As startups continue to mint new cryptocurrencies and tokens in initial coin offerings, they face a myriad of overlapping, and sometimes conflicting, regulations. That was a key takeaway from a panel discussion of blockchain experts that addressed the current state and likely future of global ICO regulations. 

CoinDesk and law firm DLA Piper convened the panel in the wake of the Organization for Economic Cooperation and Development’s (OECD) workshop on digital financial assets held May 15-16.

A Web of ICO Regulations

Martin Bartlam, partner and head of finance and projects for DLA Piper International, said each country is responsible for its own ICO regulations, which has resulted in wide differences. While some, such as China, have banned ICO markets, others, including Bermuda, have tried to promote ICO innovations. The impact is that some ICOs end up facing regulation from as many as 10 different jurisdictions, with some treating the coin as a token, others as a security and still others as a currency.

Don’t look to Congress for a road map. states and the SEC are likely to lead the way in clarifying ICO rules inside the U.S.

Amy Davine Kim, general counsel and global policy director for the Chamber of Digital Commerce, said that in the U.S. there are already a number of regulations relevant to ICOs. They include regulations related to securities but also anti-money laundering, tax and accounting laws. Financial crime and sanctions laws may also be applicable in cases where ICOs can be considered a form of money transfer, she said.

Bartlam and Kim agreed that one of the biggest challenges is when to apply which regulations. Both noted that a key issue for regulators in answering this question is determining when a coin should be considered a “utility token” versus a “security.” The former is not a financial investment like a security, but rather, acts as a sort of digital coupon,” providing future access to a company’s products or services.

The Path Ahead

Participants noted that while the U.S. federal government has been slow to act, states have begun to pass laws related to ICOs. Kim said that several states have passed legislation just to show “my state is open for business.”

Mark Radcliffe, partner at DLA Piper, said people tend to focus only on the Securities and Exchange Commission and do not pay enough attention to role of the states. The states, he said, have frequently been the “laboratories” for new regulations that “bubble up” to the federal level. He pointed to efforts by Wyoming, Puerto Rico and Arizona to innovate in the ICO space.

Caitlin Long, co-founder of the Wyoming Blockchain Coalition, pointed out Wyoming was the first state to decide that utility tokens are distinct from securities and thus should not be subject to securities laws. She noted that other states, like Colorado, have debated similar measures.

In the end, Radcliffe says, clarification of the regulatory landscape is less likely to come from Congress. Rather, the states and the SEC are likely to lead the way in clarifying the rules inside the U.S. He encourages ICO stakeholders to work together in organizations such as the Wyoming Blockchain Coalition and the Chamber of Digital Commerce to continue pushing regulators and lawmakers for clarification.

Sean Lawson
Sean Lawson is Associate Professor of Communication at the University of Utah where he researches emerging communication technologies. He is the author of Nonlinear Science and Warfare: Chaos, Complexity, and the U.S. Military in the Information Age.