ICO issuers are starting to look to jurisdictions outside the U.S. to set up shop.
In an environment of regulatory uncertainty, where the U.S. Securities and Exchange Commission (SEC) has begun investigating ICOs and the industry surrounding the capital raising technology but has yet to make a formal decision of how it will regulate crypto tokens, issuers and other stakeholders are finding other jurisdictions a better bet for launching their projects.
And no other place during Blockchain Week was the topic hotter than at Token Summit III (the original event took place a year ago) on May 27 in New York City.
Both on stage and off, startup founders, attorneys and investors had strong opinions about how far to go in an environment where enforcement agencies know how easy the market boom for the tokens makes it for malicious actors to spin up a fake company and bilk millions of dollars out of unwitting buyers.
That boom packed venues in New York City throughout Blockchain Week.
“The reason there’s a thousand people here, it’s not blockchain technology,” Jason Fang of Sora Ventures told CoinDesk, saying he’s been going to blockchain events for years and it was all the same faces until the initial coin offering (ICO) boom. “The difference is money. The difference is speculation.”
But not everyone felt that hype meant rushing headlong would be the right approach.
For instance, Paypal’s original chief operating officer and now an investor in Craft Ventures, which incubated and backed the security token platform Harbor, David Sacks spoke to how getting compliance right led cryptocurrency exchange Coinbase to be “the first really successful company in the space.”
He wasn’t the only one. Throughout the day, different speakers returned to the question of regulation, and from the stage it began to become clear that the rest of the world isn’t nearly as complicated as the U.S.
This is perhaps unsurprising – as the world’s biggest economy it also has the most rules. Regulators in the U.S. would much rather err on the side of caution, even if that means curtailing some of the excitement.
Laws in the U.S. are based around the Roaring ’20s, which led to the Great Depression, Lowell Ness of Perkins Coie explained during a panel on regulation,saying:
“Literally the securities law is intended to exclude the moms and pops from too risky investment.”
But other parts of the world take a more open-minded, if not lax, approach and that’s luring some ICO issuers overseas.
‘ICO tourism’
For instance, representatives from Switzerland, Lichtenstein and Gibraltar spoke to the crowd, both assuring listeners that their nations took an extremely responsible approach without quite the aggressive fretting of U.S. rule-makers.
Speaking for his home country of Switzerland, Andreas Glarner of MME said:
“It’s not our task as a regulator to tell people which way they want to lose their money.”
Yet judging investments is one thing and willfully manipulating people is another.
He added, “If the project is fraudulent we’re going to prosecute it.”
Representatives from Lichtenstein argued that the small country has a large enough regulatory staff to work with companies it hosts and help them build businesses that are still within its regulatory framework. Meanwhile, representatives from Gibraltar said that its regulators have done the work to build rules from the ground up that specifically fit the new world of cryptocurrency and blockchain.
Meanwhile, attorneys in the U.S. sound frustrated, but hopeful. Several who have been working with the SEC spoke on a panel about where the country is at in terms of defining rules for the industry.
“What we’re doing primarily is educating the SEC on what blockchain is,” Nancy Wojtas, a former SEC staffer now with Cooley LLP, said. “I think there was just a misunderstanding by them to what cryptocurrency is all about. They hear ‘cryptocurrency’ and they think ‘fraud.'”
Ness from Perkins Coie was more hopeful, forecasting forthcoming clarity.
“Now we have a position where there’s going to be bright lines,” he said. “Full functionality [of a platform] is a very hard bright line to draw. Full decentralization is a bit easier.”
Bloq’s Matthew Roszak has also been working through Token Alliance, a Washington DC-based initiative of the Chamber of Digital Commerce, to guide the SEC so that they make decisions that will allow the technology to thrive in the States.
“The last thing I want to do is spend time with regulators, three-letter agencies. I want to build, invest and innovate,” he said, noting that he’s doing it, though, because he believes it’s important.
Wojtas cut through the optimism, again though, stating that entrepreneurs in the space will likely have an uphill battle for some time.
She said:
“Being involved in an investigation is like living in hell without dying.”
She continued, warning founders about the price of hiring attorneys to answer questions and respond to regulator requests, “You will be spending between $100,000 and $300,000 per month.”
As such, Sebastian Bürgel of Switzerland’s Validity Labs said of companies visiting countries trying to figure out where to domicile (even if its staff doesn’t actually work from the country):
“I see what I would call ICO tourism.”
Startups’ thoughts
At Token Summit III, the room was filled with about two-thirds startups and one-third investors.
The startups, including those domiciled in places like Hong Kong and Singapore – attractive places after China’s central bank banned crypto token sales – spoke to how they viewed the regulatory environment throughout the world.
Lea Bauer, director of operations at Centrifuge, a startup building a decentralized enterprise resource planning platform, told CoinDesk that her firm is talking to lots of lawyers in the U.S. or Europe before it decides where to land.
Centrifuge envisions a token for services on the platform. And while it wants to execute a good legal plan, it won’t wait for absolute certainty.
Bauer explained:
“If we wait too long, that gives us complications on the product side, whereas if we move too early that gives us trouble on the legal side.”
Kain Warwick, with the Australia-based stablecoin project, Havven, told CoinDesk, “I genuinely don’t believe the regulators want to impede what’s happening.”
But he also added that risk in his home country “is far less than it is from the SEC,” he said.
While geographies seemed a main concern for many ICO issuers, it isn’t the only kind of distance that could lower risk. Time could also serve an issuer.
Founder of crypto loanmaking platform, ETHLend, Stani Kulechov, told CoinDesk that it did its sale last fall.
“Back then, when we did the ICO, the regulatory uncertainty was pretty vague,” he said.
However, his company is based in Switzerland, where the rules are clear enough that the company isn’t concerned. Additionally, the fact that it had a working app before doing any fundraising adds to Kulechov’s confidence.
Just to be sure, though, “We don’t accept US customers,” he said.
Jae Kwon of Cosmos said similar things of stage, telling the crowd he’s glad the company did its token fundraiser before all the ICO hype started.
“There’s too much money piling in,” he said. And if you bring in too much money, “they can always sue you, especially in the United States.”
Leonard Frankel, CEO of ClanPlay, an existing gaming company, which is building the Good Game token, in order for gamers to earn money for playing, has a very complicated plan to get both the tax and legal structures he desires. An Israeli company, Frankel plans to actually launch his tokens out of Gibraltar but then transfer them to Israel and sell them from his home country, so that the company will pay its taxes there.
Erik Buschbaum, CMO of Rlay, a protocol to validate information, said his company is based in Berlin but domiciled in Gibraltar, which works for them by and large.
Still, he said, “We have investors right now, Kryptonite1, and they advised us not to do a public sale because of regulatory risk.”
All this said, it’s clear the ICO industry is reeling somewhat from both the unclear guidelines throughout the world and the thought that regulators could create rules that make their businesses illegal at some point.
Speaking to the fear many have of U.S. regulators, MME’s Thomas Linder said:
“The U.S. needs to learn that in a globalized, decentralized economy, they are not the center of the universe anymore.”
Token Summit III image (Nancy Wojtas of Cooley, Lowell Ness of Perkins Coie, Lilya Tessler of McDermott, Will & Emory, William Mougayar and Brad Burnham of USV, who is speaking), via Brady Dale of CoinDesk