OVERVIEW OF ICO REGULATIONS AROUND THE WORLD PRESENTED BY HUBERT DE VAUPLANE NOVEMBER 2018 © 2017 KRAMER LEVIN NAFTALIS & FRANKEL LLP. ALL RIGHTS RESERVED. 1 ICO REGULATION : GENERAL OBSERVATIONS 1. Emphasis on soft law Most jurisdictions have not yet implemented specific regulations about ICOs. Financial regulators have often issued guidance, which cannot be considered as binding for either courts or legislators. As a result, analyzing the regulatory framework of ICOs often means pondering over the binding nature of such guidance, which are not set in stone. 2. Evolving frameworks Regulators do not have a definitive view of ICOs, blockchain technologies, or decentralized apps, and of the regulation that should apply to them. They are in the process of drafting regulations, or contemplating to do so, with the “wait and see” attitude regulators often adopt when faced by technological innovations. 3. Forum shopping context Token issuers are not longstanding , well-established companies. They do not have strong links with any jurisdiction (offices, employees) and are sometimes not even incorporated anywhere. Moreover, they are usually providing digital services. As a result, they can be incorporated virtually anywhere around the world, depending on the most advantageous regulation (including taxation). This has been taken into account by regulators and legislators, who understand that implementing harsh frameworks (complete ban of ICOs for example) will not work as a regulatory strategy. Regulators are adapting to the context, e.g. France is contemplating the implementation of an optional framework. 2 ICO REGULATION STRATEGIES Jurisdictions have opted for one of the following three solutions for ICO regulation: 1. DURA LEX, SED LEX 2. PRE-EXISTING FRAMEWORK 3. NEW FRAMEWORK Some jurisdictions have Some jurisdictions have Some jurisdictions seem to be opted for a complete chosen to include token contemplating the ban (China). issuances under the existing implementation of a new, regulatory framework of either specific framework for token financial instruments (USA) or issuances. This is most payment services (Japan). definitely the case in France. 3 ICO AUTO-REGULATION INITIATIVES • Professional associations surfaced in 2017 and started issuing documents outlining best practices for ICO issuers. • These auto-regulations mechanisms play an essential role in harmonizing practices around the world and in the professionalization of all actors. • The most prominent examples of such auto-regulation initiatives are : o THE LONDON TOKEN FUNDRAISING MANIFESTO o THE ICO CHARTER o THE ICO GOVERNANCE FOUNDATION WHITE PAPER 4 THE LONDON TOKEN FUNDRAISING MANIFESTO Ethical framework: ICOS should comply Individual code of conduct: ICO stakeholders should Questions for token issuers: with the following principles: be: does the token have a beneficial autonomy (insure that investors have trustworthy (act honestly and fairly, put the interests of commercial/social purpose? enough information to make an the customer first, protect their interests), autonomous, informed investment is it clear to everyone what your decision), dutiful (act with integrity, protecting the reputation of token represents? ICOs, cryptocurrencies and DLT), openness (about the intended do the money supply consequences of the token), lawful (observe applicable laws, regulations and rules/algorithms align value with the professional conduct standards), token’s social/commercial purpose? beneficence (useful commercial or social purpose of the token), careful (observe standards of market integrity, good is there a mechanism to return any practices, conduct and confidentiality expected excess or unnecessary resources? honesty (no lies or material omissions), from market participants), do you have the professional and non-maleficence (reduce the impact of a unconflicted (manage relevant conflicts of interest technical resources to deliver? failure of the token, ensure sustainability), effectively), transparency (no misleading presentation competent (professional and technological of information), competence, commit to update knowledge and skills), justice (equitable distribution of benefits and burdens), and contained (decline to act when not competent), and fairness (no party unknowingly (dis)advantaged). aspiring (strive to uphold the highest professional standards). 5 THE ICO CHARTER o information provided by the ICO o ICO smart contract code: code and o ICO safety and security: ongoing project: complete white paper; smart contracts detailing the token presence of an IT supervisor, ISO 27001 detailed presentation of the ICO; detail delivery process certification recommended info on the team, market, product, legal entities sponsoring the project; o KYC, anti-money laundering and anti- o acceptance of a third party audit to bylaws and shareholding structure; terrorist process: ID/passport, tax measure the risk of the project target amount; roadmap, bios and residency, articles of incorporation) resumes of key player; independent o post-ICO: disclosure of ICO process and check of key players/advisors outcome and of markets where the o tokens and cryptocurrency raising tokens are traded, regular updates on o independent legal review of the ico process: disclosure of the types of the project token and its issuer wallets, real time traceability of collected amounts, disclosure of fees in o commitment on the laws of listed states: o white paper features: legal and token paid to advisors, pre-sale compliance with OECD guidelines on financial info on the issuer, description mecanisms and disclosure of rules to tax transparency. of the project, target amount, use of offer discounts, traceability of all crypto proceeds, technical presentation of the transactions, disclosure of all fees project, token structure, primary and secondary markets, risk disclosure, o use of proceeds: process of restitution in warnings, disclaimers, applicable law case the target amount is not reached, and courts in the EEA. creation of an escrow wallet, rules and conditions for the release of proceeds to the ICO project 6 7 8 REGULATION IN FRANCE As a general observation, it should be noted that French regulators seem to have adopted an overall moderately enthusiastic approach toward initial coin offerings. The French Financial Markets Authority (Autorité des marchés financiers or the “AMF”) issued a warning to investors on the risks related to initial coin offerings as part of its discussion paper on initial coin offerings released on 26 October 2017. However: • the AMF has set up UNICORN (Universal Node to ICO’s Research & Network), a program in the framework of which it has initiated discussions with token issuers. Between its launch and 22 February 2018, this program has allowed the AMF to discuss with 15 token issued out of the 21 ICOs the AMF was aware of in France. 14 of the 15 project developers that met the AMF said they wished to conduct their operations and activities in France; • in the public consultation paper from October 2017, it stated that “the tokens issued in France of which the AMF is aware should not fall under French regulations governing the public offering of financial securities. This approach could be different in the case of ICOs giving rise to the issuing of tokens granting the same or comparable rights to those granted by financial securities (i.e. governance of financial rights).” • the AMF followed up on this statement in the summary of replies to the Public Consultation on 22 February 2018, in which it explicitly favored the creation of an optional approval regime for ICOs rather than expanding the current law to include ICOs since they make public offerings. It announced that “The AMF Board has therefore decided to continue to work on the definition of a possible legal framework tailored to ICOs by specifying the appropriate information and guarantees that are necessary.” 9 REGULATION IN FRANCE Article 26 draft Law on growth and transformation of enterprises (projet de loi relatif à la croissance et la transformation des entreprises) provides for a draft regulatory framework of initial token offerings. Bearing in mind that this draft will be discussed as of September 2018 in both the National Assembly and the Senate and may therefore be amended or rejected, this law, if enacted, would grant power to the AMF to deliver an optional visa to token offerings. However, the explanatory statement introducing this draft law specifies that the AMF may only deliver this optional visa for tokens “which would not be governed by existing financial regulation”. As a result, the draft article L. 552-1 of the French Monetary and Financial Code (the “MFC”) states that the proposed regulatory framework would only apply to token offerings that are not already governed by other provisions of the MCF, including its Book II, Title 1 on financial instruments. As a result, it is not possible to infer from recent regulatory developments (whether in the form of public stances taken by the AMF or of the drafting of a regulatory framework) that something that the issuer self- qualify as a “token” will never qualify as a financial security and be subject to, notably, the regulations on public offerings of financial securities. If a digital asset issued as a token meet the criteria to qualify as a financial security under French law, these regulations, amongst others, will most certainly apply. 10 REGULATION IN FRANCE Moreover, France is contemplating the introduction of a regulatory framework for crypto-