The head of United Arab Emirates Securities & Commodities Authority (ESCA) announced that the UAE plans to allow domestic companies to raise capital from initial coin offerings (ICOs); and that provisional regulations may be in place as early as next year. Speaking at a seminar, Dr. Obaid Saif al-Zaabi, Chief Executive Officer at the ESCA said:
“The board of the Emirates Securities & Commodities Authority has approved considering ICOs as securities. As per our plan we should have regulations on the ground in the first half of 2019.”
The UAE has been a notable jurisdiction for cryptocurrencies. The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Markets (ADGM) had previously sought to clarify the regime of cryptocurrencies and ICOs by recognizing that “a one size fits all regulatory apparatus for the cryptocurrency industries is inappropriate and will approach cryptocurrencies as commodities, whilst legislating many ICOs as “specified investments.”
In an attempt to become a leader in the utilization of blockchain, UAE has launched the UAE Blockchain Strategy 2021, according to which 50% of government transactions will be conducted using blockchain technology by 2021.
The IPO market in the UAE and Gulf was severely constrained in the past several years due to weak equity markets and low oil prices. This move by the ESCA may be the good news those companies in the region were hoping for, but what does it mean for the larger crypto world?
Perhaps the most controversial topics in the cryptocurrency environment are ICOs. The ever-increasing curiosity in blockchain technology and lack of a clear regulatory environment has made ICOs a popular fundraising took for companies. Start-ups all over the globe are looking into how ICOs can be leveraged to raise capital; Telegram’s $1.7 billion ICOraise, for example, indicates that there is serious potential in the fundraising model.
In an ICO, a company issues cryptocurrency tokens to investors, in a similar way it would issue shares in an initial public offer (IPO) of equity. However, there are a number of important differences. An ICO is usually performed by start-ups who want to raise funds to develop the project. Whereas an IPO is typically performed by established private companies which have a financially stable track record. A company wishing to offer securities via an IPO must create a prospectus, a legal document that is filed with the regulator of the respective jurisdiction and provides details about an investment offering for sale to the public. By contrast, companies undergoing an ICO usually have a white paper in which they explain the details about the project. It is important to note that unlike the prospectus requirement in an IPO, companies undergoing as ICO are not obligated to provide a white paper. Finally, shares bought via an IPO provide shareholders with an equity stake in a company, whereas the promise of an ICO is that “the coin can be used on the product that is eventually created.”
Most of the ICOs offered in the past few years are branded as utility tokens in which the investors with future access to a product or service instead of ownership right in the company. However, many people contribute to an ICO with the hope that the value of the token’s purchases will increase in the future leading to profits.
The argument put forward in most of these ICOs is that the utility tokens are not “securities” per the securities law and therefore do not have to comply with the relevant regulation. However, increasingly regulators from several jurisdictions including Australia, Switzerland, US, Canada, EU, Japan, have warned that many ICOs may, in fact, be security offerings and in the event they are, there are required to comply with the relevant securities laws and regulations of the country they are offered. Some countries such as China, have taken a much stricter policy by banning all ICOs.
Commentators have also been vocal in voicing their concerns over ICOs. For instance, Joseph Grundfest, who was a commissioner at the S.E.C. in the 1980s and is now a law and business professor at Stanford, commented that“I.C.O.s represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi.”
The move of a growing number of regulators worldwide turning their attention to the ICOs have both been criticized and welcomed by the crypto community. While its critics view it as a speed-bump on the innovation of blockchain, its proponents consider it as a sign of the maturation of the industry. While both claims may have merits, it is only inevitable that ICOs would get regulated.
This may lead to clarification of the muddled regulations of ICOs. The implications will depend on the exact laws as they get enacted and in what countries. But one thing is certain, thanks to the move here by the UAE today, clarification on those regulations globally may be coming sooner than we all thought.