Why there is no “one-size-fits-all” regulation for ICOs

blockchain, smart contracts

Lee Schneider and Erik Syvertsen are active legal forces in the New York legal community, where they are focused on the blockchain and cryptocurrency space. They can often be found speaking at events, running podcasts, and providing their expertise on critical and emerging issues in blockchain law around the globe.

As the world reacts to the uncertainty of cryptocurrency offerings such as initial coin offerings, initial token offerings, and sales of securities of cryptocurrency investment funds, many startups in the community are having discussions on what the future of innovation in the cryptocurrency space looks like.

Schneider and Syvertsen will be sharing their thoughts at a program entitled “Blockchains, Smart Contracts and the Law” on November 15, during a one-day program where 17 top legal, tech and financial industry experts from the US and Canada will discuss the biggest legal issues facing the blockchain.

To get a sneak peek at what to expect, Schneider and Syvertsen spoke with Osgoode Professional Development’s Program Lawyer, Amy ter Haar, about ICOs and the law.


Can you give a brief explanation about ICOs? What are they? Where did they suddenly come from? Who’s investing in them and what’s got people excited?

Erik: The ICO is itself a heated term. You see these events referred to by a number of different nomenclatures: Token launch event, token distribution events. Many securities lawyers in the US dislike the phrase ICOs because of the illusion to IPOs that it evokes. Nonetheless, it is becoming the prevailing terminology.

“I don’t think that there will be wholesale regulation of blockchain tokens because each token needs to be considered for what it is.”
– Lee A. Schneider

The substance behind it refers to a distribution of tokens on a blockchain-based network. This can mean a lot of different things. These can be tokens that are themselves simply virtual currencies, like an Ethereum token or Bitcoin. It can mean tokens that are usable in a network or consumer application, like a messaging application, a decentralized browser, or a file storage network; and it can mean tokens that are more like a traditional security where they represent an ownership interest or other economic rights and participation in a project.

Lee: Tokens represent some kind of asset – a digital asset of the digitization of an asset. That fact gets lost a lot in the conversation because people view all tokens as being a similar asset class to buy or sell or invest in.

It is important to remember that each token has specific features or characteristics that may represent some underlying assets like a stock or an ounce of gold or a technology license. Trying to lump all those tokens together a single type of asset is incorrect. You need to focus on what that token does, what its features are.

The majority of the analysis to date has centered on the debate over whether a particular coin or token should be considered a security, and the technical considerations for setting up such an investment vehicle. However, even if an ICO is not subject to financial regulation, this does not mean that no law or regulation applies. What could be done to give clarity to innovators and ‘investors’ in ICOs?

Lee: Our big mantra when we talk with projects is “Don’t commit fraud.” I try to boil it down for clients with that mantra. It is about disclosure. It is about being open with what you’re planning to do and how you are planning to use the proceeds.

If the industry adopts a good, cohesive approach to the disclosures that they are making and the explanations that they are giving in connection with these offerings, that will go a long way with the regulators.

Is new legislation or regulation necessary? Can or should existing rules be applied differently? How do you anticipate that this area of the law will evolve?

Lee: I expect there will be some regulation around it. Exactly what that regulation will look like is not yet clear to me.

Canada, China, US, Japan, Hong Kong, Singapore have issued statements in the last month around cryptocurrencies, or blockchain tokens. So we are starting to see regulators focus on these issues. I don’t think that there will be wholesale regulation of blockchain tokens because each token needs to be considered for what it is. And if you can fit it into some existing regulatory framework, that is likely a better way to handle it as opposed to creating a new regulatory framework that covers all kinds of disparate assets.

Erik: It is wrongheaded to try to bucket all tokens under one regulatory regime. This explains a lot of the measured pace that regulators have gone so far in regulating and overseeing these markets — and allowing them to self-regulate to an extent — while issuing guidance and caution precisely because there is no one-size-fits-all solution.

There is an existing body of law and regulations that ought to be applied to these projects, as it is appropriate for an individual project and token based upon what exactly its attributes are.


Lee Schneider

Lee A. Schneider, is a financial services and technology lawyer at Debevoise & Plimpton based in New York, and is the father of two wonderful, exhausting teenage ladies. His broad-based practice focuses on all aspects FinTech, including both traditional and blockchain transactions, regulatory work, and negotiating technology agreements. Lee represents of U.S. and non-U.S. blockchain projects, broker-dealers, banks, private fund sponsors, and financial technology companies. He learns about Japanese art history from his wife. Lee hosts a FinTech podcast called Appetite for Disruption, available on iTunes and elsewhere.

Erik

Erik is general counsel at AngelList. AngelList is a platform for tech startups, angel investors, and job-seekers looking to work at startups. Erik is also legal counsel for a leading New York law firm, Olshan Frome Wolosky LLP, where he served as partner until joining AngelList. At Olshan, he represented early-stage technology companies on capital raising and transactional matters. Presently, Erik is working on CoinList, a platform being developed for token backed networks to raise money through token sales.

Amy ter Haar

Amy ter Haar

Amy is the President of Integra Canada, which is involved in the day-to-day operation of the Integra Ledger “Blockchain for Law” and is part of the recently announced Global Legal Blockchain Consortium. She is also a Program Lawyer with Osgoode Professional Development and the organizer of Toronto Legal Hackers, one of the largest such groups in the world with nearly 1,000 members. Earlier in her career, she practiced law for 10 years, and she has published many articles and spoken to groups such as the World Council of Credit Unions, the Parliament of Canada, and the International Telecommunications Union. She is a graduate of Western University in London, Ontario, where she earned her LL.B and LL.M. degrees and is currently pursuing her Ph.D.