ICO – what is it?

What is an Initial Coin Offering (ICO)

The ICO usually starts with the publishing of white paper. The latter elaborates on how a crypto token technology works and what the tokens would be used for. The white paper also specifies the services or the product which is to be funded. For the distribution of the tokens a smart contract based on blockchain is set. Then, crypto currency payments (usually Bitcoin, but may be used also other) are accepted through the smart contract. The latter generates new tokens available for investors. Once a project for which the ICO was set is funded or completed, the investor who has obtained tokens has many options depending on the type of token. The investor my keep the tokens, use them for purchases, and/or sell them or trade them for services through third party platforms.

The ICO is the cryptocurrency space’s rough equivalent to an initial public offering (IPO) on a stock market in the mainstream investment world.  Nowadays the ICO are aiming to substitute the conventions method to raise capital such as venture capital issuances. In 2017 ICO total amount is approx. 1,7 billion dollars.

However the ICOs has also a dark side. There is almost none or very weak corporate governance. The protection of investors’ rights is also significantly weak. The investors are very often motivated by gambling reasons. Besides, there are a lot of fraudulent players – there might be ill-intended money grabbers who propose projects that do or show nothing at the end, yet have walked away with millions of dollars in investments. The lack of proper legal frameworks leaves also room for criminal cases such as money laundering and tax evasion.

The bright side is that the ICOs support innovation, fosters culture of transparency and stimulates the international competition. Also, regardless of the fact that the ICO projects are of high-risk, they could be also of high reward. If the service or the product in which is invested, is executed as effectively as expressed, it could become a lucrative venture.

How the European lawmakers treat them?

There is a lot of uncertainty in terms of EU regulation since there is no regulatory guidance and there is no single law that regulates this area. The current regulations are unfit for crypto tokens and currencies. However transactions happen all across Europe.

So how shall we tackle the token transactions of such kind from a legal prospective? The starting point should be to define the type of token first. Some of the main types are:

  1. Intrinsic Tokens

Represent rights or assets on the blockchain: access rights, key for using protocols, security keys etc.

  1. Asset-backed Tokens

Represent an asset from the off-chain world: fiat currency, real estate, gold, intellectual property, etc.

  1. Rights related to tokens

Represent rights not tied to material assets but an ownership to a right that relates to a material asset: e.g. the right to acquire equity or debt.

  1. Crypto Currency

“Naked tokens” – if used as a mean of payment, any token may become a currency – e.g. Bitcoin, Ether, Ripple, etc.

Legal classification within the given legal system in EU

In order the tokens to be classified the following crucial question shall be raised: Is the token considered a financial instrument in the meaning of the existing regulations?

If the answer is “No” and you are dealing with a contractual right, it is very likely that no regulatory license is required. The project should be structured in line with the relevant regulations of the civil law. If the token could be defined as a specific service, such a as deposit, loan, etc., for which relevant license is required (usually banking), the proper law requirements shall be complied with, accordingly.

If the answer is “Yes” and you have a financial instrument you need to pay attention to the details. Along with the proper license which might need to be obtained, if your token features the aspects similar to stocks, bonds or you are dealing with securities, you need to follow the capital market laws. Thus, should you are offering the tokens to unidentified group of investors you would need a prospectus, which shall be approved by a regulator. If the token features criteria like payment of money against receipt of value of electronic nature and it can be used as a mean of payment you may have an e-money instrument and you might require an e-money license. Very similar to that is if the token features aspects of payment instrument and or payment processes. In this case you may need payment services license. Further, should the token is defined as an alternative investment fund the latter may be again subject to proper license regulatory requirements. 


There are might be of course exemptions of the regulation requirements enlisted above. For instance, if the token is being offered within a limited geographic area or in any other limited manner, it may be exempt from specific license. Likewise, if the offer is addressed to qualified investors only you may be also exempt from prospectus requirements. Another example where exemption may apply is when there is a limited investor base – up to 150 investors (e.g. a private blockchain project).

What the EU says about blockchain applications?

A new regulation is expected very soon in terms of anti-money laundering license requirements. The European Commission considers to amend the 4th AML Directive and to include wallet providers and crypto exchanges. This approach is applauded in the eco-system, because it allows certain players to get out of the shade.


Progressive lawyers is very excited to be in this industry. If you need any assistance just give us a call or send us an e-mail. We would be happy to brain-storm together at any time.

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