European financial watchdog latest to warn over ICOs

European Union monetary regulator, the ESMA, has turned into the most recent regulatory body to issue a notice about the risks of getting tied up with — and running — ICOs, otherwise known as the crypto coin raising money instrument that has blasted lately to exploit a clear legal hazy area between issuing ‘software presale tokens’ versus a formal securities deal. (Which has likewise added to an enormous blast in the estimation of some crypto currencies.)

But, regulatory bodies have been fixing their examination of ICOs for a few months — and, on account of China, the government issued an altogether ban in September.

The ESMA has today issued two explanations about token deals: One on the risks for investors, and one on the appropriate standards for firms associated with ICOs — issuing clear cautioning shots in the two cases.

It says it’s concerned investors “might be unconscious of the high risks that they are taking when putting resources into ICOs”, and that organizations associated with ICOs “may direct their exercises without conforming to pertinent appropriate EU enactment”.

In its announcement for investors, the ESMA totals up the fundamental risks for investors as:

  • Unregulated space, vulnerable to fraud or illicit activities — warning, for example, that some ICOs might be being used for money laundering purposes
  • High risk of losing all of the invested capital — noting that “the vast majority of ICOs are launched by businesses that are at a very early stage of development”
  • Lack of exit options and extreme price volatility — raising potential difficulties of ‘cashing out’ of an ICO
  • Inadequate information — criticizing ICO white papers for being “in most cases unaudited, incomplete, unbalanced or even misleading”
  • Flaws in the technology — noting that blockchain tech remains “largely untested” and may be vulnerable to flaws, hacking and unreliable performance

In its announcement for firms engaged with ICOs, the ESMA alerts that they “must give cautious thought in the matter of whether their exercises constitute controlled exercises” — cautioning that some of these token deals may as of now need to consent to existing EU directions:

Depending on how they are structured, ICOs may fall outside of the scope of the existing rules and hence outside of the regulated space. However, where the coins or tokens qualify as financial instruments it is likely that the firms involved in ICOs conduct regulated investment activities, such as placing, dealing in or advising on financial instruments or managing or marketing collective investment schemes. Moreover, they may be involved in offering transferable securities to the public.

It goes on to list “key” rules that may apply if an ICO indeed constitutes a securities sale — namely:

  • The Prospectus Directive — and, if relevant, the publication of a prospectus is also subject to approval by a Competent Authority
  • The Markets in Financial Instruments Directive (MiFID)
  • Alternative Investment Fund Managers Directive
  • Fourth Anti-Money Laundering Directive

It also notes that additional national (EU Member State) rules may also apply.

“Firms involved in ICOs must give careful consideration as to whether their activities constitute regulated activities. If their activities constitute a regulated activity, firms have to comply with the relevant legislation and any failure to comply with the applicable rules would constitute a breach,” it warns.

“It is the duty of the firms themselves to consider the regulatory framework, seeking the necessary permissions and meeting the applicable requirements.”

So the tl;dr of that is your ICO might already be breaking EU financial rules — and your company could be on the hook for a big fat fine if it’s found to have done so.

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