Nestor Dubnevich: Regulators don’t keep up with ICO development

Nestor Dubnevich: Regulators don’t keep up with ICO development

Laws do not keep up with the development of new financial tools and one should not expect ICOs to be regulated in Ukraine in upcoming years. That is the forecast that the lawyer of JUSCUTUM legal firm Nestor Dubnevich shared with the Blockchain & Bitcoin Conference Kiev.

We talked to him on the topic of legislative regulation of ICOs and found out his opinion on the development of tokenization in Ukraine.


Interviewer: Blockchain & Bitcoin Conference Kiev (BCK)

Speaker: Nestor Dubnevich (N.D.)


BCK: How does the legal regulation or the lack of it influence the organization of ICOs?

N.D.: I will start from some background information. When tulip fever started in Holland in 1636, trading of exchange bulletins for flower bulbs was regulated by the traditions of street arguments only. First security deals were conducted straight in coffee houses, and the securities market just started to shape. Exchanges with more civilized trade rules started to emerge several decades later. The first laws on securitization date back to early XX century.

This retrospective journey into the history perfectly illustrates the situation when legislators cannot keep up with the development dynamics of new financial tools. Moreover, now we see that exact situation around tokenization of assets.

The development of token trading market has two sides. The first: new technologies and completely decentralized issuance of such tools create some level of anarchy. It seems very attractive for the reasons of cheapness and absence of responsibility. The second: regulation of ICOs will signalize the maturity of the market. It will open opportunities for large funds to invest in ICOs, resulting in significant increase of token market capitalization.


BCK: Does the Ukrainian legislation offer anything to regulate ICOs?

N.D.: As of today, the national regulator has not made any official statements on the issues of ICO unlike the USA (Delaware), Switzerland, and Singapore. The Ukrainian legislation on asset securitization (conversion of assets in securities) represents a crippled version of securities legislation in developed countries. And the latter hasn’t caught on in the post-Soviet legal system yet. We still do not have a derivatives market and corresponding laws have not been adopted. It makes me think that ICOs won’t be regulated any time soon in our country.


BCK: Are Ukrainian organizers of ICOs interested in regulation?

N.D.: Ukraine has great material and intellectual resources and attracting investments for their development seems very appealing. However, the lack of legal framework forces project founders to move the fund raising process beyond the national legal system. For legal registration of ICOs, they turn to jurisdictions with more advanced legislation and more loyal attitude to cryptocurrencies from the side of authorities.


BCK: Which jurisdictions provide the best protection of the interests of crypto investors and why?

N.D.: The USA and Singapore can be mentioned among jurisdictions that pay careful attention to respect the interests of crypto investors. Seeing the overheated market and the increase in the number of scam projects, their regulators have published some clarifications. They warn cryptocurrency holders about possible risks of investing in ICOs. The risks can be connected with highly speculative investments as well as money laundering and terrorism financing. However, there are grounds for believing that governments use such benevolent intentions to hide their fears of the fund raising decentralization level, implied by ICOs, which might leave their own interests unsatisfied.


BCK: What should a startup prepare before launching an ICO?

N.D.: Everything starts with the White Paper. The tradition was laid by Satoshi Nakamoto back in 2008, when he described the world’s first cryptocurrency (bitcoin) in such a way. After the concept is formulated, the startup should analyze the legal nature of the token, select a favorable jurisdiction, and draft documents to regulate the relations between the token issuer and other participants of the ICO: investors, ESCROW, advisers.


BCK: How does the business activity type influence the choice of jurisdiction for ICO?

N.D.: Today, projects interesting in running an ICO can be roughly divided in two categories: virtual platforms and real sector. That is a key criterion when choosing a jurisdiction, as it defines whether the project will face the world of fiat money, banks, and financial regulators. While virtual platforms can choose the majority of jurisdictions loyal to cryptocurrencies, the situation with real sector is more difficult. The latter should select island countries with the common law system, where cryptocurrency is traded as commodities. In those countries, banks are ready to take risks of converting bitcoins or ethers, raised during an ICO, in traditional money.


BCK: Which legal statuses can cryptocurrency tokens have? Which approach do you think to be the most appropriate for Ukraine?

N.D.: Today, the safest approach to the definition of the status of tokens for regulators lies in the following: tokens that provide their holders the right to participate in a decentralized platform. The right to participate can further split into the right to use the platform’s functional capabilities, the right to exchange tokens, and the right to participate in the distribution of bonus tokens.

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