In a recent article for Hackernoon, Kirill Shilov emphasized the upcoming shift from Initial Coin Offerings (ICOs) to Security Token Offerings (STOs). Shilov says that Malta’s “Technology First” approach in establishing new laws for security token regulations puts them at the forefront of the impending security token industry. Not everyone is in agreement however— many claim that adherence to existing securities laws will suffice for a compliant and successful security token industry.
How Fraudulent ICOs Strengthen the Push for STOs
More regulatory agencies are taking legal action against fraudulent ICOs than ever before. The increased activity comes in response to the popularized shady antics by many deceptive offerings. According to a study conducted by Boston College, more than 50% of all ICOs ceased operations within four months after launch.
Even state-funded regulatory bodies have targeted fraudulent offerings. The state of Colorado has shut down 18 ICOs in 2018.
Federal regulatory bodies have now taken actions beyond fraud. Most recently, the United States’ Securities and Exchange Commission (SEC) fined Airfox and Paragon Coin for failing to register their offerings as securities offerings. The commission also fined EtherDelta’s founder for operating an unregistered securities exchange.
The increased regulatory enforcement has pushed the larger cryptocurrency community towards security tokens. Unlike utility tokens, security tokens are required to abide by all applicable securities laws given the jurisdiction of their operation and their investors’ locations.
Kirill Shilov suggests Malta— along with its recently passed legislation designed for the flourishment of blockchain technology— will become the global hub of Security Token Offerings (STOs).
How Malta is a Clear-Cut Leader of Cryptocurrency Legislation
In July of 2018, the Maltese Parliament passed three bills into law. This effectively made Malta the world’s first country to establish clear regulations for cryptocurrencies.
Below is a summary of the three bills:
This act formed the MDIA which is tasked with promoting blockchain technology throughout Malta. Besides promoting, they also govern Distributed Ledger Technology (DLT) software by providing legal, technical, and token-economic definitions to users of Malta-based platforms.
The ITAS Act was designed to provide clear guidelines in the blockchain sector. It provides definitions and regulations which were previously absent. It also outlines the guidelines for both auditing and certifying the different DLT software involved in smart contracts, token exchanges, DAOs, and even future innovations which may be subject to regulations by the MDIA.
This act establishes a framework for regulations that can be applied to the many different entities which work with virtual financial assets. This can include custody solution providers, ICOs, brokerages, investment advisors, portfolio managers, and exchanges, among others. The VFAA has also sanctioned a financial instruments test to determine whether or not an offering will constitute a security. Ultimately, all offerings must follow guidelines established through the VFAA.
The pro-active approach in creating new legislation tailored for cryptocurrencies and blockchain technology has seemingly made Malta a global leader in the security token space.
Not everyone is ready to jump on board with such a claim however.
Security Tokens: New Laws or Existing Securities Regulations?
Financial experts such as Bruce Fenton argue that security tokens don’t need any new laws. He argues that security tokens involve the tokenization of a real-world asset, i.e. some type of a financial security. Since securities are subject to existing securities laws, these just need to be accounted for and abided by in the process of tokenization.
Harbor CEO Josh Stein has notably made similar remarks, convincing many that security tokens have no additional regulatory concerns. He says that smart contracts allow for existing regulations to be algorithmically enforced in a transparent manner, providing benefits that are currently absent from the traditional financial securities sector.
Despite the different camps, one thing seems certain: the security token industry has arrived. From luxury property to famous works of art, real-world assets are becoming tokenized at a quickly accelerating pace.
Precisely where the world’s central hub of security tokens will call home, will be made known in due time.
What do you think about the new legislation for cryptocurrencies in Malta? Will the clear regulatory framework result in an increase of security tokens operating out of Malta, or will they abide by existing laws in other jurisdictions? Let us know what you think in the comments below.
Image courtesy of Visit Malta.
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