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ICO Regulation: a Competitive Advantage?

This article was previously published on in French. Some minor changes have been made by the author.

The Chamber of Digital Commerce, the world’s largest professional association representing the blockchain industry, recently published a 108-pages document that analyses the regulation of ‘Initial Coin Offerings’ in 5 leading common law countries. Meanwhile, the blockchain/ICO working group of the Swiss Government invited stakeholders in Switzerland to participate in a consultation procedure on this very subject. While waiting for the final report of this working group, it is a good opportunity to share some thoughts on the subject of regulations.

Defined very broadly, an Initial Coin Offering (ICO) is a fundraising method during which organizers issue digital assets (‘tokens’) in exchange of other digital assets and/or fiat currencies. However, there is no unanimity among regulators and experts on definitions, typologies and standard characteristics of such digital assets, nor of the fundraising method itself. It is however a phenomenon which has attracted a lot of interest since mid-2017.

Switzerland, where the ‘Crypto Valley’ (the city of Zug) is located, hosted just under 10% of all ICO projects in 2017, ranking the country fourth in the world, after the United States (first), the United Kingdom (second) and the Russian Federation (third). Nevertheless, this ranking was based on the gross number of projects. In fact, Switzerland was the world leader in terms of funds raised with just over 25% of the total of $6,213,002,958.

Today, one might ask whether this small nation is still the world leader despite the steps set by FINMA (the Swiss Financial Market Supervisory Authority), mainly following the Guidelines of the latter published on 16 February 2018.

According to this year’s figures, Switzerland hosted only 7% of projects and is now ranked third in terms of funds raised. The so-called ‘Crypto-nation’ seems to have lost some of its attractiveness for fundraisers; however, it remains in the top 3! What are the reasons for this? What makes a country attractive to potential ICO organizers?

The reputation within the finance and the business world as well as the degree of political stability, the infrastructure in place and the ecosystem of already existing actors, are very important elements to take into account when opting for the ICO ‘drop’ location. Up to date, Switzerland remains a prestigious financial center and is considered a strong global ‘brand’. As for the infrastructure and the ecosystem, the cantons of Zug and Geneva are uncontested pioneers in the world of blockchain. Despite the direct democracy system in place, ’emotional’ populist initiatives often fail and have relatively little impact on the country’s policy on financial matters. These reasons might shed a light on why Switzerland remains one of the most popular countries for ICOs.

Another dominant element is, however, related to the legal framework. Often, ICO organizers will, above all, worry about the cumbersomeness of regulations. Some will prefer total freedom, others being ‘regulated’. Regulators will thus have to make a choice: they cannot satisfy everyone, so they try to find the right balance and juggle with the political agendas of their respective countries and the opportunity for a possible competitive advantage within the ICO industry.

While some countries have taken the opportunity to ‘market’ themselves as ‘crypto-havens’, the People’s Bank of China, for example, has decided to ban ICOs by declaring that token sales are “illegal and disrupt economic and financial stability”. Other states – including Switzerland – have adopted a moderate approach trying to promote an innovation-friendly environment while keeping in mind considerations of investor protection, the fight against money laundering and financing of terrorism, and the redistribution of wealth (taxes).

One might wonder whether this regulatory trend has a negative impact on the blockchain industry, or not? As raised before, there are two types of fundraisers: those who prefer total freedom and those who prefer to be regulated. Nevertheless, uncertainty is rarely an ally for businesses. Therefore, a sincere ICO organizer with professional manners and trustworthy work ethics should and would prefer to operate in a regulated environment rather than being engaged in ‘misty’ structures (which often include ‘off-shore’ activities). In addition, the general track record of the ICO market is not brilliant: many investors have lost funds due to fraudulent projects in the past. As a result, settling in a regulated ecosphere will necessarily reassure today’s investors. Moderate regulation, which effectively meets the needs of stakeholders, is therefore a significant long-term competitive advantage for a State.

Today, Switzerland offers this regulated environment… And an ICO can be dropped without having recourse to ‘offshore’ structures (e.g., regarding ‘cash-out’ and bank accounts). It is therefore not surprising that the volume of ICO financing in Switzerland is still high despite the relatively low gross number of projects in the country. Many projects hosted here are serious and professional. By using the blockchain technology, they generally offer real added value and bring innovation in their respective fields. They thus attract large investors.

Disclaimer: Statistics on the number of ICO projects organized and funds raised are approximate and may differ from one source to another. They are used to illustrate the general idea of this article.

This article does not claim to be exhaustive. It does not constitute legal or business/strategic advice. Given the fast-changing nature of the discussed matter, the author refuses all liability.

The text is published as is, does not include any amendments, represents the author’s point of view, which does not necessarily coincide with that of the editorial board.

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