryptocurrencies as a money surrogate, without any established criteria and legal grounds, blocking sites with any mention of well-known cryptocurrencies. And while some officials are discussing the charms and prospects of decentralized cryptocurrencies, we continue to plead with absurd and absolutely unfounded statements by St. Petersburg prosecutors about the nature of cryptocurrencies as monetary surrogates banned for circulation in Russia, and therefore in Russia continue to block any stock exchanges and crypto exchangers . In the near future, a complaint will be filed to the Supreme Court in the localbitcoins.com case. However, it is becoming increasingly difficult to deal with this. After all, a similar false judgment was recently confirmed once again by a representative of the Prosecutor General’s Office, telling about a common opinion that has developed in the supervisory authority.

Together with the prosecution authorities, the Central Bank continues to stand in a tough position, noting that

“Considering the high risks of circulation and use of cryptocurrencies, the Bank of Russia considers it premature to allow cryptocurrencies, as well as any financial instruments nominated or associated with cryptocurrencies, to be circulated and used in organized trading and clearing infrastructure in the Russian Federation to handle cryptocurrency transactions and derivative financial instruments on them. "

And so, on October 10, the President of Russia suddenly ordered Medvedev and Nabiulina to, among other things, introduce a draft law on regulating public fundraising and cryptocurrency by placing tokens by analogy with regulating the primary placement of securities before July 1, 2018.

Perhaps the era of the “Wild West” in Russia will end very soon. Top-level officials and experts working on a legal approach to regulate cryptocurrency and blockchain promise us to adopt a framework law by 2018. The law, which, we hope, will take into account the new challenges of the digital market and allow Russian and foreign founders to stay in a completely legal and comfortable field, creating new technological projects and healthy Russian economy.

But until then, it is necessary to emphasize that the organization of the sale of own tokens in Russia, as well as in most countries of the world, is not prohibited by law and does not have a special legal regulation.

Some experts currently divide countries into three groups, depending on the vector of legal regulation of cryptocurrencies and the position of the regulator regarding the ICO:

• Bears Group:

USA, Canada, China, UK, Singapore, Hong Kong, South Korea, Malaysia, UK

• Group of bulls:

Australia, Japan, Estonia, Luxembourg, Switzerland, Isle of Man, Cayman Islands, Guernsey, Jersey, Vanuatu, Gibraltar

• Penguin group:

EU, Russia, New Zealand, India, Ukraine, United Arab Emirates

Bears have already begun to create rules of the game and, at the level of regulators, to adopt standards related to the activities of the ICO, prohibiting arbitrary work of projects aimed at attracting cryptoinvestment. Bulls open the doors wide for new projects, but the penguins are still silent and are determined by which approach to choose to regulate the new digital reality. Of course, this list should be considered conditional, since, for example, in the USA, despite the position of the Federal Securities Commission, the cryptocurrency market is also developing, and crowdsales of new tokens regularly occur in the country. At the same time, in Switzerland, the ICO is warmly received, but not everyone is allowed to declare their own crowdsale.

So where is she, safe jurisdiction?

Today, there are places on the world map that are included in any WP disclaimer, if the token is defined as security — it is the United States, Canada, China, Singapore and sometimes UK. In cases with these countries, founders reasonably prefer to stay away from national regulators.

With other jurisdictions of the world, including European and Middle Eastern offshore countries, everything is in order, with the exception of some cases of refusal (due to sanctions) in opening company’s settlement accounts if the beneficiaries or directors are Russian citizens. This becomes a problem when exchanging a crypt for a fiat. In general, the risks of being attracted for violations of securities laws when conducting an ICO in them are extremely low. And the choice of jurisdiction depends more on the corporate and tax optimization of the group of companies involved in tokensail.

However, it should be understood that the jurisdiction of the company is much more important, but the determination of the legal structure of the token using various contractual configurations of traditional civil law to frame digital projects into the legal plane of the company's country of residence. As a rule, this is done by concluding a click-wrap agreement with the participants in the crowdsale in the form of a public offer (Terms of condition), which defines the legal nature of the token giving the final buyer rights to services, goods, discounts or income in the form of digital assets and all essential conditions in the relations of the parties.

Participation in the crowdsale and the acquisition of a digital product in the form of tokens is in no way prohibited in the overwhelming number of countries, either for businesses or individuals, but in these civil-legal relations with the seller, undoubtedly, investors, who are a weaker party to the contract, find themselves in a rather unprotected positions, since transferring their own bitcoins and ethers, practically do not receive any legal protection in case of violation by the organizer of the ICO / ITO of their obligations. And in these respects, the investor may not hope for protection under the 1985 Seoul Convention approving the Multilateral Investment Guarantee Agency (Seoul, October 11, 1985) or the Investor Protection Convention (Moscow, March 28, 1997), because they do not cover risks of cryptoactive assets loss.

The huge amount of scam that is increasingly being detected from past (or current today) crowdsales makes us wary of new projects and is able to bring down the whole cryptoeconomy. At the same time, in many cases, the jurisdiction of the dispute and the applicable law are not specified by the organizers of the crowdsale.

And how then to distinguish good ICO from bad?

It is worth noting that, despite the absence of mandatory legal requirements in individual national legal systems, in self-regulation, the community has independently created some generally accepted standards for organizing and conducting crowdsails, which are updated from year to year.

From the point of view of investors (especially non-professional), the jurisdiction and management structure of the organizing company is not as important as the actual assessment of the viability of the project. Today, investors want to see not just a landing page with concise “white papers” and a “road map” blurred in time, but also:

• product, at least in the alpha version;

• legally binding documents;

• technical audit of the code and guarantees of reliability of the server protection system;

• expert financial and economic opinion;

• expert legal opinion;

• an escrow agent guaranteeing that coins will return if ICO / ITO does not collect the required amount, as well as the phased payment of funds to the organizer as updates are made

At the same time, positive changes in industry standards occur constantly, especially after loud failures. The ICOs that worked under the conditions of this “Wild West” are gradually fading away, and the new ITO generation projects with a higher level of organizational and legal approach are coming to the scene.

A comprehensive expert assessment before the start of a crowdsale could significantly reduce investor risks by filtering projects with a high fraud level that are not implemented in the near future. But unfortunately, today there is practically no national and global market for independent expertise. Services with the competence to analyze the risks of the initial distribution of tokens, units.

At the same time, due diligence (legal due diligence) before launching becomes a good standard for any serious project coming out on a crowdsale, and includes a whole range of legal actions, each of which is designed to minimize legal risks that may arise during the project, like investors so with the organizers themselves. However, in rare cases, the organizers do it themselves and provide such reports to potential investors.

Filling this gap, we regularly carry out work on the preparation of rapid analyzes of new ICO / ITO, together with the agency Digrate. All reports are public, free of charge, and any investor can read them before making a decision on acquiring project tokens. As part of the legal analysis, we try to calculate all the legal risks of a crowdsale for investors (primarily Russian), taking into account the particular jurisdiction, and those legal aspects that are associated with the work of the promised service and which the organizers either did not pay attention to or intentionally ignored them.

While there are no legal mechanisms that regulate tokensail, only professional expertise can ensure the protection of investors from risks, and behind them and the founders themselves from the consequences. We would very much like to believe that in this segment of regulation the Russian authorities will not allow feil, as has happened with other areas of the digital economy. In the meantime, we observe that most ICO projects organized by Russians prefer jurisdiction outside the Russian Federation. BioCoin and RMC are rare examples when a crowdsale was organized in Russia according to Russian laws. And even if ICO / ITO are banned in Russia, or seriously limited by a special regulatory system, it will still not stop the fundraiser and investors. Nothing will prevent them from finding other ICO-friendly jurisdictions beyond the reach of Russian laws.