(For more details, see Deng Jianpeng, Sun Penglei: “Intermediary Chain Supervision and Compliance Response”, Mechanical Industry Press, 2019)
From ICO to STO, from the STO to the "IEO" that has been on fire since February 2019, the rapid changes in the various "business models" of the currency circle have stimulated the nerves of potential investors all the time.
Although the commercialization of virtual currency has been completely banned in China, the virtual currency transaction still exists due to the technical characteristics of the blockchain and the large amount of investment and speculators through the "scientific Internet access". On the other hand, mainstream virtual currencies have real market prices, and in the international environment, these virtual currencies have real purchasing power. Therefore, from the perspective of law and supervision, we must face the property of virtual currency, the protection of holders' rights and the investment risks.
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Some central bank officials believe that although Bitcoin is nominally called "coin", it is essentially a non-monetary virtual currency. This view positions Bitcoin as a non-monetary virtual currency, similar to asset-based tokens, but ignores Bitcoin's global payment functions and application scenarios, especially in Japan as a payment instrument. In the world of blockchain, only from the perspective of international vision can we understand its connotation and problems more deeply.
Some researchers have divided ICO into three types: donated crowdfunding, similar to physical crowdfunding and equity return crowdfunding. There are theoretical innovations in the classification of ICO and crowdfunding. Among them, equity return crowdfunding is undoubtedly the most risky, similar to the risk of issuing stocks or bonds, but the ICO classification stop is slightly insufficient. For example, if the payment type token belongs to the crowdfunding, this classification may be difficult.
Another researcher divides ICO into virtual goods, income rights certificates, fund shares, and company shares based on the different legal characteristics of issuing tokens. This classification method is beneficial to legal supervision, but ignores tokens and securities tokens that are of a payment nature.
The legal nature of the ICO and the virtual currency or tokens issued by the current hot IEO project is extremely important for determining whether the ICO∕IEO project party is suspected of committing a crime or what crime it has committed.
There are many drawbacks to targeting virtual currency such as Bitcoin as a virtual commodity. If it can be classified according to the classification, it is more timely and judicially recognized.
For example, for payment type tokens, in order to maintain the legal status of the renminbi, such tokens can be directly restricted for sale. For application-type tokens, which are essentially similar to services, goods, or certain usage rights, the sale and purchase of such tokens, similar to the sale of goods or services, has a lower legal risk and can be liberalized. For asset-based tokens, since such tokens involve the impact on the traditional financial industry, they can be further refined, and a registration or license licensing mechanism is introduced to supervise the token-based securitization that meets the characteristics of securities. These three categories of tokens basically cover most of the tokens that appear on the market.
However, a token may also conform to the characteristics of two or even three tokens, and the token may be required to meet various legal requirements without prejudice to its future judicial determination. For example, if a token meets both the characteristics of a payment token and an asset token, it can be required to comply with the legal requirements for payment as well as compliance with the asset. In this regard, the corresponding international legal supervision experience can be referenced.
In terms of international experience, for the issue of tokens, you can refer to Swiss FINMA (and Singapore MAS) to classify the classification according to the economic function of the tokens – payment tokens, application tokens and asset tokens. To make up for its shortcomings, it can basically cover most of the token projects currently on the market. The significance of classifying all kinds of virtual tokens is that it can help the regulatory authorities to quickly determine the specific laws and regulations that the token project should comply with. At the same time, the token project party can also reasonably avoid legal risks before issuing the token. The advantage of classification is that it is convenient to distinguish tokens of different natures. In reality, there are indeed tokens of different natures, but the names are different. It is difficult to do legal recognition in general terms and it is easy to cause unnecessary disputes.
After establishing the legal nature of various types of virtual tokens, future regulators should also focus on the rights protection and risk education of qualified investors.
Previously, some ICO projects adopted the “whitelist system”, that is, the early investors need to provide various information and materials according to the requirements of the blockchain project party, and carry out KYC certification. The blockchain project will send an email to a KYC-certified investor. The email will generally have a virtual currency address that participates in the ICO. Investors only need to send the ICO's virtual currency to the specified address. But this "whitelist system" cannot identify investors' assets and risk tolerance. In addition, whether the project party has the strength to complete the KYC certification, or the actual implementation of KYC, is still a question.
Individual qualified investors and institutional qualified investors have always been in a legal blank in China. Apart from professional investment institutions, there has been no clear legal requirement for individual investors to enter the market. In the past, ICO hype and virtual currency trading platforms had no threshold for investors. Under the lure of tokens, many individuals who did not have risk tolerance entered the trading market.
From the perspective of long-term supervision of the country, the author believes that investors who deal with ICO∕IEO projects should be treated differently. Professional investment institutions and high-net-worth individuals should be the main participants, and retail investors should limit transactions. In terms of establishing a system of qualified investors and professional investors, Singapore's standards for qualified investors and professional investors can be used.
In the financial market, especially in the high-risk investment field, strengthening investor education is an important topic, and the ICO∕IEO market is no exception. As a new financing tool, ICO∕IEO has different opinions on professional cognition, and it is more difficult for ordinary investors to distinguish between right and wrong. ICO∕IEO investor protection needs to be regulated. But in the long run, investors need their own maturity, including professional knowledge, stable emotions and rational cognition.
Since February 2019, the IEO model has been hot. At the beginning, when a well-known exchange launched a token sale under the IEO model, it carried out a strict KYC strategy to exclude citizens such as China and the United States. However, as we all know, there are nearly 16,000 virtual currency exchanges in the world, and the competition between exchanges is extremely fierce. Since April 2019, more than ten exchanges have successfully launched the IEO or IEO token primary market. Due to fierce competition, some exchanges have gradually lowered the threshold. It is not ruled out that in the near future, some exchanges will carry out “bottomless” marketing. Under the crazy slogan of “grab is to earn”, the exchange does not A rigorous review is conducted, that is, on-line tokens and high-risk tokens are directly promoted to investors without risk-taking ability. As a result, the majority of investors (speculators) will surely lose their money. IEO, which looks good in the future, may soon be notorious for it! According to the author's latest understanding, there are already tokens in the IEO model.
Unlike ICO, in the IEO mode, the exchange directly undertakes all the substantive contents of project promotion, project review, and token sponsorship. For example, the function of the exchange is similar to the sum of the China Securities Regulatory Commission and the Shanghai Stock Exchange. At the same time, the exchange itself is an institution that is profitable from it. The exchange lacks independence and there is a great interest relationship. ? This means that the “powerful” exchanges also focus on various risks, and if the project proves that there is fraud in the project under the IEO model, the exchange may bear the responsibility of the bottom. Therefore, the author believes that overseas exchanges that want to engage in the IEO model should be cautious, otherwise, "to get mixed, always have to pay back."
This article starts with: Babbitt Information
Author: Deng Jianpeng, Central University of Finance and Law Professor