Academic journal article Chicago Journal of International Law

Regulation of Initial Coin Offerings: Reconciling U.S. and E.U. Securities Laws

Academic journal article Chicago Journal of International Law

Regulation of Initial Coin Offerings: Reconciling U.S. and E.U. Securities Laws

Article excerpt

I. Introduction

Seventy-three terawatt hours (53.2 TWh). This is the predicted annual energy consumption of mining Bitcoins based on a projection made on December 4, 2018.1 It is the equivalent of the annual energy consumption of Bangladesh, a developing country with 162.9 million citizens.2 It is 0.24 per cent of the world's annual energy consumption.3 It is arguably the first time in history that a payment system might be regulated due to its negative impact on the environment. The environmental implications are not the sole contributors to the cryptocurrency hype: If you had invested a mere one hundred dollars in the, then new, cryptocurrency Ethereum in 2015, and sold everything in January 2018 when the market price reached an all-time high, your investment portfolio would be valued at $462,000.4 Similar returns on investment were generated by other cryptocurrencies,5 such as NEO and Spectrecoin.6 It is fair to say that the world is currently captivated by Bitcoin and other cryptocurrencies. Given these staggering numbers, it is not surprising that Bitcoin and Ethereum are often referred to in the general media and even American comedy shows.7 These cryptocurrencies raise significant and tricky legal questions, such as: Do they require specific regulation? Are they "real" currencies? How can fraud be reduced? What is the tax treatment of cryptocurrencies?

Not only is the sheer size of the cryptocurrency phenomenon noteworthy, but the market has also developed with remarkable speed. In 2009, Bitcoin was created as the first cryptocurrency.8 Although technically significant, cryptocurrencies remained a niche of the financial system for years. It was not until 2016 that the markets realized the enormous potential of the blockchain technology9 upon which cryptocurrencies are based. Staff members of the German financial markets regulator Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) described the crypto-token bonanza as a "wave" that started washing over them in 2017.10 In 2016, a modest $98.7 million was raised by initial coin offerings (ICOs) worldwide.11 This increased to $6.6 billion in 201712 and then $20.3 billion in December 2018.13 As of publication, more than $27 billion has been raised in about two years. ICOs such as Filecoin and Tezos each managed to collect more than $200 million from investors.14 The Russian messaging service Telegram raised a whopping $1.7 billion in two token presales.15 The internet startup Block.one even raised $4 billion without having a live product.16

Currently, the cryptocurrency market seems to be reorganizing itself. Of the 902 ICOs in 2017, forty-six percent had already failed during the first half of 2018.17 This suggests a high level of incompetence among the issuers and/or a high level of fraud in the market. Commentators estimate that about ten percent of ICOs have involved scams, phishing, Ponzi schemes, and other forms of fraudulent behavior.18 These numbers also emphasize the need for investor protection provided by financial markets regulation.19 Market insiders have stated that a growing number of incumbent listed companies are planning to raise funds using blockchain technology.20 These observations suggest that the first "ICO gold rush" has slowed down and that the token market is undergoing a process of maturation.21 However, it is a reasonable assumption that the market volume will keep growing, with no end in sight. Some commentators even argue that token sales could reshape the structure of capital markets in general, similar to the changes to media distribution and retail structures triggered by the internet.22

Oddly, these developments hang in legal limbo. Starting with the U.S. Securities Act of 1933, nearly all countries have established rules to regulate their capital markets.23 The common objectives are to ensure market fairness and integrity, to protect investors, and to facilitate systemic stability.24 It is evident that a company issuing crypto tokens online to the public in return for funds strongly resembles an initial public offering (IPO), in which a company offers securities to the public at a stock exchange. …

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