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The legal status of tokens, cryptocurrencies and ICOs

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The last two years have been literally crazy for the cryptocurrency market with Bitcoin spiking to almost $20,000 in December 2017, the overall market capitalization reaching its all-time-high of almost $832 billion in January 2018 and ICOs raising $6.5 billion in 2017 and $21 billion in 2018. All this cannot have passed unnoticed by authorities of different countries. So far, dozens of special laws have been created and various attempts to regulate the industry have been made across the globe, but there is no consistency and no commonly accepted recommendations.

Applicability of the product, an extensive marketing campaign, a professional team and well-prepared documentation was enough for a successful ICO in 2017, but it is not sufficient now. One more vital aspect is the choice of jurisdiction. If you are interested in cryptocurrencies or plan to launch your own blockchain business, you first have to make sure that ICO is a legal way of raising funds and that cryptocurrencies have a legal status in the country of your residence. In this article, we are going to review how cryptocurrencies are regulated in different countries.

The unfriendly bunch

First, let’s review the regions where you have no chances to grow a cryptocurrency-oriented project. This is the list of the countries that have officially banned cryptocurrencies (as of 2018):

  • China
  • Bangladesh
  • Nepal
  • Bolivia
  • Ecuador
  • Pakistan
  • Algeria
  • Egypt
  • Morocco

The case of China is the most interesting one, as this region is one of the leading economies in the world. Cryptocurrencies and ICOs are illegal here after the People’s Bank of China prohibited Bitcoin transactions in 2013. In addition, Chinese authorities have also banned any ICOs and cryptocurrency exchanges in 2017. Binance, the most popular exchange platform with more than $700 million daily trading volume, had to move its business to Malta after the new law came into force.

The legal status of security tokens in the US

The US case should also be regarded separately. Being a motherland of startups, the United States is an excellent jurisdiction for ICOs, but exclusively for the US residents. Non-residents who want to launch a startup in this jurisdiction will face serious risks and expenses as well as become a subject to close scrutiny from authorities.

There is no consistent opinion regarding ICOs and cryptocurrencies among financial regulators here. The Internal Revenue Service (IRS) names Bitcoin a property, the Commodity Futures Trading Commission (CFTC) says that it is a commodity and the Securities and Exchange Commission (SEC) defines tokens issued by ICOs as securities.

The last definition can be regarded as a standard for those who have decided to launch an ICO. According to the Howey test, tokens fall under the definition of a security. This gives token issuers an opportunity to apply for an exemption if they fill in a special application and register their tokens with SEC. Thus, startups can get more freedom in terms of issuing security tokens. However, you stay alert as the laws can change at any time for such a turbulent industry.

What are the best countries for ICOs?

The following regions are considered as the most friendly ones towards the new technologies. However, there are drawbacks in each of them as well.

  1. Switzerland. You can freely exchange crypto to FIAT here and establish your business in only a week having paid $30,000 as a state fee. But banks are still reluctant to work with cryptocurrencies. Although cryptocurrencies are legal here, an ICO has to wait for 3-6 months to officially register its whitepaper with authorities.
  2. The United Kingdom. There is no special legislation that would regulate cryptocurrencies in this region. And although among the European countries, UK can be considered one of the most favorable towards cryptos, you will see no bank support here just like in Switzerland.
  3. Malta. So far this ‘blockchain island’ is one of the most benevolent countries towards cryptocurrencies. For example, here you can register your whitepaper in only 10 days. No wonder that many companies move here from less favourable regions, just like Binance did from China. However, the expected drawback is that the banks are not very eager to support blockchain businesses here, too.
  4. Singapore. This country is also suitable for launching an ICO if you register it as a security. In this case, you can get full support from MAS, the local financial regulator. However, the problem with banks takes place here as well.
  5. Gibraltar. The Gibraltar Financial Services Commission (GFSC) created a special legislative structure for cryptocurrency exchanges in the beginning of 2018. Now there are no taxes for capital gains or added value, which has already attracted many blockchain startups to move to this region.
  6. Denmark. There are no special laws for cryptocurrencies in this country. The authorities do not acknowledge cryptocurrencies as means of payment and thus do not set up any taxes.
  7. Germany. The German Federal Financial Supervisory Authority qualifies cryptocurrencies as financial instruments and considers Bitcoin a legal currency, but does not put any taxes on payments in crypto.
  8. Portugal. Cryptocurrencies are not regulated by the Federal Bank of Portugal and there are no taxes for profits that you receive via trading cryptocurrencies, but you will need to pay taxes if you use cryptos in your commercial activities.
  9. Netherlands. The Dutch Central Bank is reviewing opportunities that are offered by cryptocurrencies, but does not acknowledge them as a “real” currency. The Dutch Blockchain Coalition works on the legal framework for cryptocurrencies in order to help blockchain-oriented businesses be compliant with KYC and AML requirements.
  10. Belarus. So far, this is one of the most cryptocurrency-oriented countries in Eastern Europe. Buying, selling and mining cryptocurrencies is fully legal here and cryptocurrencies are excluded from taxation which aims to help the High-Tech Park Belarus grow and implement new technologies.

The future of ICO

Although with time there seem to be more and more new regions that are loyal to crypto and legalize ICOs, the problem of governments not recognizing crypto as a means of payment etc. still persists and there is no region where ICO could freely use the same facilities as a usual business. However, there’s no reason to despair and to reject the new technology only because the legal instances have no idea how to properly regulate it.

The problem with legalizing cryptocurrencies is that authorities don’t know the industry specifics and create contradictory laws preventing the growth of blockchain startups. As a result, crypto businesses have to struggle with simple daily tasks such as taxation, payments, etc. instead of developing their projects.

However, the momentum that cryptocurrencies have gained over the last 2 years is fairly strong, and the blockchain technologies are here to stay. What ICOs and other blockchain startups can do right now is to conduct negotiations with authorities and create separate zones with their own rules. The attempts to create such zones are already made (Sol city in Puerto-Rico, Noah city in the Philippines, Akon in Senegal), so we may still see cryptocurrencies become an integral part of our lives.

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