Hello World;
In this blog post I discuss the current ICO regulation in various European countries.
The popularity of ICO's as a fundraising mechanism for cryptocurrency and fintech startups has grown exponentially in recent years.
In this respect, government agencies have responded with an increasing urge to develop constructive regulation for the sector to ensure growth and safeguards for the marketplace.
I focus exclusively on the continental European market. I've intentionally left the UK out, due to possible ramifications resulting from Brexit. However, I've tried to cover the most important markets for hosting an ICO as comprehensively as I can.
All data is based on current regulation in the end of the first quarter of 2018.
Part two here: https://steemit.com/ico/@starwalkerz/european-ico-regulations-part-two
Countries covered in part 1:
Sweden
Finland
Estonia
Lithuania
France
Germany
Anyway, let us go straight down to business:
-Sweden
ICO's are currently unregulated in Sweden.
The financial supervisory agency has issued warnings related to risks associated with ICO's. No formal regulation exists in the second quarter of 2018.
https://www.fi.se/sv/publicerat/nyheter/2017/varning-for-risker-med-initial-coin-offerings/
Swedish ICO investors are provided with no guarantees whatsoever by the regulator.
As a general rule, the Swedish regulator expects the EU financial services regulator ESMA to issue universal regulation in order to be able to make a judgment on the subject matter.
-Finland
ICO's are mostly unregulated in Finland, so long as they do not qualify as securities offerings under securities regulation.
ICO's that do not qualify as securities, are governed under the Crowdfunding Act.
Finland's financial controller has not determined any specific regulation on ICO's as of yet, but the regulator expects prospective ICO organizers to be in touch with the agency through the Innovation Helpdesk:
http://www.finanssivalvonta.fi/fi/Toimiluvat/Innovaatio/Pages/Default.aspx
The Finnish financial controller FiVa has issued a warning related to ICO's:
http://www.finanssivalvonta.fi/fi/Tiedotteet/Lehdistotiedotteet/Pages/17_2017.aspx
Generally speaking, the Finnish regulator expects the European Union financial service regulator ESMA and European Banking Agency EBA to introduce unilateral regulation in order to be able to make a final judgment on the matter.
Prospective ICO organizers are advised to contact the regulator through Senior Digitalization Expert Hanna Heiskanen at +35891835030 between 9 AM and 4 PM from Monday to Friday Finnish time.
Registration of an ICO seems to be mandatory, at least it is strongly suggested.
-Estonia
Cryptocurrencies are generally not regulated in Estonia, but there are some regulation that applies to exchanges and ICO's. Compliance with AML regulations is mandatory for exchanges, wallet services and ICO's based in Estonia. Mining is unregulated.
In Estonia, ICO's and public offerings of cryptocurrencies must be registered with the financial supervision authority and complete due diligence with the regulator, including compliance with AML regulations.
For compliance with the AML regulations, namely to § 70 (1) 4) and (5) and § 71 of the Money Laundering and Terrorist Financing Prevention Act (RahaPTS), one must apply for a license from the financial intelligence unit for the provision of money exchange services and virtual currency payment services.
ICO's are subject to regulation only if the tokens can be described as securities under the securities law, namely within the meaning of § 2 of the Securities Market Act (VPTS).
Tokens qualify as securities, for example, if such instruments (proprietary rights or obligations or contracts) are issued on basis of a unilateral statement of intention and if they give voting rights or discretion over the issuer or give the investor a certain return on their investment (for example, the right to participate in the issuer's profits, regular cash flows or any other promise of future income), regardless of whether the funds involved are either repayable or non-repayable (for example, an " perpetual bond" ).
Tokens issued within the ICO are considered as digital assets only if:
-There are no participations by the investors into an undertaking, or obligations to repay the asset, or any amount of interest, dividend, or any other type of cashflow back to the investors on behalf of the token issuer.
-The fundraising must not be a utility token, or rights of use to a product that does not yet exist.
If the tokens qualify as securities, the token issuance must qualify with the securities law, namely with §12, which determines whether the offering is a public offering of securities.
The ICO is not considered a public offering if:
-It only is offered for professional investors, or
-For each stage of the ICO, a maximum number of 150 people, who aren't professional investors, or
-If each investor commits a minimum of 100 000 EUR, or
-Each token issued in the ICO is worth at least 100 000 EUR, or
-The total ICO offering is valued less than 2 500 000€ per annum, counting from the first year.
If at least one of these conditions are not met by the ICO, the ICO must be registered with the Financial Services Authority as a public securities offering.
In the event that the ICO is classified as a securities offering by the Financial Services Authority, it must be determined whether the ICO is an offering of shares, bonds, or other regulated financial instruments. There are no exceptions for ICO's in Estonian law for ICO's classified as securities, therefore the same rules concern of ICO's as legacy financial instruments in regard to public offerings.
Startup companies enjoy some special privileges, described in the ESMA Update of CESR recommendations. The consistent implementation of the Commission Regulation (EC) No 809/2004 implementing the Prospectus Directive "(20 March 2013) and" ESMA Q & A Prospectuses "(October 2017).
If the ICO is issued by a credit institution, or if the ICO is involved in investing capital with the aim of charging interest, it is subjected to regulation concerning credit institutions and mutual funds. In so doing, the fund must have a management company regulated as an investment fund. The management company may manage one or more funds, established under Estonian or foreign law.
A fund management company and the fund manager must be registered with the Financial Services Authority. There are a variety of licenses offered for this purpose.
The definition and qualifications for investment funds are provided by ESMA here:
http://www.fi.ee/failid/Soovituslik_juhend_ESMA_suunise_ylevotmine_2013_611.pdf
According to § 2 (1) of the EWCP, the following securities must be registered in the register:
- Debt securities issued by a private legal entity registered in Estonia, for which a public offering prospectus must be registered with the Financial Supervision Authority in accordance with the Securities Market Act;
- Units and shares of investment funds registered in Estonia, admitted to trading on a regulated securities market or an MTF;
- shares and subscription rights of publicly issued or publicly traded securities belonging to the register.
In the promotion of ICO, it is important to pay attention to the general terms and definitions used in the terms used and advertising under the Advertising Act (Section 2 of the Advertising Act). The advertisement must give the addressees a clear and true view of the product or service, in particular, it should not be misleading about the features offered. The advertisement must concern particular interest in being truthful about which licensed activities it carries out.
If the ICO is a fundraising activty to provide a pre-payment service for a product or service, the ICO is subject to the crowdfunding lawe, and thus the organizer of the ICO must properly inform the investors about the essential characteristics of the object of the contract, the total price of the object of the contract and any taxes, and the terms and conditions of the agreement and other contractual rights and obligations, technical steps. This information should be made clear and highlighted. Any non-deliveries must be fully refunded to the investors.
An investment firm's license is required if the tokens qualify as securities and the company provides the following services as a permanent activity:
- acceptance and transmission of a token order on behalf of a client;
- execution of orders related to token on behalf of or on behalf of a client;
- Token trading for the company's own account;
- Tokenized securities portfolio management;
- Investment advice on token securities;
- Token warranty or token provision, issuance or sales warranty;
- Organizing token offerings or issuance (organization of ICOs);
- The organization of a multilateral trading facility, in which, under uniform conditions, different or simultaneous interests of the acquisition and transfer of securities of different persons are concluded, which results in the conclusion of a contract;
- Organizing an organized trading service or platform.
This regulation does not concern of websites, which simply provide information about token sales to the public, but do not conduct or profit from token sales themselves.
To discuss specific ICO matters with the Financial Services Authority, it is important that you have previously thought about and be able to answer at least the following questions:
- Project name for which resources are involved;
- Name and contact details of the project owner / company / ICO;
- Project Schedule: Temporal Definition of Inclusion, Temporal Points for Project Execution;
- Description of the product / service being developed / offered (its main characteristics);
- Which ICOs are targeted?
- Are there any restrictions on investors?
- What technological solutions are used in this project / ICO?
- In what (virtual) currency and how can a project be invested?
- What is the ICO volume?
- What exactly are the tools to be used?
- How and how does the ICO create a new token?
- At what point and at what time does the token be transferred to the investor?
- What are the token features?
- What rights can an investor have?
- How to ensure compliance with RahaPTS provisions when organizing the ICO?
- How and where is it possible to resell the token later?
- Can tokens be used to purchase products / services or pay for third parties?
- Does the project owner / issuer plan to redeem the tokens?
-Lithuania
There currently are no regulations pertaining to ICO's in Lithuania, but the Lithuanian State Tax Inspectorate is in the process of consulting enterprise in promoting regulation regarding to ICO's.
Generally speaking, the regulations will concern the following types of token definitions:
-Utility tokens, where the token is used to purchase a product or a service, or
-Securities tokens, where the tokens have attributes to a bond, or
-Digital property, where the token is treated as a financial asset.
Prospective ICO organizers should contact a Lithuanian tax advisory agency, notably 'Crypto Tax & Legal” upon decision to look into organizing an ICO within the country.
Generally speaking, the Lithuanian government is very open to discussion on the subject with industry players.
-France
France is a crypto-friendly and ICO -friendly nation.
France requires all cryptocurrency -related companies register with ACPR for compliance with AML regulations. The regulations officially concern exchanges, but regardless registration is strongly recommended.
https://acpr.banque-france.fr/page-sommaire/presentation-de-lacpr
The French financial regulator AMF has named a regulatory task-force UNICORN to spearhead formal recognition and regulation of ICO's with industry self-regulation as a method of learning. There is zero-tolerance for fraudulent or criminal practices. The task-force is headed by veteran Jean-Pierre Landau, an industry veteran and former central bank vice president. Regulation should be complete by mid-2018.
According to the AMF, risks presented by token offerings include:
Absence of specific regulation;
Risks related to the information documents;
Risk of loss of capital;
Risks of volatility or the lack of a market;
Risk of money-laundering and scams;
Risks associated with the projects financed.
The regulator is considering three avenues for token offering supervision:
Promote best practices without changing existing legislation;
Extend the scope of existing texts to treat token offerings as public offerings of securities;
Propose ad hoc legislation adapted to token offerings.
Taxation of cryptocurrencies in France is based on net earnings of cryptocurrency conversion into fiat currency.
According to the BOFiP (the French administrative doctrine), two scenarios should be considered:
- the purchase-resale of bitcoin on a regular basis and for its own account is a commercial activity; the revenues are then to be declared in the category of industrial and commercial profits (“BIC”).
- Occasional purchase-resale falls under the category of non-commercial profits (“BNC”).
The criteria for the regular or occasional exercise of the activity result from a case-by-case examination taking into account, in particular, the periods separating the dates of purchase and resale, the number of bitcoin sold and the conditions of their acquisition.
In practice, each year, net income (including profits and losses) is subject to the progressive income tax schedule as well as to social security contributions (enhanced by the 2018 Social Security Financing Act).
As a rule of thumb, France taxes cryptocurrency resales on capital gains by 30% savings tax on reported earnings, and up to 80% personal income tax on any unreported earnings that might come under scrutiny by the tax inspector.
-Germany
German regulation is governed by BaFin, the country's financial controller. In Germany, conducting an ICO is not legal unless it's explicitly cleared by the regulator. An ICO based in Germany, must be registered and cleared before it may start fundraising efforts.
It has to be noted that Germany expects ESMA, the European Union financial services regulator, to take the first step in introducing regulation for ICO's.
German ICO regulation is currently under formal scrutiny, as the country is establishing in which way cryptocurrencies and digital assets may be governed. According to BaFin, any cryptocurrency or digital asset may fall into following categories, each governed by their own legislative framework:
-Financial instrument under European Union MiFID II regulation https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir
-Security under securities law (Wertpapierprospektgesetzes (WpPG))
If the ICO token is classified as a security, there must be a distinction whether the token is a derivative under derivatives regulation, or whether the token requires a case-by-case assessment.
If the token is found to be a security under the token description as stipulated in the securities law (Wertpapierprospektgesetzes (WpPG)), MiFID II -regulations regarding securities apply on the token deployment.
Things that commonly rule on the assessment:
-Company form and formation
-Type of instrument in the financial market.
-Platform the crypto-instrument is traded upon.
-Compliance with MiFID II if the token is a payment instrument.
-Digital property, governed under property law (Vermögensanlagengesetz (VermAnlG))
Depending on the case, the token may be considered a share of an investment fund, or a share in a collective investment undertaking, as stipulated in the MiFID II.
If it can be shown that the token is not a security, and that the token is not a share in an investment fund, the token may be considered a subsidiary investment under property law (Vermögensanlag).
Depending on the token deployment and company organization, the token issuance can be determined to be either a banking business, namely financial commissioning business, or an issuing business, or a financial service, namely as investment mediation, investment consulting, operation of a multilateral or organized trading system, financial placement business, brokerage or financial portfolio management.
All of the abovementioned trades must comply with trade-specific regulation in Germany.
An ICO in Germany must be cleared as compliant with current AML regulation, and complete due diligence together with the regulator. This is mandatory.
The company running the ICO fundraising must submit the regulator a proof of credit under the Banking Act (Kreditwesengesetz (KWG)) and comply under the reporting requirements stipulated under Kapitalanlagegesetzbuch (KABG)), and furthermore either under the insurance oversight law (Versicherungsaufsichtsgesetz (VAG) or payment services oversight law (Zahlungsdiensteaufsichtsgesetz ZAG)).
It has to be noted that the current guidelines issued by BaFin are only indicative, and no final regulation has been issued in the second quarter of 2018.
Taxation of ICO proceeds and cryptocurrency business of any type in Germany depends on the type of business and license.
I hope you got something out of this blog post. I encourage comments and feedback, so I may discuss this topic further.