Entering a Mainstream Era: Why Governments Seek to Regulate Initial Coin Offerings and Cryptocurrencies

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Global attitudes towards blockchain have transformed radically from an extremely cynical period to a cautiously-adopting phase. From 2017 to 2018 the industry has exploded into the global discourse in an unexpected way and now governments around the world are pressing to regulate the technology giving focus to cryptocurrencies and initial coin offerings (ICOs).

Crackdowns and Crypto Havens

There is no global regulatory standard for the nascent sector and almost every country approaches it differently, some embrace the tech and others introduce ICO and cryptocurrency bans and red tape, impeding the use of the technology.

Malta has taken an all-encompassing pro-blockchain stance with adequate laws and regulations in place to facilitate cryptocurrencies, ICOs, and blockchain technology at public and private levels. Contrastingly, China banned cryptocurrency trading and ICOs outright, giving focus entirely to the development and implementation of blockchain.

South Korea, however, sits somewhere in between the two, with world-leading levels of blockchain innovation and cryptocurrency adoption, but have also banned ICOs for now.

This hot and cold temperament can be found in pretty much every nation, each with their own justifications for their stance. Whilst some view cryptocurrencies and ICOs as high risk for investors and institutions with no ‘real’ value, others view them as an essential part of the digital future and accommodate them to boost and support domestic blockchain projects.

Global Usage

Ever since bitcoin came into existence, the niche cypherpunk technology was slowly beginning to be realized as a viable financial tool, granting privacy, sovereignty and financial inclusion to anyone with an internet connection.

Over time, bitcoin and other virtual assets have grown significantly in popularity and value; at present, there are approximately over 20 million bitcoin wallets according to data collected by Bitinfocharts.com, though this doesn’t provide a great deal of accuracy as bitcoin users have multiple wallets. Though if other cryptocurrencies are considered, the number of created wallets is estimated to be approaching 30 million.

Additionally, a 2017 study conducted by the University of Cambridge revealed that the number of ‘active’ wallets is between 5.8 million and 11.5 million, although this doesn’t accurately reflect the usage in emerging markets such as Brazil or the Philippines.

Emerging markets are touted to be catalysts for the adoption of cryptocurrency, with Fundstrat co-founder and chief adviser Thomas Lee spotting a correlation between the growth of these markets and bitcoin earlier this year.

Cause for Concern

2017 was a record-breaking year for bitcoin and all cryptocurrency related activities, but to get to this point the cryptocurrency markets went through extremely troubling times. 2014 saw around 800,000 bitcoin stolen from cryptocurrency exchange Mt Gox, which at the time was worth $450 million USD.

This event caught the attention of global governments and regulators who were now beginning to consider the evidently significant security risks associated with the technology, at this point consumer and investor protection became part of the across all social spheres

Since bitcoin hit a value of $10 in 2011, it is estimated that approximately $2.3 billion USD has been lost from hacks and scams to this day and according to reports, around half of that figure was stolen from the beginning of 2017 to Spring / Summer of 2018 according to a crypto-crime report.

A study of 2017’s red-hot ICO market published in July 2018 by ICO advisory firm Statis Group LLC made headlines around the world as it drew some rather startling conclusions.

The report picked out ICOs that had a minimum market cap of $50 Million and were expected to enter into active market trading, then these ICOs were put into six categories: Scam, Failed, Gone Dead, Dwindling, Promising and Successful.

According to the study, total ICO funding up until the date of publication had amounted to around $11.9 billion and $1.34 (11%) of that total was lost to scams. Interestingly, it wrote that over 80 percent of ICOs were scams, indicating that the gigantic number of small ICOs received miniscule levels of funding. The truth is, three huge scam projects took the lion’s share of the $1.34 billion between them, raking in $1.31 billion from the scam-pot.

Despite the controversies, ICOs have remained a popular choice for blockchain startups, by the end of March 2018, the value of the ICO market had broken past 2017’s total of over $5 billion USD.

In 2017 almost 350 token sales had taken place, comparatively by March 2018, there had been around 200 ICOs which managed to raise $6.3 billion USD.

Follow the Money

The burgeoning markets caught the attention of governments around the world and slowly but surely, regulators began taking notice also.

It appears as though there are almost as many ways to regulate ICOs and cryptocurrencies as there are countries that regulate them; with no global standard in place, governing entities are either paving the way for pro-crypto/ICO regulations or, circumventing associated risks by circumventing the financial aspects of the technology with blanket bans.

In September 2017, China responded to nefarious ICOs by banning individuals and companies from raising funds via an ICO, as well as cryptocurrency trading services. Whilst rocking the markets at the time, it has become apparent that the ban has failed to stifle the use of cryptocurrencies in business. Reluctant to change this stance, China, however, is one of the world leaders when it comes to funding blockchain related projects and initiatives.

Similarly that same month, South Korea announced that it too will be banning ICOs due to increasing risks and fraudulent activities. Cryptocurrency and trading platforms would remain legal but closely monitored and controlled. Over a year later, there is a chance that ICOs will be legalized in South Korea with a decision due in November.

Malta, however, has taken a radically different approach and has set out to be the regulatory standard-bearer. In July, the ‘Blockchain Island’ passed three bills that legitimize ICOs, establish an entity that supports the development of technology innovation and facilitates blockchain-based enterprises as legally sound.

2019

To some, these three nations display a scope of regulation from extremely against to extremely for, with South Korea sitting somewhere in the middle. The actions taken by these nations have created stirs within the global community, causing market values to rise and fall with every step taken.

Malta, South Korea, and China perhaps represent ‘best-case’ solutions depending on the outcome of regulations. Whilst it is entirely possible for blockchain technologies to thrive without ICOs or cryptocurrency trading, it appears as though the value of the two can be considered to be worthwhile in some jurisdictions.

Regulations run the risk of being too harsh, stifling industry developments and innovations, and some may be too lax, opening the door for more scams and fraud. There may be a regulatory Goldilocks zone out there, but it is yet to be established, tried and tested.

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