For some time now, lawyers have been warning about the uncertainties connected with operating a crypto company in the States, particularly when tokens are in the mix. Unfortunately, these threats are more obvious than before.
There have been instances where European clients who sold tokens in the States became victims of US regulators, even though they were small players, due to the States’ push to establish law through enforcement, in order to probably pursue larger players in the far away future.
The regulators in the US secured in 2020 significant court rulings versus firms that sold tokens in 2017 and 2018. Those who issued tokens this year and in the coming times cannot oversee the USA security rules without taking significant risks and possibly litigations after a few years.
Luckily, the USA isn’t the lone marketplace where businesses can collect money by selling tokens. There are nations around the world that support token offerings and should be checked for business. The rules of the USA aren’t intended to limit the sale of tokens there.
New sales of tokens
As claimed by the ICO Watchlist, the EU is currently the go-to place when looking at the globe and producing capital via token offerings. As more firms pick to put the USA on the list of forbidden regions and North Korea, Syria, and Afghanistan, the European Union will probably become an even more renowned region.
Both based in Europe, Austria’s Bitpanda and the Swiss Polkadot have sold in 2019 tokens worth millions of euros via ICO and IEO offerings. Popular distributed leverage ventures like ETH and MakerDAO found support in Swiss foundations. While newer names like Morpher from Austria finished their financing cycles with known USA venture capital companies while holding main offices in Europe. Moreover, the aforementioned Bitpanda raised 43.6M euros last year via sales of BEST tokens. Morpher is conducting the sale of the MPH token now.
It’s no surprise that firms are attracted to Europe. This is mainly due to legal reasons, like the Howey Test imposed by the Supreme Court of the USA. SEC Chairman Jay Clayton summed up recently and accurately by saying that all ICO’s he encountered were securities. The majority of European regulators, especially those from Germany, Austria, and Switzerland, make distinctions between security and payment tokens and utility ones. They are aware that utility ones are, for the bigger part, not subjected to financial services or capital marketplace laws.
Regulators from Europe don’t have a background in doubling down on those who issue tokens, in contrast with the USA’s practices. Those who issue tokens in Europe have less chance of finding themselves in private litigation than those in the USA.
Difference in regulation methods
Such diverse regulatory strategies for token offerings can be accredited to the historical funding mechanisms utilized by European and North American businesses, together with their clear legal structures. In the States, equity offerings continue to be found more easily than in continental Europe, where debt financing still is the aim of major financial entities.
There isn’t such a long history of capital marketplace exposure in Europe as much as in the States. So while capital markets in Europe were under the heavy influence of the States, the requirement for harmonizing the definition of transferable securities between member nations of the European Union stopped the European Union from implementing the Howey Test right away when adopting in 2004 the Markets in Financial Instruments Directive. From our perspective, the limits of the civil law tradition in Europe vs. common law systems of the States and the United Kingdom also stop national regulators from implementing a test similar to the Howey Test in upcoming times, even with the push to conduct such a move when talking about token sales.
In comparison to the USA, the European Union has made considerable steps in unifying the rules regulating token sales. On 24 September this year, the EC released a proposal named Regulation on Markets in Crypto-assets, creating a transparency regime for token sales and laying the groundwork for those who issue stablecoins and crypto service providers to operate safely in the EU. It is planned that the Regulation will become law in all European Union States by 2023.
When accepted, the law will offer legal safety nets for those who issue tokens. It will assist in setting Europe as the main authority for conducting cryptocurrency jobs. We are yet to see how the USA and Europe’s very much different strategies shape the cryptocurrency sphere from now on. Europe will, it seems, prevail.