Regulation of the Initial Coin Offerings: Sitting in the Waiting Room

LAGOS (Capital Markets in Africa) – Although the debate about whether or not to regulate initial coin offerings (ICOs) is in full swing, many key regulators are hot on its heels, and even if we are in the first paragraph, ‘in summary’, they are going to be regulated. The challenge, of course, will be to regulate appropriately without stifling growth and innovation.

The volatility of certain tokens (also traditionally referred to as cryptocurrencies or coins) can be quite alarming. It is one of the predominant factors in the drive to regulate this space and protect the ordinary investor. There is also the fact that ICOs are usually initiated by start-ups, and participants who are not used to venture capital investing stand to lose all of their investment if the project is unsuccessful.

As things stand, it is generally standard for the issuer of a new token to produce a white paper, although the related process and its content are unregulated. It is good practice – though not mandatory – for a white paper to outline the status of the project, along with its prospects, key leaders, founders and advisors as well as the financial, commercial and technical information of its blockchain project. It has also become common to publish the source code for the public, online, in order for participants to assess its security and functionality at an early stage. However, ICOs being unregulated, the issuer may include or omit information as it sees fit.

There are likely to be obvious problems in regulation. One of the main difficulties with regulating this area is that an ICO does not commonly accept fiat currency (government-declared legal tender) in its fundraising process. Although it is understandable why the public would want to see the token issued in an ICO being regulated, the regulators cannot ignore the fact that ICOs are almost always conducted to receive predominantly Bitcoin and Ether: the most difficult-to-regulate tokens on the market, because of how decentralised they inherently are. It is virtually impossible to properly regulate specifically those two, because no one person or entity can control either of them. Simply put, how do you regulate only half of the relevant process?

An extract from the INTO AFRICA August Edition: Driving Africa Opportunities. The article is written by Mili Soni (Senior Associate, Bowmans South Africa) and to read the full article, please download by clicking: INTO AFRICA PUBLICATION: AUGUST 2018 EDITION.