After the first two articles have presented the current and future regulatory framework, the final article of this trilogy now gives an outlook on how ICOs will probably develop in the future under MiCA.
MiCA has finally delivered the regulation many have been longing for. Even though the blockchain was designed as an antithesis to government-regulated technologies and financial products, platforms and issuers have recognised the problems and risks of a lack of regulation and transparency for clients and the market itself. A number of FinTech start-ups have established themselves around the process of an ICO, and as they have gained experience, they have independently introduced a number of compliance and security standards within the platform.
The biggest criticisms of ICOs have always been the lack of regulation and, in particular, the lack of a prospectus requirement, which has subsequently led to a great asymmetry of information between issuer and buyer. These points of criticism have been largely eliminated by the whitepaper obligation.
Like a prospectus, whitepapers achieve the goal of adequately informing the buyer without, however, presenting an equally large regulatory hurdle. As a result, ICOs can continue to retain their character as a lower-threshold form of corporate finance compared to other forms of corporate finance, while at the same time buyers are better protected from the consequences of missing and incorrect product information. The low-threshold aspect is important in order to continue to grant small crowdfunding projects, without large resources and without claims to commercial success, access to this form of corporate financing.
The European Banking Authority (EBA) also has better tools at the same time to enforce compliance and thus ensure effective implementation of MiCA. This will help to remove the negative image still attached to the crypto industry, and thus also to ICOs, as a result of lack of compliance with money laundering regulations and lack of prosecution through anonymity. This will help the industry as a whole, and ICOs in particular, to achieve a higher degree of respectability as a form of corporate financing.
Furthermore, EU passporting will also be introduced for the sectors regulated by MiCA. This possibility is a great relief, especially for smaller companies, for which an adaptation to the respective, sometimes strongly differing, regulatory conditions in the individual member states means a great deal of work and financial effort. This will promote competition among companies in the future and increase the attractiveness of ICOs for issuers and investors.
The criticism that also in the future the dominant part of the service providers in the crypto sector will be located outside the EU and thus not within the scope of MiCA is also addressed in this regulation. By regulating cooperation with third countries in accordance with Art. 90 MiCA, for example by drawing up cooperation agreements, there is an opportunity for local issuers to remain in competition with issuers from regions without or with less regulation, even in the international area.
In the past, fears have often been expressed that increasing regulation of ICOs will take away their appeal, which lay in their lack of regulation in particular. Many companies have also chosen ICOs as a form of corporate financing because they were not as heavily regulated as other forms. However, these fears are already allayed by the fact that the need for regulation has been so great in the past that the industry itself has started to introduce compliance and security standards. Overall, ICOs continue to be a low-threshold corporate finance offering and the benefits from regulation, in particular more trust from institutional investors through greater respectability, more than outweigh the concerns.
On the other hand, the consumer-unfriendly nature of the proof provision in Article 14 Para. 2 MiCA must be viewed critically. According to this, it is up to the holder of the crypto securities, under certain circumstances a consumer, to provide proof of incomplete, unfair, ambiguous or misleading information in the white paper that violates Art.5 MiCA. This can be very time-consuming and expensive.
While the liability of issuers for the accuracy and completeness of whitepapers is positive, the consequences of the most high-profile crypto-related scandals have usually been the insolvency of the issuers – in which case a payout of damages would have become very unlikely.
With regard to the insolvency of the crypto trading platform FTX, which issued the utility token FTT, things would probably have been different for European investors if MiCA had regulated in the EU. The whitepaper requirement on FTT’s ITO alone would probably not have prevented insolvency. However, FTX’s classification as a financial services provider would have made it subject to authorisation under the German Banking Act (KWG) and would have had to separate client funds from the company’s capital. A classic fraud would still have been possible, but it would have been less likely due to the increased supervision by the EBA, including the possibility of sanctions. The increased and more efficient regulation will therefore better protect investors from similar insolvencies in the future, this will increase confidence in products such as utility tokens and thus also the interest in ICOs.
In summary, even if ICOs will still not be regulated quite as strictly as IPOs in the future, MiCA nevertheless provides a good basis for a more transparent and trusting relationship between issuer and buyer. This will help, especially in times of very high-profile bankruptcies of large crypto platforms, to bring back the trust of buyers and consumers and help the EU to lead the way in the regulation of crypto assets and ICOs. As the past years have shown, good regulation has always given Europe a locational advantage in global financial markets. A more trusting relationship between issuers and buyers through MiCA in ICOs will eventually help this fledgling form of corporate finance to find a permanent place in the ranks of public and private equity.
Only time will tell what impact MiCA will actually have on ICOs. But the signs are positive.