Balance required between innovation and investor protection
Canada’s securities regulators should develop smart regulations to ensure that initial coin offerings meet the requirements of both entrepreneurs and investors.
That’s the conclusion of a report from the CD Howe Institute which says that ICOs fill a gap in funding for entrepreneurs with limited access to other capital.
Although individual investors often have relatively small stakes in an ICO-funded project, they are cryptocurrency investments and carry associated risks.
The report’s authors, Thorsten Koeppl and Jeremy Kronick are proposing a simple test to ascertain whether an ICO is fundamental to a business venture's success; and if it is then it should allow for regulatory relief.
They say that for an ICO to be an efficient way of financing, the business venture needs to develop:
- a decentralized platform, usually based on blockchain technology; where
- a coin gives digital access to the platform; and serves as
- a means of payment for users that engage in decentralized, person-to-person (P2P) exchange in order to create and transfer value between them.
"Our proposed test can also create guidelines for the right approach to taxation that is consistent with the value that is added by such financing," notes Koeppl. "Tax rules can be based on the dual roles of the coins, which are both an investment stake and a currency."
What the regulators should do
Koeppl and Kronick suggest that Canadian securities regulators develop specific regulations for ICOs passing this simple test, including less onerous disclosure requirements, exemptions from securities dealer registration requirements, an extended timeframe for exemptions to be granted, and the restriction of investments to smaller amounts.
Alternatively, the simple test could be formalized quickly and be used to decide whether an ICO obtains access to the Canadian Securities Administrators Sandbox.
Initial Coin Offerings (ICOs) have the potential to fill an essential gap in funding for entrepreneurs with limited access to other forms of capital. How should regulators approach this innovative form financing? Read our latest research: https://t.co/csWOnaXVBu #ICO #blockchain pic.twitter.com/unoGAT4lpy— C.D. Howe Institute (@CDHoweInstitute) November 21, 2018