The AMF published a discussion paper on Initial Coin Offerings (ICOs) on October 26th, 2017, in which it wished to gather the views of stakeholders on ICO regulation.
We are happy to share our response and would like to thank the Autorité des Marchés Financiers (“AMF”) for the opportunity given through this discussion paper to contribute to the discussion on how to regulate ICOs.
Response from the Government Blockchain Association
The GBA recognises that the development of cryptocurrencies and ICOs create a new way to conceptualise money and the financing of a project/company. The GBA recognises that this change is partly driven by a cultural and philosophical need for decentralisation and to avoid classic intermediaries, such as banks and other financial institutions. This, combined with the fact that cryptocurrencies and ICOs are decentralised and global by nature, creates a complex environment for one regulator to try to impose rules and regulation. Regulators must find the right balance between the risk of shielding their countries investors from potential investments in ICOs through a complex and restrictive regulation and the risk of loss of investors’ confidence and money due to the lack of safeguard and prevention against scams.
Despite this, the GBA considers the need for such regulation as paramount to the success of ICOs and the safeguard of investors.
Please find below our answers to specific questions asked by the AMF in the discussion paper.
Our overall answers are being driven by an acknowledgment that the current ICO market is mainly comprised of early stage start-ups that do not always have the resources to go through the heavy administrative constraints that can exist in classic large fundraising.
With this first point in mind, we also feel it is important to mention that there is an overall tendency for serious projects to impose self-regulations to make this ecosystem a truly viable and beneficial business place. It should then not be possible today to raise over 100 million euros with nothing but a presentation and a promise like what happened in early 2017. Best practices are being adopted more and more by the community without being directed to do so by any official regulator.
We note that the AMF does not mention the reason for why ICOs are getting so much attention from private investors and we find that it would be greatly beneficial, in order to present a full picture of the current blockchain world, to mention that it is the speculative aspect that is driving a great part of the ICO success.
This speculation is partly made possible due to the current absence of regulation, yet, in our opinion it is still important to mention it.
Finally, we feel it is imperative to stress that most of the tokens issued by new ICOs include smart contracts. This technology is at its very infancy and we would like to highlight the fact that most of the smart contract potential is yet to be discovered. Any kind of regulation should, in our opinion be designed in a way that is flexible enough to react and adapt quickly as the technology continues to evolve.
The GBA Position: Option 1: Maintain a regulatory status quo and establish best practices
Would be favourable to option 1 while opening doors for a wider regulation at European level.
We believe this option would put France in a world leading position as one of the first countries to officially set some tangible and controllable best practices that, if met, would give ICO projects the official recognition they deserve and allow them to access basic business services such as bank accounts for the funds they have raised (one of the hardest challenges they find today).
4.1.1. If specific regulations are not established for ICOs, would you support an approach based around a common set of market best practices?
Yes, that is exactly what the GBA is about, gathering best practices from around the world to educate and empower governments to make well informed decisions on how to they can act in the best interest of their citizens. Establishing a set of market best practices should be the first step before any regulation. As the environment is changing quickly it might be difficult to adopt a relevant regulation now.
Those best practices could then get synthetized in an appendix of the whitepaper and potentially audited and certified by independent and approved companies to unlock business services.
4.1.2. Would you be in favour of having ICO originators comply with the following principles and best practices?
We recognize that all ICOs might not be fit, or even looking for regulator best practices, following the generally accepted best practices set up by the market itself and based on experiences of what went wrong or not.
The GBA’s overall purpose is to facilitate the discussion between regulatory bodies and start-ups in an effort to identify a regulation that is both widely accepted by the projects and attractive enough to potentially draw in other great foreign projects that could change society for the best.
This could not happen if the regulation is badly perceived by the ICO originators as they might just look for another more welcoming country. That is why we would rather give the choice to ICO originators to follow the best practices without banning projects that would not follow them.
4.1.3. What other best practices do you think should be applied to ICOs?
The only general best practice we could add is for the project to prove why it cannot be developed without the blockchain technology. As we see today that a lot of businesses are performing ICOs because of the trend, there are a significant number of them that are legitimate businesses but have simply nothing to do with blockchain technology and could be perfectly performed via a classic fundraising method. If the technology can’t be proven to be central to the project, then a project should not be accepted as eligible for an ICO.
This best practice would be achievable by asking the projects to clearly identify what kind of benefits the token offers and what it exactly contains in a short paragraph to keep it understandable by most.
We agree with the other best practices mentioned in 4.1.3
4.1.4. As regards the benefits offered by tokens, should the types of rights that may be associated with tokens (e.g. voting rights, financial rights, access to associated services, ownership rights, governance, and so on) be subject to guidance or restricted?
We are at the infancy of this new technology and we believe that the full potential of tokens is yet to be achieved. We believe that restricting or providing guidance on what a token can or cannot do would have the adverse effect of limiting its overall potential and we would not advise for it.
4.1.5. Should token investing be restricted to a certain investor type? What type of buyers, if any, do you believe should not be solicited by ICOs?
One of the main reason behind the success of ICOs is the ease of access for people that did not previously have access to more strictly regulated markets but still wanted to invest in projects they believed in.
We believe that ICOs should be able to accept investment from anyone that has passed the control process and we would stress out that this is in our opinion a key factor for this industry to thrive. ICO projects should be made accountable for proving that they know who they are accepting money from and accept it as long as it is compliant with the agreed procedures.
It might be a good idea to offer an option where there would be different tiers based on customer type and how they’re investing in an ICO that would be based on best practices. There really is no one-size-fits-all and there needs to be some flexibility for all people to realize this new type of investment and not having it limited to just accredited investors.
4.1.6. If you answered “Yes” to question 4.1.2 a., do you think the white paper should be approved by an authority, a professional association or another key institution in the jurisdiction where the transaction is organised?
This would not necessarily be a mandatory approval as it would go against the very core nature of ICOs, but it would be great to develop some kind of government approval certificate for projects audited by such an institution.
France and perhaps the EU on a per country or an EU-wide basis (given the passporting ability for an e-money license) would benefit from an industry self-regulatory body that works in partnership with the government. The GBA would be a great fit for this and an analogy that has been wildly successful is the Japan Blockchain Association. The self-regulatory body should be the one to certify the paper. One of the best ways to foster effective regulations (consumer protection, anti-money-laundering, etc.) is for the government to work closely with the industry and one of the best tools to do that is a self-regulatory body with representation from the government.
4.1.7. If you answered yes to question 4.1.2 a., should the white paper be validated by one or more independent experts? If so, what type of experts should do this?
Blockchain has the potential to impact a large spectrum of industries. Good ICO projects should already include industry leaders in the advisory board. We don’t believe adding more experts would make a lot of difference. Having great ones on board is already a sufficient guidance in our opinion.
4.1.8. If you answered yes to question 4.1.2 a., do you think it would be useful to define a template for the white paper?
To provide sufficient security to investors in ICOs, the GBA suggests that such set of principles and best practices (which we will identify later in this document), should be accompanied by an optional review process of the ICO whitepapers. Willing ICOs should have the opportunity to come forward to the AMF to get their whitepaper reviewed. Such review could be performed against a light version of the EU Prospectus requirements (REGULATION (EU) 2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and repealing Directive 2003/71/EC). More specifically, the AMF could consider articles 6 and 7 of the Regulation to identify all the relevant information that should be included in whitepapers. ICO originators should be given the opportunity to communicate to investors using the AMF’s opinion. The idea is to create a virtuous circle and establish the AMF’s review as a standard of quality.
The GBA believes that such review on ICO whitepapers should be performed by state financial regulators. As ICOs and the underlying technology blockchain are relatively new, it is currently hard to envisage for any association or independent experts to be able to establish sufficient credit in the market to perform such review. Although there will always be self-appointed experts, the current reality of the ICO world is that every stakeholder is at the beginning of the learning curve and only regulators should have the power to perform a review of ICO whitepapers.
The GBA believes that a whitepaper template developed by the AMF would have massive advantages such as ensuring that the appropriate disclosures and disclaimers are included and facilitate the aforementioned AMF’s review of such whitepaper. The use of such template could be a pre-requisite for the AMF’s review to ensure quick and consistent turnaround.
Finally, given the very wide spectrum of potential ICO projects, the production of such template should be flexible enough to ensure the potential inclusion of most ICOs. There should also be, in our opinion, a possibility for projects that would not be able to fill the template due to the very nature of their project, to submit their paper to the regulator for approval, maybe to a dedicated team.
4.1.10. Should the starting value of tokens be set solely by the issuer? What rules should apply to the financial assessment of the token price?
An open and free market is the best solution to pricing, especially for ICOs. This will not remain an unregulated market as the self-regulatory body in partnership with the government would have necessary controls in place that would impact the pricing.
The starting value of tokens could be better developed in the white paper at length with specifics.
Following market rules is fine in our opinion but there is a need for marketplace harmonization (some projects are looking into it).
4.1.11. During the token presale phase, would it be acceptable to allow tokens to be presold at preferential prices below the starting price set for an announced issue? If so, should a price range for the presale phase be set and announced?
We believe that investors should increase their cautions around presales. In many cases, presale money is solely used to create a larger ICO in a second offering. The GBA is advocating for serious projects to be able to have a working proof of concept prior to one single round of ICO to show investors that the founding team will ultimately be able to deliver their promise.
We would however not recommend highly regulating presales as we believe that this part of the market should self-regulate in time as investor awareness grows.
4.1.12. Should the transparency of ICOs be prioritised during the presale and sale period so that potential investors can find out the funds raised during an ICO in real time?
As ICOs are relatively new, there is no widely recognised set rules to calculate the value of a token. The GBA has been made aware of efforts from accounting firms and governments treasury departments to lay out rules for the accounting and tax treatments of ICOs. It is the GBA’s belief that the market will sort itself out and stakeholders (such as ICO originators, investors, accounting firms, government treasury departments, etc.) will design widely recognised methods to calculate the value of tokens.
ICOs are currently massively unregulated. There is a clear lack of transparency during the presale and sale period that could be detrimental to potential investors. Although real time transparency might not be appropriate in most cases (especially due to the previously suggested enhanced Know Your Customer (KYC) and monitoring of the origin of the funds principles and best practices), daily or weekly transparency should provide transparency to potential investors while leaving enough time for ICO originators to perform the necessary checks. Therefore, the GBA suggests including the transparency during the presale and sale periods to the principles and best practices.
Transparency is of upmost importance when it comes to investing in new forms of technology so that the government is comfortable that consumers can be protected, and illicit activities do not proliferate. To that end the self-regulatory body (as mentioned above) would be in a good position to balance the needs of government with new forms of fundraising through an ICO model and token utilities.
4.1.13. ICOs may be a vehicle for money laundering and terrorist financing practices. What anti-money laundering and terrorist financing procedures do you believe should be introduced? What types of due diligence should token issuers perform on their partners, and particularly platforms that exchange fiat money for digital assets? Do you think that the participation of a third party, such as an authorised investment service provider, is required?
In the discussion paper, the AMF lists 11 principles and best practices that could be adopted by ICOs to demonstrate the strength of their projects. The GBA agrees with the list and suggest that the AMF expands the requirements under “d. Provide clear, exact and non-misleading information in a single document, supplying balanced details”. The GBA recognises the single document as the whitepaper and, in line with our response to your previous questions, suggest requiring that the non-misleading information included in the document should be in line with the EU Prospectus requirements articles 6 and 7.
It is the GBA strong belief that ICOs, crypto-currencies and the underlying technology blockchain will never be able to provide their full potential until money laundering and terrorist financing are not possible. The AMF could use the Financial Action Task Force International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation published in February 2012 and updated in July 2017 as a starting point to identify the minimum best practices required.
The GBA suggest at least including the need to identify investors and beneficial owners using reliable, independent source documents (such as ID cards). Therefore, the GBA are in favour of ICOs originators adopting strong Know Your Customer (“KYC”) standards and ensure that they monitor the origin of the funds raised through the ICO. The GBA suggest including strong KYC standard and monitoring of the origin of the funds to the principles and best practices.
Similarly, ICOs and crypto-currencies are dependent on the ICO originators ethical and moral behaviour. ICOs are investments and, as such, will always be risky. But investors should have sufficient assurance that ICO originators will not “run with the money” as soon as the sale is completed. To mitigate such risk, the AMF could include a minimum vesting period of 12 months for ICO originators and that money raised through the ICO should be held in an escrow account. In line with our previous answers, the GBA suggests including a vesting period and an escrow account to the principles and best practices.
4.1.15. Should funds in cryptocurrencies collected by token issuers be covered by specific rules (for example, a requirement to be placed in an escrow account evidenced by an e-wallet locked by multiple signatures)?
There is obviously a great deal of improvement to be made in that area and projects should be able to prove how they secure the funds raised. We suggest that it could even be included more clearly as part of section 4.1.2 best practices certificate.
4.1.17. What information should be provided to token holders to notify them about the project’s success or failure? Where necessary, do you think it would be useful to have information about the existence of token buyback facilities or to set rules governing the payment of gains to token-holders, for example? In a situation where the ICO is more successful than expected, should the issuer have a ceiling above which investor funds will no longer be accepted?
The whitepaper should clearly stipulate how the project advances will be communicated and commit to a regular newsletter of blogposts to feature advancement. Given that those projects are raising funds with no developed products, we agree that this is indeed a key part. Once the token is issued to the investor, he should remain able to exchange it on approved marketplaces or use it on the dedicated network as intended. The token would be there to use as much as euros can be spent in Europe or translated in dollars to be used in the USA.
Regarding highly successful ICOS, the GBA believe that hard caps should be indeed set up prior the sale. We would also add that projects who sets there goals up to a certain level (for example 50 million euros) should be required to provide an additional layer of details regarding the use they intend to make of the funds.
4.1.18. Do you think it would be useful to have a disclaimer given the unregulated nature of ICOs?
As mentioned previously in this document, the GBA recognises that ICOs are risky investments and unregulated. The success or the failure of the project is the main way for an investment in an ICO to generate a profit or a loss for the investor. Therefore, ICOs should only be invested in by investors that have the financial capacity to survive the loss of their investment.
The GBA considered the warning included in the discussion paper by the AMF and suggest that the AMF publishes such warning as widely as possible, similarly to the warning issued by the FCA in September 2017. Such warning can also be included as a disclaimer to the whitepapers reviewed by the AMF as part of the process described above.
Any type of disclosure should be reviewed and edited by a self-regulatory body so that it is crystal clear that any current disclaimers that are used might not work in the future.
4.3.3. Are you in favour of adopting new laws specifically regulating ICOs that would be optional and combine a prior authorisation regime with the issuing of approval with an obligatory disclaimer for offerings that were not approved?
The Government Blockchain Association would like to thank again the Autorité des Marchés Financiers for the opportunity to respond to their discussion paper and would be happy to discuss our response in person if necessary.
See below a list of all the parties of our organization that have participated to this discussion:
GBA President: Gerard Dache
Paris Chapter President: Leila Nassiri-Jamet
GBA Director, Working Group PMO: Robert Perry
Financial Regulatory and Compliance Working Group:
Group Lead: Michael Bombace
Working Group Members: Thibault Charbonneau & Tommy Jamet
Financial Oversight Working Group:
Group Lead: Bernie Doyle