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Has Regulation arrived for Cryptocurrencies through the back door?

Over the last couple of years, the crowdfunding market started to build rapidly. ICO or Initial Coin Offering is not only a very advantageous way of raising capital for additional project’s progression but also a remarkably profitable investment tool.

But there are many troubles in this market, which need an answer.

According to data from DeadCoins and Coinopsy, around 1000 cryptocurrency-related projects floundered in 2018 and are now dead. Although this may seem like bathing, the reverse couldn’t be truer.

Dishonest and Poor Crypto Projects

The hyperbolic bull run and ICO mania phase of 2017 brought on the creation of numerous fraudulent digital currency strategies and poor cryptocurrency projects. One such example is Bitconnect, which is one of the largest crypto-Ponzi schemes of all time. One way the industry classifies a crypto project as dead is by concluding the founders dumped the project, was a scam, has no trading volume or transaction validating nodes, and/or its website is over.

Regulators all over the world have been in a quandary regarding what to do with crypto coins as they didn’t quite fit traditional investment or currency rules. Regulation of these funds was patchy, erratic, and often politically driven. Regulation may have actually found a way to embrace the new elements after the emergence of a new type of crowdfunding on the cryptocurrency market-Security Token Offerings (STO).

The main problems of ICO

As discussed before, the ICO reputation suffered during the 2017 and 2018 years. The sad statistics indicate that the vast majority of cryptocurrency startups that conducted public ICO, failed. There are many scammers on this market, whose activities are aimed only at personal enrichment. In 2018 genera investments in ICO totaled greater than 18 billion US dollars and by the end of the year, all projects provided only losses and irritation to their investors.

Cryptocurrency startup Hush, which was wanting to build the first participative, regulated, tokenized and cryptocurrency compatible bank, appears to have all but vanished following a failed ICO earlier this year.

A vast majority of cryptocurrency startups that conducted public ICO, failed

In ICOs the Assets fall into 2 camps

Users can purchase two types of digital assets in a process of involvement during initial coin offerings:

  • Payment Tokens. They can be used to pay for different goods and services, offered by a company who is the issuer.
  • Utility Tokens(or useful tokens). They allow using some specific services, offered by an issuing company.

It is very important to be aware of, that possession of the above-mentioned sorts of assets does not provide an investor either with influence on the destiny of the company (for example to join the voting of shareholders), nor with the protection of his rights. The fact is that payment and utility tokens are not equivalent to securities or stocks.

Considering this, the regulators began to actively monitor start-ups that raise their capital through crowdfunding.

What is STO?

It worth noting, that there is one more type of tokens; Security Token. This variant of assets is very similar to traditional stocks, to which everyone has actually managed to get used on stock markets. The main feature of this particular type is that their owners, in reality, have the right of ownership of a certain share of a company. Such a form of investment is fully protected by regulators. It means that a company’s failure to fulfill financial obligations to its investors will entail legal proceedings. In the UK/EU this kind of investment may well be deemed covered by MiFID II and full regulatory authorisation of the fund will be demanded.

Many experts note, that STO will replace ICO in the crowdfunding market. The matter is the greatest attributes of ICO and IPO were united in this particular investment tool. STO got that level of security, which IPO has, and also the relative simplicity and accessibility that is inherent to ICO.

Who can make an application for or invest in an STO

The FCA will undoubtedly use the Non-Mainstream Pooled Investment (NMPI) rules in COBS 12 for the Self-certified sophisticated investors (where the investor is one of; a)a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date of certification; (b)Has made more than one investment in an unlisted company in the two years prior to the date below;(c) Is working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector,or in the provision of finance for small and medium enterprises; (d)Is currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least 1 million.) &Certified sophisticated investors (with a valid certificate and confirmation by way of a ‘Sophisticated Investor Statement’) as well as the Certified high net worth investors (an annual income to the value of 100,000 or more. As well as, throughout the financial year immediately preceding the date of the declaration, net assets to the value of  250,000 or more).

The SEC has developed rules for investors who wish to take part in STO. Briefly, one of the following will have to be true; An investor must have a net worth of $1million; The investor should have a net income of 200 thousand dollars a year. If we talk about an organization, its net assets must be at least $5 million in order to participate in STO. Also, all members of the company must be accredited investors.

The two big successes of crypto thus far

I can see the future- maybe.

It is early to talk about the future that expects for STO yet. The main indicator of success, which deserves taking note of is the variety of companies that do not operate on the blockchain technology market, who want to conduct an STO in the future. This type of attractive investment should interest middle class companies, for which to conduct a classic IPO is too expensive. If this scenario comes true, then it will be possible to assert with confidence that STO has a great future. It worth noticing, that this is not a fast process. It will take approximately 1-2 years to set all the mechanisms and launch STO for a wide audience. It is quite possible with the right approach of investors and regulators.

The main set back to the entire area is that another challenge has now presented itself, smack in the center of the marketplace, the general decline of the cryptocurrency market. The fact is that people’s interest in investments in cryptocurrencies has decreased at the moment. But the fall cannot last forever (or can it?) Cryptos listed in Coinopsys Scam Coins lists those who had the sole intention of scamming their users or investors. One famous example is Bitconnect, which once had a value of an astonishing $442 per coin and had a market cap of over $2 billion.

Many experts still have optimism and count on a better future of both STO and the cryptocurrency industry, and by doing this, the regulators can step in and apply consumer protection measures and added monitoring so that the crypto market losses of nearly $700 billion since the start of 2018 due to varied reasons including fraudulent projects, failed promises, and investors losing faith in the markets, will ideally never be repeated.

Lee Werrell Chartered FCSI.

Compliance Doctor.


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