Cryptocurrency regulatory realities and consequences

After spending an overall of 21 days in South Korea, Japan and China, we decided to share with you all the latest happening on these countries buzzing cryptocurrency scene. In this two-part blog post, we will share with you our insights regarding the regulatory aspects and the best ways to market your project and brand in the far east.

2018 will be recognized among few other things as the year we poked the bear. With 1,354 ICOs since the beginning of the year raising a mind-blowing amount of almost 8 Billion USD, regulators in the likes of the SEC had no choice other than releasing some inclusive announcements referring to all ICOs as securities offering and even actively prosecuting some of them.

Usually, when we consider participating in an ICO we naturally pay better attention to the obvious mainstream factors such as: the initial price of the tokens, having all-stars names in the team and advisory board, the magnitude of hype around the project and several other factors. Perhaps one of the biggest parameters missing in that amateurish due diligence is the regulatory compliance. As regulatory compliance is mostly defined with a complex and threatening legal jargon and terms it is often overlooked.

One of the first actions a project conducting an ICO have to address is the design and nature of its token either as a utility that serves a specific purpose on its designated platform or as a security, requiring an entire set of applications and registration duties used in the traditional securities markets. As this specific point is worthy for its own blog, let me just say that in the current market conditions we become accustomed to, practically all ICOs are in fact securities offer. In order to avoid being labeled as a security under the SEC guidelines, one must actively prevent any exchanges listing, bounty campaigns and have a product its token holders can use as soon as the public sale is live. Unless the aforesaid takes place it is likely that what you are selling is basically an investment contract, one of the U.S securities definitions.

Going back to the ICO participants perspective, making sure a certain project is compliant with its jurisdiction regulator, is critical to make sure hell won’t break loose sometime after the sale causing the entire operation to cease business or suffer great sanctions basically killing the token’s actual use.

Hoping to mitigate that risk, during the past 6 months pretty much every ICO had closed its doors to US participants to avoid the SEC governance. Although this act is far from being enough as the restrictions mentioned above apply on the secondary markets as well, blocking American citizens from your ICO might drastically lower your exposure placing you in the bottom part of the SEC subpoenas queue.

So, blocking US citizens from participating in your ICO might be a smart thing to do right now but where will you get your hard cap filled from? With that exact question in mind, we traveled to Shanghai, Seoul and Tokyo and got back with some interesting answers. So, without further ado here is BITSME’s 2 Satoshis about the current regulatory guidelines in the far east and their immediate consequences:

BITSME is an investment banking firm helping cryptocurrency-based projects to conduct successful TGE campaigns. In this ever-changing environment, it is simply a must to be always on top of the regulatory guidelines. Being a market in its first steps, no fixed framework exists requiring us to be constantly vigilant doing our best to keep up with the latest requirements and statements of the relevant regulators we might be subject to.

People's Republic of China

Back on September 2017, the PBOC (People bank of China) installed a comprehensive ban on all ICO related activities prohibiting any company from conducting an ICO on Chinese soil along with restricting Chinese based exchanges from trading ICO coins and even demanding several ongoing ICOs to return all the collected funds to their original contributors. The PBOC sanctions came after over 500 Million USD were raised in China over 2017, 1/5 of the entire ICO market, with most of them turning out to be exit scams. This drastic prohibition caused all Chinese exchanges to incorporate new entities overseas to gradually stream all operations outside the country. See Binance’s move to Malta and Houbi expansion to Korea. The PBOC widely communicated ban led to the significant BTC drop back in September from 4,800$ to 3,160$ in few days. That deep lasted only for a short period ending in the most famous BTC rally reaching ATH of 19,880$ at December 2017.

Currently, all banns and restrictions in China remain the same. Conducting an ICO is still illegal in China as well as foreign projects offering Chinese citizens to participate. For that reason, the best practice for now for a raising project is to add the Chinese citizens to the prestigious ban club with their fellow Americans. So, does that mean no ICO activity takes place in China? NOT AT ALL. Apparently, some forces are too strong to control. Same as all the exchanges moved to other jurisdictions, so does the crypto funds, marketing agencies and individual investors. Most of the Chinese crypto funds have established sibling funds in Korea acting on their behalf. Meeting with funds in Korea will verify our last point although no official statement will ever be given on the matter. The bottom line is that although dealing with direct Chinese entities is forbidden, reality bound has led local companies to turn their skins and continue their operations under a structure of foreign entities.

Japan

To many of us, Japan has always been the pioneer accepting Bitcoin as an official currency. Many of the legal and tax opinions in the world both for individuals and major corporations, rely on the Japanese law recognizing Bitcoin as a common currency just like the JPY. As a country known for its advanced Fintech industry, Japanese banks were the first to utilize XRP to settle their internal transactions in a giant consortium of 61 banks! In fact, the Japanese embrace of cryptocurrencies is so extraordinary that at the beginning of 2018 it was it announced that Japan's largest bank and the fourth largest bank in the world Mitsubishi UFJ Financial Group is about to launch its own new exchange!

However, despite the favorable attitude toward Bitcoin and Rippel, it appears that regarding ICOs, the Japanese regulator takes the opposite view, and some would even say a hostile one. This can explain why while Japan is perhaps the leading country in the field of cryptocurrencies, you can count on one hand the number of Japanese ICOs. Apart from few small ones and most of Cardno’s staff, there are no other Japanese representatives in that space.

The absence of Japanese representation can be mainly explained due to the fact that in order to promote the sale of cryptocurrencies or the performance of any associated transaction in Japan, a government license is required which is extremely difficult to obtain. This is a critical fact since it means even foreign projects that as part of their advertising efforts decide to translate their website into Japanese may violate the law and be subject to the Japanese FSA prosecution! Therefore, it is recommended to always use a local licensed agency to translate your site in a way that will not constitute as public solicitation, avoiding legal exposures that may endanger your entire campaign. If that’s not enough, due to the increasing number of hacks in Japanese exchanges, both reported as the Coincheck hack and rumors about others, the FSA has tightened its license requirements sending out last month official letters to all current license holders calling them to step up their compliance enforcing stricter rules and regulation on their ongoing operations and reporting duties.

South Korea

South Korea was, is, and unless something special is going to happen, will remain one of the leading regions for cryptocurrencies. With few local exchanges, South Korea is responsible for approximately 10% of the entire daily crypto trading volume worldwide. Although being a very common topic on the general agenda, to date there is no official legal statue for ICOs or even cryptocurrencies in general in South Korea, allowing ICO companies the freedom of operating in the grey zone. In fact, even the mysterious death of a high ranked officer in charge of cryptocurrency regulation did not interfere with the positive attitude towards crypto-based ventures. As a direct results of the South Korea legislators approach, we are currently witnessing a massive inflation of South Korean projects.

This reality is about to change and luckily this time in a good way! On June 13th South Korea held its local elections. When we asked people in Seoul “who is going to win?” we always got the same reply “those who will convince the young generation”. A short visit to South Korea demonstrates how Koreans like to be associated with the general stream and to be like each other. With the electoral power in possession of the same generation constantly keeping itself busy with cryptocurrencies, it is not surprising that only two weeks after the elections ended the Korean government started a classification process to acknowledge crypto exchange as a formal industry followed by additional legislation initiative to establish cryptocurrencies legal status and creating a legal framework for initiating such currencies in South Korea.

After being one of the world’s most embracing countries for cryptocurrencies South Korea is now continuing its positive attitude and is even embarking on far-reaching steps to establish a full cryptocurrency legal framework within its territory.

Conclusion

Our main goal in the journey to the far east was to identify the best environment for our projects to establish themselves and build their brand awareness. While all three countries above share the top on the list of desired places to be well recognized while conducting your ICO campaign, we discovered that while the Chinese money is still unbeatable, Japan is the leading country regarding putting the technology to use with South Korea having the most favorable conditions for promoting and branding your TGE. The main question remains: How to launch a successful ICO campaign in China, Japan and South Korea? , and you can read all about it in our next blog post, Stay tuned!

End of part 1 of 2