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European Regulatory Authorities Publish ICO Hazard Notifications

ICO (Initial coin offering) is a form of attracting investments in the form of selling a fixed number of new units of cryptocurrency, received with a single or accelerated emission. In the middle of November, the European financial regulators, including ESMA (the European Securities and Markets Authority), the Belgian FSMA (the Financial Services and Markets Authority) and the Dutch AFM (the Authority for the Financial Markets), issued warnings about risks for the investors and rules applicable to the companies participating in the ICO. The market of so-called cryptocurrencies has heated up. The approximate total market capitalization of all cryptocurrencies has increased from $ 18 billion in early 2017 to staggering $ 200 billion by the time of writing this article. Needless to say, some people were worried about this hype, and not only the European financial regulators. ICO is the key concept of cryptocurrency as a type of “crowdsale” (“crowd” and “sale”) where the project developers offer a new type of cryptocurrency (also called “token” or “coin”) using the distributed ledger technology. Cryptocurrency can acquire various characteristics based on the purpose of a particular project: they can be designed for use, in particular, as money resource/virtual money, as a financial instrument or as a means of providing access to a product or service. Investors are warned about the unregulated character of the space, which is vulnerable to fraud or illegal activity, about high risk and instability of the cryptocurrency rate, as well as the lack of information. In addition, the companies participating in the ICO are reminded of their obligations under the European financial legislation. The following regimes may be applied to the ICO: the Prospectus Directive, MiFID (The Markets in Financial Instruments Directive), AIFMD (The Alternative Investment Fund Managers Directive) and the 4th EU Anti-Money Laundering Directive. Depending on how the ICOs are structured, they can go beyond the existing rules and, therefore, be outside the regulated space. However, if token coins are classified as financial instruments, it is likely that the companies participating in the ICO carry out regulated investment activities, such as placement, implementation or consulting on financial instruments, management or marketing of collective investment schemes. Each of the ICOs should be evaluated in each particular case, for the purpose of getting into one or a few of the above modes (or any other regulatory regime). These notifications of the European financial regulators may signal the long-expected start of an extended review of regulatory standards in the cryptocurrency market.