The European Parliament’s Committee on Economic and Monetary Affairs is considering a proposal for ICO regulation for the EU. Ashley Fox, Member of the European Parliament (MEP) – United Kingdom, submitted a draft of proposed initial coin offering rules to be added to Europe’s crowdfunding regulatory framework.
The proposed regulations would apply to public-facing ICOs with a target raise of less than 8 million euros. The new rules would require affected ICOs to follow securities laws regarding, among other things, KYC/AML (know-your-customer/anti-money laundering) requirements.
Fox said of his proposal, “Initial coin offerings are a new form of crowdfunding not anticipated in current European regulation of crowdfunding platforms. At present, initial coin offerings are operating in an unregulated space and consumers are at risk from fraudulent activity in the market. The ICO space must be regulated. But be assured that as legislators we’re trying to make ICOs more possible and more successful at the same time. The ICO market wants legitimization from every jurisdiction, and regulation will do that. I am not sure as to what extent my draft report provides the solution, and I welcome suggestions.”
ICO regulations enacted by the European Parliament would create standards for token sale projects conducted in any of the 28 member-nations.
Subsequent to Ashley Fox’s draft submission, the European Parliament Innovation Group hosted a discussion panel, led by Fox, on whether the European Commission’s proposals for regulating crowdfunding could be extended to ICOs. Fox was joined by representatives from the European Commission, the European Securities and Market Authority (ESMA), the European Banking Authority (EBA), the Financial Conduct Authority (FCA), the European Banking Federation (EBF), and the European Crowdfunding Network.
Laura Royle, representing the FCA, said, “We certainly do see a huge potential benefit in this space for firms to raise capital from a broad array of investors without the cost of an intermediary. But there are risks associated, such as the potential for fraud tied to lack of transparency.”
Fox said, “This is one of the first in-depth discussions within the Parliament on ICOs. This year alone has seen in excess of 18 billion US dollars raised in ICOs. What attracts me to ICOs is the fantastic opportunity that it provides to tech startups across the EU. Eighteen billion dollars shows the amount of capital that is waiting to be unlocked and invested if we are just willing to facilitate the process with prudent regulation. Regulators across the European Union are having this debate and trying to sketch out the pitfalls and problems with ICOs. But we don’t want to over-regulate. We want to regulate in a way which is sensible without demolishing the market. We have to protect consumer investors and also lead globally by having some legal certainty for this new technology. I believe that ICOs are instrumental vehicles to mobilize capital and also for people that are unbanked and cannot find any other way of funding. European capital markets are in need of non-bank financing.“
Unlike most of the crowdfunding regulated by the European Parliament, ICOs sometimes raise vast amounts of money. However, though this is a concern from a regulatory standpoint, there are two bigger issues to be addressed by regulators:
- ICO-issued tokens are not sold through an intermediation platform, rather, they are sold via self-placement on a non-intermediated ICO platform on which the project owner develops the tokens and sells them.
- Compared with crowdfunding on centralised platforms, ICOs have the unique ability to issue a transferable security that moves quickly to secondary markets via trading on token exchanges.
The European Parliament Innovation Group discussion panel meeting left open the issue of how to best attach ICO rules to the existing crowdfunding regulatory framework, though it was agreed that payment tokens (cryptocurrencies), utility tokens sold as prepayment for a service, and security tokens would each require distinct regulation.