[DAF2020] "Clear regulations needed to reduce ICO risks”
[DAF2020] Jung Hoseok “Whenever new financial techniques come out, they come into conflict with existing regulations, but there is a benefit from new techniques that can enhance society and the finance industry, and that techniques can go through a process and be legislated. If initial coin offerings (ICO) have clear regulatory standards, that could be a feasible way to deliver funds,” said SEUM Law Partner lawyer Jung Hoseok during his presentation on ICOs. Below are excerpts from the presentation. "ICOs are hard to verify" Traditional markets and ICOs are different from the very first stage. In traditional securities markets, when a company is being founded, it receives seed funding and offers a business plan for increased value. And it also receives more funds depending on the stage of development, so there is no unnecessary investment. But ICOs involve white papers, the setting of the price for the token and the collecting of funds by selling those tokens. There is no chance for evaluation, so you either win it all or lose it all. Even the white paper has no guidelines on how it should be written and what should be covered. Although in recent days the white papers have closely resembled securities reports, before they usually had nothing more than mere explanations of technologies. There is also a difference in that there is no place for regulatory filing, like the Financial Supervisory Service’s data service, and no analysis, retrieval and transfer system. The sector has no legislative underpinning, so there is no actual channel for information to be distributed. It is also not totally legal, so collecting funds is done through anonymous messenger services. The trend is even more apparent for projects done in Korea. As the Korean government prohibits ICOs, some companies found themselves in foreign countries even though they actually operate in Korea. This shouldn’t be an issue if the ICO is included in the legislative sphere, but as the government just prohibits it, risks are growing further. “ICOs are prone to unintentional legal violations” Problems with ICOs with foreign founding are starting to surface. For paper companies overseas, problems occur in the fund management process. There are also problems from changing cryptocurrency like Ethereum into real money as funds are collected in coins. Some are unintentionally evading taxes as the filing method for taxes is also not clear. As for Korean projects, there is a possibility that companies are violating laws on foreign currency transactions. It is a violation to pay employees with cryptocurrency like Bitcoin, but there really is no way to report that, so there are potential hazards moving forward. "CEOs embezzle and white papers are inflated" Illegal practices also happen as a result of moral hazard. Funds collected in cryptocurrencies are often sent to the company CEO’s own wallet instead of official bank accounts, which sometimes leads to lack of transparency and those publicly-collected funds being diverted for individual use. Some CEOs use those funds to pay back loans they took out when opening the busines or hoard them for themselves. Embezzlement can be a problem, and paying extra for certain members could be penalized as a breach of duty. Lack of guidelines also tends to inflate the actual content of white papers. Some list part-timers as full-timers and claim vaguely associated executives as advisors and even fake their own careers. In these cases, blockchain projects could also be penalized for fraud just like any other companies. To reduce those risks, we need clear regulatory guidelines. ICO is a fund collecting method that can facilitate global capital raising. It could be positive if regulatory pushes can define what could be done lawfully or not.