1 Introduction

Initial Coin Offering (ICO) is thought to be the reason for significant future changes in financial and capital systems.Footnote 1 Furthermore, it is an important method of fundraisingFootnote 2 which is used worldwide by new technological start-ups.Footnote 3 Nonetheless, there are no special financial regulations concerning such matters in the most significant legal systems of the world.Footnote 4

A future legal framework, which should be tailored for ICO purposes, will probably lead to broader acceptance of this method of building capital.Footnote 5 This revolutionary tool of capital formation, which ICO is,Footnote 6 should be regulated in new legal acts because current financial regulations seem to be incompatible with the issues discussed.Footnote 7

Because of the fact that ICOs are in principle cross-border, internationally standardised legal solutions concerning issues elaborated in this paper should be developed.Footnote 8 With such standardisation, financial regulations in the area of ICOs will become extremely effective. However, there is no worldwide consensus concerning regulations on ICOs.Footnote 9

There are two possibilities which can lead to the entry into force of standardised legal principles concerning ICO matters. The first is related to the activities of the international community. The second can be achieved by developing a legal theory of cryptocurrencies.Footnote 10

In view of the fact that none of the existing significant international organisations is currently involved in developing legal solutions in the area of cryptocurrencies,Footnote 11 model regulations in this field can be created only through legal research, legislative process and European legal integration. It is important to research issues regarding ICOs because the lack of well-designed regulations leads to legal uncertainty.Footnote 12 This legal uncertainty could be limited by lawmakers, regulators and international actors.Footnote 13

In view of the above, a theoretical model of regulations in the area of cryptocurrencies should be designed. The author believes that this article can lead to the development of a legal theory of ICOs.

2 Theoretical Notion of Crypto-assets

2.1 General Remarks

Crypto-assets are virtual units of value or units of account,Footnote 14 which are issued in principle through Initial Coin Offering.Footnote 15 They are issued using blockchain technology,Footnote 16 which enables disintermediate payments,Footnote 17 capital investmentFootnote 18 and the purchase of digital services.Footnote 19

Cryptocurrencies are varied because of the fact that they involve a wide range of applicability,Footnote 20 i.e. there are payment tokens,Footnote 21 equity tokens,Footnote 22 debt tokensFootnote 23 and utility tokens.Footnote 24 These types of cryptocurrencies should be discussed separately because different regulations should be created for each of these groups of crypto-assets.

2.2 Payment Tokens

Payment tokensFootnote 25 are also known as coins.Footnote 26 Such crypto-assets play a similar role as money.Footnote 27 Hence, they are a medium of exchangeFootnote 28 and a store of value.Footnote 29

Payment tokens are often described as a decentralised surrogate for moneyFootnote 30 because they are an unofficial medium of exchange.Footnote 31

Nevertheless, they are not legal tenderFootnote 32 (except in JapanFootnote 33). In view of the above, it should be stated that payment tokens are not money but have only significant features of money.Footnote 34

2.3 Security Tokens

2.3.1 General Remarks

Security tokensFootnote 35 are also called investment tokens.Footnote 36 Although they are varied,Footnote 37 they can be divided into two main groups:Footnote 38 debt tokensFootnote 39 and equity tokens.Footnote 40 Both are issued in exchange for fiat money or other cryptocurrencies.Footnote 41 Equity tokens and debt tokens are discussed separately below.

2.3.2 Equity Tokens

Equity tokens are crypto-assets which are purchased to obtain capital flows or to gain profits related to their value changes.Footnote 42 It means that they certainly have a financial nature.Footnote 43

Equity tokens are similar to shares.Footnote 44 In principle, they enable entitlement to dividends,Footnote 45 profits,Footnote 46 royaltiesFootnote 47 and voting rights.Footnote 48 Hence, they entitle their purchasers not only to typical rights of shareholders but also to rights related to e.g. royalties.Footnote 49

It is extremely important to distinguish between pure utility tokens as discussed below and equity tokens, which can have additional utilities.Footnote 50 Most of all, equity tokens have a financial nature, contrary to pure utility tokens.Footnote 51

2.3.3 Debt Tokens

The main feature of debt tokens is that they do not give entitlement to any profits or rights, but do only involve the obligation for the issuer to pay back debt.Footnote 52

Consequently, these tokens are crypto-assets which are similar to debt securities.Footnote 53

2.4 Utility Tokens

Utility tokens are issued to build the loyalty of purchasers of digital services.Footnote 54 The majority of utility tokens should not be treated like securities, but there are significant exemptions,Footnote 55 which are related to the financial nature of such assets.Footnote 56 Nonetheless, most utility tokens have the nature of non-financial gift cards.Footnote 57

Some scholars state that utility tokens are similar to payment tokens but that they can be used only to buy specific services provided by their issuers.Footnote 58 However, it should be added that utility tokens have more applications than typical payment tokens.Footnote 59 Therefore, utility tokens can be understood as payment tokens created for special purposes.

Some legal practitioners believe that utility tokens cannot have features of traditional financial instruments.Footnote 60 However, the majority of these assets have such featuresFootnote 61 because issuers of utility tokens offer access to their products in exchange for capital formation.Footnote 62 Therefore, it may be stated that it is difficult to create pure utility tokens.

3 Definition of Crypto-Asset According to the Proposal for a MiCA Regulation

3.1 General Remarks

The European draft definition of a crypto-asset, which is contained in the proposal for a MiCA Regulation, seems standard as it is based on the notion of ‘digital representation of value or right’.Footnote 63 It is easy to see that this explanation of the notion is similar to the theoretical definitions elaborated above.

Furthermore, it should also be noted that the technological aspect of the European definition of cryptocurrencies is constructed correctly. It stems from the fact that crypto-assets, within the meaning of the proposal for a MiCA Regulation, should be stored or transferred by using cryptographic technology, which is defined in an extremely wide and technologically neutral way based on similarity to DLT technology.Footnote 64 Therefore, it seems difficult to avoid future applicability of the MiCA Regulation.

3.2 Main Groups of Crypto-Assets According to the Proposal for a MiCA Regulation

There are three main groups of crypto-assets in the proposal for a MiCA Regulation,Footnote 65 namely:

  1. a.

    ‘asset-referenced tokens’;Footnote 66

  2. b.

    ‘electronic money tokens’;Footnote 67

  3. c.

    ‘utility tokens’.Footnote 68

It should also be noted that there are financial tokens which are beyond the scope of MiCA.Footnote 69 Traditional European financial regulations apply to such assets.Footnote 70

Therefore, even if the MiCA Regulation enters into force, there may be tokens which would not be explicitly regulated in any European regulation.Footnote 71 Hence, MiCA tokens and non-MiCA crypto-assets should be distinguished for theoretical and practical purposes.

Because of the fact that only certain crypto-assets would fall within the scope of the proposal for a MiCA Regulation, the creation of uniform European regulation for crypto-asset purposes should be considered.Footnote 72

Although the latter solution seems justified and correct, it may turn out to be extremely difficult. This is due to the variety of crypto-assets.Footnote 73 However, it will probably be necessary to create general regulation in the field of crypto-assets in the next phase of harmonisation of these matters.

In the current legal and factual situation in the European Union, two groups of crypto-assets should be discussed separately. The first concerns cryptocurrencies which fall within the scope of the proposal for a MiCA Regulation. The second consists of tokens to which traditional European financial regulations apply.

3.3 Tokens Beyond the Scope of MiCA

It should be repeated that most financial tokens do not fall within the scope of the proposal for a MiCA Regulation. In principle, such tokens are financial crypto-assets, which meet transferability criteria defined in general financial European regulations.Footnote 74 Hence, the MiCA Regulation would not be applied to crypto-assets that are transferable securities because issues relating to such assets are regulated in other European normative acts.Footnote 75

The above-mentioned legal solution related to financial transferable crypto-assets is similar to a ‘wait and see’ approach. Such a legal solution will be justified until the entry into force of a general European legal act in the field of crypto-assets which would apply to both financial and non-financial tokens.

The main problem related to financial crypto-assets is that the transferability of such assets should be tested in a precise manner. Theoretically, the features of financial crypto-assets are similar to those of ‘analogous’ financial instruments.Footnote 76

Moreover, special regulations designed for financial crypto-asset purposes could turn out to be discriminative or favourable. This means that such legal provisions would be incompatible with the European legal system.

Furthermore, there is the risk of legal competition between Member StatesFootnote 77 because national regulators and legislators are in principle free to create crypto-asset legal provisions. Therefore, such provisions can differ between Member States.Footnote 78

3.4 Tokens Within the Scope of MiCA

3.4.1 Asset-referenced Tokens

Asset-referenced tokens’ are asset-backed tokens,Footnote 79 which seem to be crypto derivatives. The value of such instruments should be based on the value of:

  1. a.

    several fiat currencies; or

  2. b.

    at least one other crypto-asset; or

  3. c.

    at least one commodity.Footnote 80

In view of the above, asset-referenced tokens are linked with various groups of assets, i.e. the following crypto-derivatives should be distinguished:

  1. a.

    currency crypto derivatives;

  2. b.

    tokenised crypto derivatives; and

  3. c.

    commodity crypto derivatives.

3.4.2 E-money Tokens

E-money MiCA tokens can be defined as a stable medium of exchange based on fiat currencies.Footnote 81 This definition seems extremely narrow because these tokens are understood in a wider sense by legal theoreticians.Footnote 82

E-money tokens, which are proposed to be regulated in MiCA, would have to be authorised by a competent authority.Footnote 83 Furthermore, they should be issued only by an ‘electronic money institution’ or a ‘credit institution’.Footnote 84

The above definition has been constructed for the applicability of the MiCA Regulation. Coins based on fiat currencies should be regulated in European legal acts because they can influence currency stability and are substitutes of fiat currencies. Still, it would also be reasonable to regulate in European legal acts coins which are not based on fiat currencies. However, this will probably be done in a future phase of harmonisation of crypto-asset issues.

3.4.3 Utility Tokens

According to the proposal for a MiCA Regulation, a utility token is a crypto-asset which can be used only to buy particular goods or services.Footnote 85 Such a token should be accepted only by its issuer.Footnote 86

It is important to state that this definition is completely compatible with the above-mentioned notion of utility tokens constructed by legal theoreticians.Footnote 87 Therefore, this issue need not to be elaborated separately or in detail in this subsection.Footnote 88

3.4.4 Significant Tokens

According to the proposal for a MiCA Regulation, e-money tokens and asset-referenced tokens can be significant within the meaning of the discussed draft legal act.Footnote 89

The notion of significance is based on a number of criteria such as:

  1. a.

    the number of customers to whom crypto-assets will be offered;

  2. b.

    the value of the crypto-assets issued;

  3. c.

    the number of transactions related to those crypto-assets;

  4. d.

    the size of the issuer’s reserve of assets;

  5. e.

    the cross-border nature of the issuer’s activity; and

  6. f.

    the connection between the significant crypto-assets and the financial market.Footnote 90

Special regulations in the proposal for a MiCA would apply to significant asset-referenced tokens and e-money tokens.Footnote 91 It is a good solution because the issuance of such assets should be related to particular obligations and principles as these instruments can play an important role in the European crypto market.

4 Notion of Initial Coin Offering

4.1 General Remarks

Initial Coin Offering is alternatively called Token Generating Event,Footnote 92 Initial Crypto-asset Offering,Footnote 93 Security Token Offering,Footnote 94 Initial Issuance of TokensFootnote 95 and Initial Membership Offering.Footnote 96 Each of these names is justified, but using the most common notion, namely Initial Coin Offering (ICO), is preferable and clear.

There is no common definition of Initial Coin Offering.Footnote 97 Nonetheless, ICO is undoubtedly an alternative method of capital formationFootnote 98 and is regarded as a modern and innovative toolFootnote 99 used for capital formation purposes.Footnote 100

Initial Coin Offering is a process designed for issuing new crypto-assets.Footnote 101 The mechanism is defined as the selling of digital assets to the public in exchange for money or other cryptocurrencies.Footnote 102 This process is of a digital,Footnote 103 virtualFootnote 104 and online nature.Footnote 105 It should also be noted that ICO is more than only a fundraising method.Footnote 106 In particular, ICO can be used to create new digital assetsFootnote 107 which have additional utilities.Footnote 108 Hence, ICOs should be regulated separately in new legal acts.

Through this method of capital formation, crypto-assets are sold to a wide range of investors.Footnote 109 Hence, ICO is similar to IPO which is organised for issuing traditional financial instruments.Footnote 110 Some scholars even claim that each ICO is an unregulated IPO.Footnote 111 However, this is not a correct statement because there are many differences between ICOs and IPOs.Footnote 112 Therefore, a distinction should be made between these two financial processes.

ICOs are used especially to finance new projects, ideas and start-ups.Footnote 113 However, well-established companiesFootnote 114 also organise ICOs to avoid regulations concerning IPOs.Footnote 115 Therefore, it should be considered whether a new legal framework in the area of crypto-assets should be designed in such a way as to make it difficult or even impossible for traditional companies to organise ICOs.

4.2 Phases of Initial Coin Offering

ICOs are divided in phases.Footnote 116 According to most scholars, there are three main phases of ICO: the pre-ICO phase, the real ICO phase and the post-ICO phase.Footnote 117 Some researchers distinguish analogous phases: the ‘white paper’ phase, the primary market phase and the secondary market phase.Footnote 118 Properly constructed new legal regulations in the field of ICOs should be based on this division

In the pre-ICO phase, issuers create ideas and plans related to tokens.Footnote 119 During this phase, tokens are designedFootnote 120 and a white paper is prepared.Footnote 121 In this phase, the white paper should be auditedFootnote 122 and the credibility of the issuer should be checked by the regulator.Footnote 123

In the primary market phase, crypto-assets are issued and sold to the public.Footnote 124 This phase is essential for the success of the Initial Coin Offering. Tokens are sold in exchange for fiat currencies or crypto-assets.Footnote 125

The post-ICO phase is related to the secondary market.Footnote 126 This phase is extremely important for the stability of the crypto-asset market. New financial regulations concerning the post-ICO phase should be focused on the functioning of crypto-exchangesFootnote 127 and the fulfilment of disclosure and reporting obligations by issuers.Footnote 128

4.3 Smart Contracts

Agreements concerning ICOs are often reached by using digital tools called smart contracts, which are programmable digital codes.Footnote 129 It is obvious that traditional ways of entering into contracts are not used in the case of completely digital assets.

In general, smart contracts are used to connect two persons (in the case of ICOs: issuer and investor) in order to achieve an agreementFootnote 130 which can be automatically executed.Footnote 131 However, this tool has many additional utilities. For instance, it makes it possible to programme transactionsFootnote 132 and their rules.Footnote 133 Furthermore, smart contracts can be used to design tokensFootnote 134 and generate crypto-assets.Footnote 135 They can also be used as tools enabling investors to vote.Footnote 136

Because of the fact that smart contracts are pure IT tools, replacement of classical agreements by digital codes is thought to be extremely difficult.Footnote 137 However, it should be regulated that entering into a smart contract is legally binding and has the same effect as concluding a traditional agreement.Footnote 138 For instance, smart contracts are not regarded as legally binding agreements in Germany.Footnote 139 In that country, investors who did not sign a traditional agreement in writing cannot be protected by German general and traditional legal regulations.Footnote 140 Hence, issues regarding smart contracts should be regulated in new financial regulations so as to ensure protection of investors.

5 Current Legal Framework

5.1 General Remarks

There are a number of legal approaches to the discussed issues in contemporary legal systems.Footnote 141 For instance, ICOs are banned in China and South Korea.Footnote 142 In most countries, traditional financial Footnote 143and civilFootnote 144 regulations are applicable to issues regarding cryptocurrencies.Footnote 145 Examples of such countries are the USA, Australia and the UK.Footnote 146 There are also countries with special regulations for crypto-assets,Footnote 147 e.g. France,Footnote 148 GibraltarFootnote 149 and Malta.Footnote 150 Special Maltese and French regulations apply for instance to ICO issues.Footnote 151

5.2 Applicability of Traditional Financial Regulations

In some countries, traditional financial regulations (especially regulations concerning IPOs) are applicable to ICOs.Footnote 152 This stems from the assumption that some tokens have most of the features of traditional financial instruments,Footnote 153 which is related to the fact that ICOs are based on IPOs.Footnote 154 However, traditional regulations are ineffective in the case of such mattersFootnote 155 because the differences between traditional financial instruments and digital assets are significant.Footnote 156 Therefore, it is high time to regulate ICO issues separately.

5.3 Applicability of General Contract Law

There are countries where general contract law applies to ICOs.Footnote 157 This is justified until smart contracts are treated as typical ‘analogous’ agreements (viz. a contract between issuer and investor is understood as a contract of saleFootnote 158 or a barter contract).Footnote 159 A contract of sale enters into force when cryptocurrencies are issued in exchange for fiat currencies,Footnote 160 whereas a barter contract is signed if crypto-assets are issued in exchange for other tokens.Footnote 161

The application of general contract law to matters relating to crypto-assets is undoubtedly justified in the case of non-security tokens. Furthermore, general contract law can be applied to issues that are not regulated in traditional financial regulations.

5.4 Applicability of General Consumer Law

In some countries, regulations in the area of consumer law are applicable to issues regarding crypto-asset manipulation.Footnote 162 Such legal provisions apply to both security and non-security tokens.Footnote 163

The discussed regulations should definitely be applicable to utility tokens without any exemptions. However, in the case of security tokens, legal provisions in the field of consumer law apply only to issues not regulated under general financial law until the moment special regulations on financial tokens enter into force.

In the case of European law, consumer protection regulations enacted under the general Market Abuse Regulation (MAR II)Footnote 164 are applicable to all kinds of financial tokens.Footnote 165 This is in line with the European ‘Digital Finance Strategy’.Footnote 166 However, it would be more accurate to separately regulate the protection of European investors who purchase transferable tokens through ICOs.

5.5 Regulators’ Guidelines

Some countries have non-binding guidelines related to issues regarding crypto-assets, created by regulators.Footnote 167 Such guidelines are useful for issuers because the applicability of current general financial regulations in these matters is explained in such documents.Footnote 168

The main disadvantage of these guidelines is that activity compatible with such guidelines cannot guarantee that issuers, developers and other operators do not breach the law.

5.6 Regulators’ Warnings

Although in most countries ICO issues are not yet regulated, many regulators publish warnings about this method of fundraising.Footnote 169 They can be useful not only for investors but also for issuers.

However, such warnings are extremely general and non-binding because regulators focus on indicating certain issues instead of solving existing problems.Footnote 170 Therefore, regulations should be created which limit the liability of persons who act in accordance with these warnings.

5.7 Innovation Hubs

Interesting examples of regulators’ support for crypto-asset companies are innovation hubs,Footnote 171 such as, for instance, the Australian innovation hub.Footnote 172 Innovation hubs are used to give issuers and other crypto-asset entrepreneurs non-binding advice on the applicability of traditional legal regulations.Footnote 173 They are useful because they lend particular advice concerning matters regarding cryptocurrencies.Footnote 174

Some scholars are even of the opinion that in the area of cryptocurrencies innovation hubs should be created instead of legal regulations.Footnote 175 In that case, legal rules which limit the liability of operators using support offered through innovation hubs should be developed .

5.8 Construction of Maltese Regulations in the Field of ICOs

Malta is a country where regulations on ICOs are in force.Footnote 176 These legal provisions are enacted in the Virtual Assets Act 2018,Footnote 177 which should be briefly discussed in this part of the article.

According to these regulations, the initial offering of virtual financial assets under Maltese jurisdiction must be preceded by the issuance and registration of a white paper which should comply with the principles defined, among others, in the First Schedule to the Virtual Financial Assets Act 2018.Footnote 178 According to this Act, the principles defined by the regulator are applicable to the information published on issuers’ websites.Footnote 179 There are also special regulations related to ICO advertisements.Footnote 180

Although Malta has jurisdiction for a wide range of disintermediated factual situations related to ICOs, in the case of cross-border Initial Token Offerings, the legal regulations, which are in force at the location of the crypto-exchange involved in the crypto-asset trade, should be applied.Footnote 181

Crypto-asset undertakings should obtain a special licence and be registered in order to fulfil the Maltese legal requirements related to ICOs.Footnote 182 Furthermore, a special agent should be appointed in the case of tokens issued under Maltese jurisdiction.Footnote 183 Such agent’s main obligation is to ensure accordance of an ICO with Maltese legal regulations.Footnote 184

The Maltese Virtual Financial Assets Act 2018 also contains detailed anti-manipulation measures.Footnote 185 They concern the prohibition of insider dealing and abusive strategies related to crypto-assets.Footnote 186

The Maltese legislator has also regulated issues related to audit requirements and liability of crypto-asset undertakings.Footnote 187 In view of the above, the Maltese financial system has undoubtedly been designed to ensure protection of crypto-asset investors.

5.9 Construction of French Regulations in the Field of ICOs

5.9.1 General Remarks

Legal regulations in the field of ICOs are also in force in France.Footnote 188 ICO issues are regulated in the French Code monétaire et financier.Footnote 189 The legal provisions are extremely general. They contain definitions of:

  1. a.

    tokens (‘jetons’);Footnote 190 and

  2. b.

    public offering of crypto-assets.Footnote 191

Furthermore, issues regarding informative documentsFootnote 192 and authorisation related to tokensFootnote 193 are also regulated in this legal act.

5.9.2 Definition of Tokens

Under the French regulations, tokens are digital intangible assets which are registered virtually.Footnote 194 This definition seems correctly constructed because it is general and technologically neutral. However, it may turn out to be too broad in certain factual situations.

5.9.3 Notion of Public Offering of Tokens

The notion of ICO is not explicitly used in French regulations. The legal act in question contains a definition of public offering of tokens.Footnote 195 The notion is related to the offering of crypto-assets to the public through the mechanism of subscription.Footnote 196

The definition does not seem to be of a cryptographic and digital nature, but may prove useful. It is also technologically neutral and may therefore have practical value. Still, it should not be used in legal research.

5.9.4 Authorisation and Other Issues Regulated in French Legal Provisions

Each public offering of tokens should be authorised by the French financial supervisory authority (AMF).Footnote 197 In view of this fact, it is obvious that the issuance of crypto-assets is being supervised. The scope of this supervision is specified.Footnote 198

According to the French regulations, the competent supervisory authority is obliged to:

  1. a.

    examine if the issuer is reliable;

  2. b.

    confirm if the issuer is a legal entity; and

  3. c.

    check if the assets of the issuer are properly monitored and protected.Footnote 199

Furthermore, French issuers of tokens must publish documents containing useful information on the issuance of crypto-assets.Footnote 200 Disclosure obligations of French crypto issuers are specified in general financial regulations,Footnote 201 but, as stated, the disclosure of useful information is regulated separately.Footnote 202

5.9.5 Opinion on the French Legal Provisions on ICOs

The French legal provisions on crypto-assets seem extremely general. They do not have any especially designed features to deal with legal situations related to crypto-assets. The same regulations could be created for traditional financial instruments. They were probably enacted only to explicitly regulate that the issuance of crypto-assets should be authorised and supervised by the French financial authority.

6 General Remarks on the European Approach to Crypto-asset Issues

The European approach to crypto-asset issues is still evolving. In general, the European ideas related to such matters seem similar to the above-mentioned concepts common in legal research (also outside the European Union).

Most of all, it should be stated that the European institutions aim to develop legal solutions related to crypto-assets and ‘digital revolution’.Footnote 203 The main example of this approach is the publication of the proposal for a MiCA Regulation which is planned to be applicable only to utility tokens, e-money tokens and other crypto-assets that do not meet the transferability criteria.Footnote 204

In the case of entry into force of the MiCA Regulation, future European legal provisions in the field of crypto-assets would be based on separate approaches related to particular types of assets and specified groups of entities.Footnote 205 Hence, the MiCA Regulation would lead to fragmentation of legal approaches to different crypto-assets.Footnote 206 Furthermore, in the MiCA proposal, issuers and crypto-service providers are governed by different regulations.Footnote 207 This is related to the fact that the legal and factual situations of these groups greatly differ.

Reconciliation between new technologies and traditional financial provisions is thought to be problematic.Footnote 208 Therefore, general European financial regulations have to apply to tokens, which are transferable securities, also if the MiCA Regulation enters into force.Footnote 209 This distinction between transferable and non-transferable tokens will lead to further fragmentation of crypto-asset issues in the European legal system.Footnote 210 Such a construction of European legal provisions relating to crypto-assets should be temporary. It will probably exist until European general crypto-asset regulations enter into force.

7 Role of the International Community in the Process of Creating Standardised Financial Regulations in the Area of Cryptocurrencies

7.1 General Remarks

It is difficult to develop effective national regulations in the area of ICOs.Footnote 211 Many scholars are therefore of the opinion that it is necessary to design an international legal system concerning ICOs and other issues related to cryptocurrencies.Footnote 212 This stems from the justified idea that financial regulations concerning ICOs should be internationally standardised.Footnote 213

However, none of the significant international organisations is currently involved in coordinating the creation of such regulations.Footnote 214 Therefore, a new international organisation should be set up that would be competent in crypto-asset matters. Under the auspices of such an organisation, a new international legal system for cryptocurrencies could be developed.

7.2 Treaties on Matters of Cryptocurrencies

The above-mentioned international organisation should play a significant role in the preparation of an international treaty on cryptocurrency matters. Such a treaty would lead to uniformity of legal provisions concerning cryptocurrencies and ICOs. The most important regulations of this treaty should be legal provisions related to jurisdiction in matters of crypto-assets.Footnote 215

The international legal system should provide for bilateral treaties on the exchange of information in these matters so as to provide for effective countermeasures against international crypto-asset manipulation and money laundering.Footnote 216

7.3 Internationally Recommended Regulations in the Field of Crypto-Assets

Instead of an international treaty, the development of non-binding model regulations at international level could be considered. Alternatively, global guidance on ICO matters could be developed.Footnote 217

The above-mentioned international solutions could lead to world-wide uniformisation and standardisation of cryptocurrency issues. In that case, it would not be necessary to reach international consensus on these matters.

8 New Legal Theory of Regulations in the Field of Initial Coin Offering

8.1 General Remarks

It is doubtless that a new legal framework concerning crypto-assets should be created in the future.Footnote 218 In most countries there are no special regulations,.Footnote 219 This stems from the fact that crypto-asset trade is not common yetFootnote 220 and is still in the beginning phaseFootnote 221 although it is starting to become mainstream.Footnote 222 Furthermore, legislators are aware that the shape of the crypto-asset market is still evolving.Footnote 223 Therefore, a ‘wait-and-see’ approach in the area of cryptocurrencies is still justified in contemporary legal systems.Footnote 224

Nonetheless, it is necessary to discuss the shape of future legal regulations concerning crypto-assets. It is obvious that the entry into force of a new legal framework should be preceded by the creation of a new theory of crypto-financial law.Footnote 225

8.2 General Principles of a New Legal Framework in the Field of Crypto-assets

Fundamental general principles of a future legal framework should be created before complex legal solutions concerning Initial Coin Offering are developed.Footnote 226

First of all, a legal framework in the area of ICOs should be flexibleFootnote 227 in order to prevent future problems related to outdated legal regulations. This is crucial because the crypto-asset market and new financial technologies are still changing.Footnote 228

Furthermore, new financial regulations should be protective of investors but should not discourage entrepreneurs.Footnote 229 In view of the above, legislators should not limit the development of a modern financial market, but this should not lead to a ‘Crypto Wild West’.Footnote 230

New legal regulations in the area of Initial Coin Offering should be general in order to make it impossible to avoid them.Footnote 231 It is also important to create clear principles related to jurisdiction in these matters.Footnote 232

A new legal framework in the area of ICOs should be technologically neutral in order to be resistant to changes in financial technology and prevent avoidance of crypto regulations.Footnote 233

Finally, new financial regulations should focus on counteracting scams and fraud.Footnote 234 However, they should not be too complex so as not to have a negative influence on the development of the crypto-asset market.

8.3 Scope of the New Regulations

New legal regulations in the field of ICOs should concern especially jurisdictional matters,Footnote 235 issues of taxonomy,Footnote 236 disclosure and reporting requirements,Footnote 237 anti-money laundering principles,Footnote 238 anti-fraud provisions,Footnote 239 payment rules,Footnote 240 liability insurance requirements,Footnote 241 registration obligations,Footnote 242 licence obligations,Footnote 243 audit obligations,Footnote 244 legal provisions concerning intermediaries,Footnote 245 legal principles related to rating agencies, and secondary market issues.Footnote 246

8.4 Jurisdictional Issues

Because of the fact that crypto-asset trade is borderless and virtual,Footnote 247 developing effective principles of jurisdiction in the area of cryptocurrencies is extremely difficult.Footnote 248 Jurisdictional problems are probably the main reason for the lack of regulations in the field of ICOs.Footnote 249

Therefore, internationally binding principles of jurisdiction should be created. Such principles can be based on the notion of issuers’ beneficial ownersFootnote 250 or the place of issuers’ management.Footnote 251 Regulations based on the place of registration may be ineffective because many entrepreneurs could decide to establish mailbox companies in blockchain paradises so as to avoid undesirable jurisdictions.Footnote 252

It could also be considered to base the rules in question on the jurisdiction of the purchaser of the crypto-assets. Such jurisdiction could be valuable for anti-money laundering purposes.

8.5 Normative Taxonomy of Cryptocurrencies

Normative taxonomy of cryptocurrencies is not merely a theoretical issue. Payment tokens, utility tokens and investment tokens should be treated in different ways by regulators and legislators. For example, the Maltese Virtual Financial Assets Act is applicable only to financial tokens.Footnote 253 Regulations concerning pure utility tokens should be focused on jurisdictional issues and anti-fraud rules, whereas regulations in the area of security tokens and payment tokens should be more complex and more developed.Footnote 254 They should concern not only issues of jurisdictionFootnote 255 and manipulationFootnote 256 but also matters related to registration of issuers,Footnote 257 disclosure obligations,Footnote 258 reporting standardsFootnote 259 and secondary market principles.Footnote 260

8.6 Registration Obligations

It is obvious that payment tokens and security tokens should be registered by their issuers.Footnote 261 In many countries, crypto-assets are currently registered in registers which were created for traditional financial purposes.Footnote 262 In some countries, there are special registers of crypto-assets for anti-money laundering purposes (e.g. in Australia)Footnote 263 and general registers of crypto-assets (e.g. in Malta and Gibraltar).Footnote 264 Central registers of crypto-assets, crypto-asset issuers and ICOs should be kept in all countries.Footnote 265 The creation of an international register for crypto-asset purposes should also be considered.

Current methods of registration in the field of cryptocurrencies are based on standard solutions applicable to traditional financial instruments.Footnote 266 However, crypto-assets have many digital features which can enable the entry into force of new methods of registration. For instance, the development of automatic methods of registration, which could be directly connected to smart contracts, could be considered.Footnote 267 Such a solution could prove extremely effective in the case of ICOs. Hence, the obligation to register new tokens through smart contracts seems particularly innovative and ideally tailored to crypto-assets.

8.7 Licence Obligation

The quality of the professional activities of crypto-asset issuers, crypto-asset intermediaries, crypto-asset rating agencies and other institutions involved in crypto-asset trade could be ensured by the obligation to obtain special licences.Footnote 268 Special requirementsFootnote 269 should be included in regulations, imposing on crypto-asset issuers the obligation to obtain special licences.Footnote 270

8.8 Payment Rules

Each ICO can turn out to be a scam.Footnote 271 Therefore, several regulators from different countries decided to publish official warnings concerning ICO issues.Footnote 272 However, such a solution is not effective and even naïve.

The most effective method of counteracting fraud committed by crypto-asset issuers seems to be special payment rules for ICO purposes. Some scholars postulate that payments for tokens should be made into a separate bank accountFootnote 273 which could be prepaid.Footnote 274 This would be a good solution because it could protect crypto investors. Other researchers are of the opinion that tokens and money paid for cryptocurrencies issued should be held by third-party custodians.Footnote 275 Such a model would lead to additional control over crypto issuers.

All the above-mentioned rules seem reasonable because they make it difficult for crypto-asset issuers to misappropriate investors’ money or tokens.Footnote 276

8.9 Anti-money Laundering Regulations

It is obvious that legislators should create special legal provisions to counteract money-laundering in the area of ICOs.Footnote 277 Such regulations should be countermeasures against the anonymity and pseudonymity of investors and entrepreneurs.Footnote 278

KYC (Know Your Customer) obligations should be imposed on issuers.Footnote 279 Still, such obligations should not merely consist of a voluntary declaration of the investor. Investors should prove their identity through a bank transfer, digital signature or in another effective way.

Furthermore, countermeasures against the anonymity of investors should be supported by regulations on the international exchange of information in crypto-asset matters.Footnote 280 For instance, it is suggested to create an International Information Sharing Agreement.Footnote 281

8.10 Disclosure Regulations

8.10.1 General Remarks

In principle, no special rules concerning disclosure obligations in the case of ICOs are in forceFootnote 282 (except in the Maltese financial legal systemFootnote 283). It is obvious that such regulations could limit fraud.Footnote 284 However, in some countries traditional financial regulations concerning prospectuses are applicable to ICOs.Footnote 285

Instead of prospectuses, issuers of crypto-assets use several methods to communicate with potential investors. The most common method of disclosure of information on ICOs is the issuance of white papers, which are similar to prospectuses.Footnote 286 Additionally, issuers use special forums, issuers’ websites and social media as channels of communication with future purchasers of their coins and tokens.Footnote 287 In Malta, white papers, issuers’ websites and advertisements of ICOs must comply with binding legal regulations.Footnote 288

There is no doubt that disclosure obligations should be imposed not only on issuers of crypto-assets but also on investorsFootnote 289 and that false disclosure of information should lead to civil, penal and administrative liability.Footnote 290

8.10.2 Disadvantages of White Papers

Although disclosure of information on cryptocurrencies through white papers is the most common method of communication between issuers and future token holders, such documents have many major disadvantages.Footnote 291

First of all, there are no special regulations concerning mandatory information which should be in these white papers.Footnote 292 This leads to informational asymmetry.Footnote 293

Furthermore, the information in the white papers is not reviewed and audited by experts.Footnote 294 For this reason, such information is frequently misleading.Footnote 295

It should also be noted that there are no special liability rules which could apply to issues regarding white papers. In some countries, spreading misleading information through white papers can lead to liability under consumer protection lawFootnote 296 and civil law.Footnote 297

Such misstatements should be prohibited under penalty of law. Legal principles related to civil liability could also be designed for the issuance of unreliable white papers, because there are often omissions and misinformation in those documents.Footnote 298

Finally, current white papers are often difficult to understand. They should therefore be written in plain English.Footnote 299

8.10.3 Proposals for Mandatory Information to Be Disclosed in White Papers

It is obvious that new legal provisions related to white papers should include a list of mandatory information to be disclosed,Footnote 300 such as:

  1. a.

    the issuers’ and developers’ identity;Footnote 301

  2. b.

    the beneficial owners of the issuer;Footnote 302

  3. c.

    the location of the issuer;Footnote 303

  4. d.

    the status and basic features of the issuer;Footnote 304

  5. e.

    information on the issuer’s activity;Footnote 305

  6. f.

    technical information on the tokens issued;Footnote 306

  7. g.

    price of the tokens and methods of payment;Footnote 307

  8. h.

    number of tokens that are planned to be issued;Footnote 308

  9. i.

    rights of the investors;Footnote 309

  10. j.

    goals of the fundraising;Footnote 310

  11. k.

    risks related to the ICO organised;Footnote 311

  12. l.

    investment strategy;Footnote 312

  13. m.

    detailed description of the financed project;Footnote 313

  14. n.

    usability of the financed project;Footnote 314

  15. o.

    information on potential investors and the distribution of tokens;Footnote 315

  16. p.

    predicted duration of the financed project;Footnote 316

  17. q.

    predicted profits from the investment;Footnote 317

  18. r.

    auditor’s opinion on the financed project;Footnote 318

  19. s.

    information on the complaint procedure;Footnote 319

  20. t.

    information on the financial guarantees;Footnote 320

  21. u.

    information on the reserve of assets;Footnote 321

  22. v.

    information on the risks related to the crypto-assets;Footnote 322

  23. w.

    information on issues regarding custody;Footnote 323

  24. x.

    information on the suitability of the ICO procedure for the financed project;Footnote 324

  25. y.

    information about tax issues significant for investors;Footnote 325

  26. z.

    the issuer’s plans for the future.Footnote 326

Furthermore, there are researchers who believe that Initial Business Plans should be attached to the white papers,Footnote 327 which would be a good idea. It could even be considered to attach other documents, such as, for example, as stated in the MiCA proposal, summaries and warnings.Footnote 328

8.10.4 Reporting Obligations

Disclosure obligations should also be fulfilled through temporary reporting,Footnote 329 This means that issuers should be obliged to report amendments in the information included in the white papers, whereas owners of crypto-assets should be obliged to inform regulators of the purchase and disposal of their tokens.Footnote 330

8.11 Anti-manipulation Regulations

Fraudulent ICOs are frequent.Footnote 331 Some financial specialists even believe that all ICOs are scams,Footnote 332 which seems exaggerated. However, counteracting manipulation and fraud in the field of ICOs is undoubtedly an extremely important task of legislators and regulators.Footnote 333 In Malta, for instance, insider trading, illegal disclosure of information and abusive strategies related to crypto-assets are prohibited.Footnote 334

Primary market manipulation should especially be counteracted by auditors, whereas countermeasures against secondary market manipulationFootnote 335 should impose obligations on crypto-exchanges and other trading platforms.Footnote 336

8.12 Audit Requirements, Rating Agencies and Lists of Trusted ICOs

The quality of crypto-assets and ICOs should be evaluated in an organised and professional way.Footnote 337 Such evaluation can be prepared by auditorsFootnote 338 or rating agencies.Footnote 339 Eventually, regulators can draw up lists of trusted ICOs.Footnote 340

There are those who believe that token holders should be protected through supervision and monitoring of ICOs by auditors and lawyers.Footnote 341 They are quite right because ICOs should be supervised by reliable professionals. A serious problem is also the fact that the due diligence obligation does not exist in the case of ICOs.Footnote 342

The role of rating agencies in these matters is currently played by listing platforms.Footnote 343 Contrary to rating agencies, the quality of information provided by listing platforms is unstandardised.Footnote 344 Legal regulations should be created as regards mandatory obligations to be fulfilled by such platforms.

It is important to add that France has an official white list of trusted ICOs.Footnote 345 A similar register exists in Gibraltar.Footnote 346 Such an idea could certainly be applied instead of audit requirements and regulations concerning listing platforms.

In view of the above, legal regulations concerning the evaluation of ICOs should be designed. Such regulations could concern listing platforms, audit obligations and official lists of trusted ICOs.

8.13 Liability Insurance

A significant problem related to ICOs is the lack of mandatory liability insurance.Footnote 347 This obligation should be imposed on issuers of tokens, developers of ICOs and other institutions involved in ICOs. This legal solution would protect investors.

8.14 Regulations Concerning Crypto-asset Intermediaries

Although the crypto-asset world is thought to be disintermediated,Footnote 348 there are crypto-asset intermediaries such as crypto exchanges,Footnote 349 clearing houses,Footnote 350 wallet providersFootnote 351 and custody service providers.Footnote 352

Issues related to the activities of such enterprises should be regulated because they can have an impact on the proper functioning of the crypto-asset market.Footnote 353

It is obvious that all crypto-asset service providers should be neutral and independent of issuers.Footnote 354 It seems extremely difficult to design standardised regulations concerning crypto-asset intermediaries because such intermediaries are greatly varied.Footnote 355 The most important matters to be regulated in these legal provisions are jurisdictional issues regarding such enterprises.

8.15 Secondary Market Regulations

Crypto exchanges play a significant role in the post-ICO phase.Footnote 356 Therefore, a proper and effective legal framework should be set up as regards the secondary crypto-asset market.Footnote 357

The most important legal task in such matters is the creation of jurisdictional rules related to crypto exchanges. This is obvious because conflicts of laws and avoidance of jurisdiction can become serious problems for the effectiveness of future regulations in the field of ICOs. So-called blockchain paradises, which are countries enabling the avoidance of jurisdiction in crypto-asset matters, should be counteracted.Footnote 358

In the legislative process concerning secondary market regulations, lawmakers should also focus on anti-manipulation and anti-money laundering matters.Footnote 359 It is especially important to create crypto-asset secondary market regulations based on current KYC (Know Your Customer) rules.Footnote 360

Finally, it is also necessary to impose registration, reporting and auditing requirements on crypto exchanges. Legal provisions on such issues should lead to improvement of the quality of crypto-asset services.

Such regulations would undoubtedly increase investors’ security. They should be tailored for crypto-asset purposes but can be based on traditional financial legal solutions. This is extremely important because secondary market manipulation is a frequent occurrence.Footnote 361

9 Recommendations for Legislators

First of all, legislators should emulate the regulations in force in other countries, which can thus lead to unofficial harmonisation of legal solutions regarding ICOs. This consideration is especially important in the field of jurisdictional matters. A similar strategy is recommended in the case of non-binding international and supranational legal documents in the area of cryptocurrencies (such as the MiCA proposal), which should also be adapted by national lawmakers.

Furthermore, national financial regulations concerning ICOs should be based on well-considered principles.Footnote 362 Such principles could be:

  1. a.

    technological neutrality;Footnote 363

  2. b.

    flexibility;Footnote 364

  3. c.

    effectiveness;Footnote 365 and

  4. d.

    general nature of new solutions.

Legislators should also enact regulations enabling crypto-asset enterprises to automatically fulfil their registration, reporting and disclosure obligations through smart contracts.Footnote 366

It should be possible to apply general consumer law, contract law and financial law in the case of issues not regulated in new regulations. This means that new regulations should be supported by traditional legal solutions. However, legislators should mainly counteract the development of a so-called ‘Crypto-Wild West’.Footnote 367 In this way, there should be no crypto-asset areas without regulations.

In the framework of these regulations, legislators should pay special attention to payment rules,Footnote 368 anti-scam regulations, anti-manipulation principlesFootnote 369 and the effectiveness of liability insurance requirements.Footnote 370 Furthermore, crypto-investigation units should be set upFootnote 371 and it should be made difficult or impossible for well-established companies to use ICOs to avoid regulations concerning IPOs.Footnote 372

In addition, obligations related to counteracting primary and secondary market manipulation should be imposed on crypto-asset intermediaries. A well-developed system of crypto licences should be set up as well.Footnote 373

A well-organised system of support for investors and entrepreneurs should also be created. For instance, regulators could draw up lists of trusted crypto-asset issuers and crypto exchanges.Footnote 374 Furthermore, national authorities should develop official platforms which could contribute to arriving at a professional and binding interpretation of the new legal regulations.Footnote 375

10 Recommendations for the European Union

In view of the above considerations related to a European legal framework, a crypto-asset legal order compatible with the proposal for a MiCA Regulation would undoubtedly be extremely complicated, heterogenous and difficult to apply.

Therefore, general European regulations in the field of crypto-assets should be created. Such legal provisions should be well thought out so as not to be discriminative or favourable in comparison with general regulations in the field of financial instruments.

Crypto-asset regulations should definitely be harmonised.Footnote 376 There are also justified opinions that the MiCA Regulation and financial European provisions should be coordinated.Footnote 377

It is also obvious that current proposals for regulations in the field of crypto-assets are temporary. Hence, it is necessary to design comprehensive legal regulations regarding cryptocurrencies in the next phase of harmonisation of these matters.

11 Recommendations for the International Community

An international system of standardised regulations in the field of crypto-assets needs to be developed. Such a system could be based not only on a multilateral treaty but also on bilateral agreements.Footnote 378 Furthermore, a new international organisation whose tasks would concern crypto-asset matters, could be created.Footnote 379 Model regulations in the area of crypto-assets could be developed under the auspices of such an organisation.

There is no doubt that international uniform principles of jurisdiction should be enacted in an international treaty on crypto-asset matters,Footnote 380 with respect to the fact that jurisdictional rules should be the same in all countries as jurisdictional conflicts in the area of ICOs are to be avoided.

Furthermore, the international community must counteract blockchain paradises and crypto-mailbox companies.Footnote 381 In view of the above, issues related to the exchange of information in crypto-asset matters should be regulated in bilateral agreements.Footnote 382 It would also be a good idea to conclude model bilateral conventions on the exchange of information in these matters.Footnote 383

12 Conclusions

Although most countries have adopted a ‘wait and see’ approach in the area of Initial Coin Offerings,Footnote 384 new regulations should be designed to ensure a proper functioning of the token market.Footnote 385

New regulations should not be ‘ad hoc’,Footnote 386 which means that a legal theory of cryptocurrencies and a legal theory of Initial Coin Offering should be created before legal acts concerning these matters enter into force.Footnote 387 Furthermore, new crypto regulations in Member States should be based on the solutions included in the proposal for a MiCA Regulation. This is regardless of whether the MiCA will enter into force or not. It stems from the fact that the relevant legal provisions should be uniform.

First and foremost, new crypto-asset regulations should be general and technologically neutral.Footnote 388 Such a solution should make it difficult to avoid new legal provisions. Technologically neutral regulations should also be resistant to future changes in financial and cryptographic technologies.

Regardless of technological neutrality, disclosure and reporting obligations should be fulfilled automatically through smart contracts.Footnote 389 A similar solution could be applicable to registration.Footnote 390

Furthermore, it is necessary to elaborate a taxonomy of tokens and Initial Coin Offering. This is crucial because Initial Coin Offerings of payment tokens, investment tokens and utility tokens should be subject to different legal regulations.

Regulations on payment and security tokens should definitely act as countermeasures against fraud, whereas in the case of financial regulations concerning utility tokens, legislators and legal theoreticians should focus on general principles of consumer protection.

The most complex regulations should concern investment tokens. Such legal provisions should be based on current financial regulations but must differ from them because of the fully virtual nature of crypto-assets.

The main legal problem of cryptocurrencies, which should be solved immediately, is the jurisdictional issue. Principles of jurisdiction should be discussed in an international forum under the auspices of an international organisation competent in such matters.

However, none of the existing international organisations is involved in the process of designing future crypto-asset regulations.Footnote 391 Therefore, such regulations should be created at national level. Until international regulations enter into force, national principles of jurisdiction in the field of ICOs should be based on the location of the beneficial owners of the issuers or the location of the purchasers of crypto-assets.

It is recommended that the new legal framework in the area of investment tokens should be based on a detailed division of ICO phases.

Regulations concerning the pre-ICO phase could concern especially audit requirements and disclosure obligations related to white papers and the process of obtaining licences.Footnote 392

Regulations applicable to issues regarding primary market trade should be developed. New regulations should be applied to payment,Footnote 393 registration,Footnote 394 anti-money laundering (especially Know Your Customer obligations)Footnote 395 and mandatory liability insurance requirements.Footnote 396

Regulations applicable to the post-ICO phase should focus on reporting obligations and the proper functioning of crypto exchanges, other crypto-asset intermediaries and listing platforms.Footnote 397 Furthermore, obligations related to counteracting secondary market manipulation should be imposed on crypto-asset intermediaries.Footnote 398

There is no doubt that new financial regulations in the area of ICOs should be well conceived and resistant to technological changes. Because of the fact that the crypto-asset trade is global, new regulations should be internationally uniform.