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ICOs and Cryptocurrencies Regulations

ICOs and crypto regulations

October 22, 2020 | 

JOHN K MWANIKI |  1 Comments| 



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The use of Initial Coin Offering (ICO) to raise funding is rising. It is growing to ease transactions as people warm up to cryptocurrencies. At the same time, crypto challenges are at par. Digital currencies come with the possibility of fraud and other illegal activities. 

There is also the possible use of money laundering and volatility. This has brought along increased attention from financial services regulators. 

Most financial regulators are forming technology-neutral regulations. They are after regulating the tokens more than the technology for execution. This is to ensure the safety of users while also allowing the issuers to prosper.

The laws allow transactions in various forms. For example, an issuer of cryptocurrencies can receive payments through fiat currency. They can then remit the cryptos to a foreign counterpart through the internet. The foreign partner then pays out to the intended recipient in fiat currencies.

The expansion in crypto use has made ICOs become an alternative for IPOs. ICOs raised around $118m in Q1 of 2019. These values are relatively small compared to fiat currencies transactions. Digital currencies are only 0.1% of daily retail transactions. Still, increased regulations are likely to improve it.

Follow this analysis to learn the status of regulations in cryptocurrencies and ICOs. 

Crypto Risks 

Crypto risks are the main reasons for the regulations. Most of the ICOs operate unregulated. Any project can offer the token then fail to deliver. With regulation, the companies will have to deliver on their mandates. 

Once regulated, the investors would be willing to take up the offers. It means the regulations are significant for both parties. The ICO offering company gains market while consumers gain assured security.

The regulations will also cover other concerns like volatility. Centralized usage is easy to manage hence the ability to control price movements. It will also help in managing the use of cryptos in illegal activities.

Regulatory Measures on Cryptocurrencies and ICO

Various entities provide for different regulatory measures on ICOs. These rules might vary depending on the existing financial standards. Some of the regulatory measures in other countries are;

  • Ban on ICOs

Even though ICOs are convenient ways to raise funds, they come with risks. Most governments are after protecting their citizens. That is why some countries like China have banned ICOs. They are after ensuring investor protection and financial risk prevention. 

Cryptos don't need government authorization to operate. Still, there should be a control party. The government can crackdown on the illegal issuance of tokens. After which, it can be safe for consumers.  

  • Requirements for Crypto Exchanges 

Several crypto exchanges have been operational since the surge of cryptos. They provide the platform to buy and sell digital assets. Unlike before, they will have to register with the SEC to operate. The only exemption is when the platform is part of another regulatory body.

Some crypto exchanges are considering the option of registering as licensed broker-dealers. It is through this way that they can operate without having to register with the SEC.

SEC also wants non-exchange crypto service providers to register. These services also offer crypto wallets for holding virtual currencies. Only registered cryptocurrency service providers can offer ICOs.

  • Virtual Currencies Service Providers Requirements 

Any sale involving virtual currencies must be regulated like fiat currency. For example, US virtual regulations fall under Treasury with Financial Crimes Enforcement Network (FinCEN). FinCEN describes virtual currencies as a medium of exchange operating like a currency. Yet, it does not have all its attributes.

All the virtual currencies service providers are considered money transmitters. They must only operate under strict guidelines. 

The control helps in regulating money laundering and financial terrorists. The regulations will still run to include other entities. 

Implications of the regulations on firms 

The cryptocurrency service providers are the main affected by the regulations. They have been operating before without any constraints. Still, this comes with the risk of unscrupulous traders. For now, they have to contend with the national regulations.

Consumers value security more than any other thing. They only want to deal with a compliant platform. Any service provider looking to attract users should be regulated.

The regulations also come with several other benefits for the firms. Such as; 

1.    Ease of accountability and auditing 

Transparency is an essential trait for firms. Regulations allow tracking of assets and documenting the ownership of the ICO tokens. This follows the focus on sound reporting developed following the rules. 

2.    Effective Systems and Processes 

As a new entity, most cryptocurrency and ICO struggle to develop an operational framework. They don't understand what's essential for the best outcomes. That is where the regulations come in. It guides the firms on the areas of focus, like on record keeping and reporting. It also helps in how the firms can keep safeguarding their assets from possible hacking.

3.    Global Access

Unlike traditional currencies, virtual currencies operate cross border. The regulations coming up understand this. For that, they are looking for the best ways to ensure harmonization with other national laws. In the end, it will be a whole unionized ICO and cryptocurrency regulations.

4.    Transparency to Investors 

Even though profitable, cryptocurrencies and ICOs are risky. The regulations need firms to let investors have all information before they invest. They should only put in their money when sure of what they are getting into.

The regulations also provide for how to deal with investor questions and complaints. 

Bottom Line 

After operating for over a decade, digital currency is becoming a sought-after asset. Companies are embracing ICOs as the best way to raise funds. While they are gaining traction, they also come with several risks.

Investors have lost a lot of money on ICO scams. They invested in tokens that never picked up. 

The issue has prompted the government to react to ensure consumer protection. Several financial regulatory bodies are coming up with rules to guide the sector. 

The regulations determine the operations of ICOs and other crypto service providers. It is excellent for both crypto issuers and users. While it ensures consumer safety, it creates a market for service providers. It is a win-win situation in the end.

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