Computer and the Judge

The regulatory noose is tightening around the breathless world of initial coin offerings, with South Korea following in the footsteps of China by banning them outright.

Switzerland, meanwhile, is taking a more measured approach. Swiss regulator Financial Market Authority (FINMA) issued a statement indicating that it will start investigating ICOs they feel are not in accord with established financial legislation. The Swiss regulator's announcement is significant, given that the country is perceived to take a progressive sandbox approach to financial technology. Switzerland also happens to be ICO central.

The South Korea ban (following the Chinese ban issued on 4 September) is also a massive hit to cryptocurrency fans and traders, given their top three digital asset exchanges move in excess of half a billion dollars every day day.(Bithumb 24h volume is $348,808,610, Coinone 24h volume is $147,219,510 and Korbit 24h volume is $64,125,380).

This week, members of the Trump administration also publicly affirmed their interest in exploring potential use cases of blockchain technology. As South Korea and Switzerland crack down on ICOs, this news could indicate a momentous shift in the market for blockchain startups. Here's what some well known participants in the blockchain space had to say:

Oliver Bussmann, President of the Crypto Valley Association (CVA) in Zug, Switzerland, said: "The FINMA announcement is in accord with what we have been saying at the CVA. FINMA clearly states in its guidance that it supports the innovative potential of blockchain technology, but also that, depending on the structure, regulation can and should apply. We think this is another sign of the Swiss regulator's clear and balanced approach to blockchain and Fintech."

Nolan Bauerle, Director of Research at CoinDesk, said an important point to note is that recent regulatory crackdowns in South Korea and Switzerland involve ICOs for so-called 'alt-coins', and do not apply to Bitcoin or ethereum. The SEC, in its ICO guidance this past July, noted that ethereum itself was a currency and not a security and elaborated on the test needed to distinguish between the two. While the supply of many ICOs has been questionable, there are two forces at work:

  1. The first is market-based from the growth of analysis of key price indicators that emerged from a new professional buy-side in cryptocurrencies. The effect of this market approach will likely be positive for the quality of new tokens.
  2. The other force is regulatory, and will likely have an effect on the quantity of ICOs in the market.

"The regulatory approach creates challenges for the regulators themselves. This is a big test of whether regulators can ban or restrict anything cryptocurrency. Cryptocurrencies empower individuals and challenge the legal idea of jurisdictions. These are important forces behind the success of cryptocurrencies. Regulators have lots of work ahead to achieve the kind of compliance they've signalled," said Bauerle.

Serafin Lion Engel, CEO of DataWallet, said: "I think that the FINMA statements set exactly the right tone. The agency appreciates the innovative potential of ICOs and is cognisant of the groundbreaking implications of the technology ICOs are driving.

"This is great news for every company that actually wants to change the world by building the technology they stated and through that provide value to their token holders. This type of regulation will seed out fraudulent players, therefore reducing the level of noise in the ecosystem, and help legitimate companies rise to the top.

"The only players who should be afraid by the statements of FINMA are criminals looking to defraud potential investors who would otherwise invest their money with companies looking to build the next generation of the internet.

"Enabling buyers to make informed decisions critically includes introducing regulatory barriers to seed out companies looking to defraud potential token purchasers or engage in illegal activities such as money laundering or terrorist financing.

"A ban on ICOs, on the other hand, such as that introduced by China and South Korea is simply a naive solution for a complex problem. It is shockingly shortsighted and will inevitably lead to a brain drain of innovators who will now set up their operations in a different jurisdiction.

Ambrosus CEO Angel Versetti said: "The announcement from FINMA validates the prudent policy Ambrosus has taken in our TGE with the enforcement of strict KYC requirements for all participants. Astute observers recognise that the sector is becoming increasingly regulated and that companies which hope to thrive in the future and to be considered legitimate players in the industry will need to be compliant with appropriate rules and regulations.

"There have been those who have questioned our strict policy, but we look at today's announcement as an affirmation of our prudence to date, and consequently we believe that Ambrosus will be considered an example of how to properly and compliantly conduct a TGE in the future.

Polymath CEO Trevor Koverko, added: "China is the influencer in Asia; after they moved on the ban, the pressure was on for everyone else in the region. But the market largely shrugged this off. The smart money is betting that these bans are a temporary band aid until more thorough regulations are thought out."