BLOCKCHAIN, DLT & ICOS Dirk A. Zetzsche, ADA Chair in Financial Law (inclusive finance), University of Luxembourg The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators, Prof. Dirk A. Zetzsche, Prof. Ross P. Buckley, Prof. Douglas W. Arner, Linus Föhr (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072298 ) Supported by the Luxembourg National Research Fund Project „A New Law for FinTECHs? – SMART Regulation“, INTER/MOBILITY/16/11406511 „The Distributed Liability of Distributed Ledgers: The Legal Risks of Blockchain“, Illionois Law Review – forthcoming, Prof. Dirk A. Zetzsche, Prof. Ross P. Buckley, Prof. Douglas W. Arner, available at: SSRN: https:// ssrn.com/abstract=3018214
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BLOCKCHAIN, DLT & ICOSDirk A. Zetzsche, ADA Chair in Financial Law (inclusive finance), University of Luxembourg
The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators, Prof. Dirk A. Zetzsche, Prof. Ross P. Buckley, Prof. Douglas W. Arner, Linus Föhr
Supported by the Luxembourg National Research Fund Project „A New Law for FinTECHs? – SMART Regulation“, INTER/MOBILITY/16/11406511
„The Distributed Liability of Distributed Ledgers: The Legal Risks of Blockchain“, Illionois Law Review – forthcoming, Prof. Dirk A. Zetzsche, Prof. Ross P. Buckley, Prof. Douglas W. Arner, available at: SSRN: https://ssrn.com/abstract=3018214
§ Increasing involvement of institutional investors (>100)
Þ Systemic risk on the rise
« OPEN-ENDED » STRUCTURES ≈ EXCHANGES
Example: Fast Invest (Estonia)§ Volume: USD 336 million
§ Very high volume + buyback commitment
Example: Niobium (Austria)§ Volume: USD 752 million
§ Access to and means of payment for Sao Paolo Virtual Currency
Exchange (BOMESP)
Legal Assessment
D.
GENERAL CONSUMER PROTECTION LAW
Liability in case of breach§ Contractual liability
§ Possibility of Prospectus liability or promotional communication rules
(e.g. FRA)
GENERAL CONSUMER PROTECTION LAW
Determination of applicable law§ Frequently choice of law in token sale agreements
§ BUT: limited by Private International Law in consumer relationships
and often for all entities in tort cases (fraud)
§ Applicability of company law or partnership law?
§ Special provisions of financial law? (e.g. Art. 6 IV Rome I Regulation)
FINANCIAL LAW: EQUITY TOKENS
§ “securities” in some jurisdictions à Registration & prospectus obligation;
U.S. SEC in Munchee Inc.: Assessment of economic realities underlying
transaction required for determining status as security;
Europe: MiFID “other participations equivalent to shares”?
§ Investor portfolio management: Tokens may be financial instruments if
“equivalent to shares” – cash flow + some influence
§ Collective investment: eg Alternative Investment Fund (EU), pooled
investment, CIS etc?
§ Derivative: if coin derives value from “underlying asset” à AUS, US
§ AML/CTF
Policy considerations
E.
OPTION 1: OUTRIGHT BAN
Introduced by China and South Korea
§ On initiative of SEC warning against “pump-and-dump” ICO
Benefits
§ Legal certainty at low regulatory costs
Downsides
§ Overly strict response
§ Overemphasize control of risk
§ Underemphasize importance of innovation
OPTION 2: REGULATORY WARNINGS
Þ About insufficient disclosures, risk of fraud
Benefits
§ Inexpensive
§ Less intrusive than outright ban
§ Potentially measurable effect on consumer
Downsides
§ Warnings may create awareness and promote ICOs by assuring
promoters that financial law does not apply (in certain cases)
OPTION 3: WIDENING SCOPE OF FINANCIAL LAW
Þ Regulate eg usage, currency tokens
Benefits
§ Inclusive: catches most activities of token
Downsides
§ Takes time
§ Intrusive: Would catch all license-based business models
§ Financial regulators not best equipped to combat consumer-fraud
§ Too broad a response viewed systematically
OPTION 4: REDUCING INFORMATION ASYMMETRY
Introduced by eg Russia
§ Minimum formal requirements for whitepapers
§ Best practices
§ Certification of disclosures by initiators (e.g. through auditors)
Benefits
§ Consumer protection
§ Standardization => enhance market forces
Downsides
§ High regulatory costs
§ Discouraging innovation
OPTION 5: ENFORCEMENT THROUGH CONCERTED ACTION
Options
§ Take out some obvious examples (equity tokens, exchanges)
§ Enforce existing rules in cooperation with all agencies (e.g.
ESMA/NCAs, consumer protection, AML/CTF, data protection etc.)
Benefits
§ No additional legislation required
Downsides
§ Enforcement cooperation restricted due to constitutional framework
§ Information & incentive asymmetry among agencies involved
Conclusion & Theses
F.
1) Case for regulatory intervention
§ ICOs no longer too small to care => consumer protection, systemic risk
§ Cost-benefit analysis required to determine best regulatory approach
2) Consider the differences
§ No one-for-all solution possible
§ Application of financial law depends on token type: usage, currency, equity
§ Fraud hard to detect without detailed intervention
3) Supervisory intervention necessary
§ Intervention by cooperation of FSAs and CPAs advisable
§ Financial law enforcement best against Equity Tokens & Exchanges
Thanks!
Prof. Dr. Dirk Zetzsche, LL.M. ADA Chair in Financial Law (Inclusive Finance)Faculty of Law, Economics & FinanceUniversity of LuxembourgMail: [email protected]
The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge forRegulators, Dirk A. Zetzsche, Ross P. Buckley, Douglas W. Arner, Linus Föhr (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072298)