A review of cryptocurrency issuance regulation and an analysis of the current status of compliance development of token issuance

Have those of you who have invested in cryptocurrencies noticed that in the bull market from 2020 to 2021, few people mentioned the statement that "99% of tokens have returned to zero". In fact, this is mainly due to the compliance of token issuance in the market and the improvement of investors' awareness of market risks. Needless to say, the improvement in awareness is the compliance of tokens, which is what we are concerned about today.

There were not many rules and regulations for the early issuance of tokens. For example, Ethereum was invested directly by a few bigwigs after reading the white paper. At that time, there were no crypto funds or investment institutions. Most of the investment in projects was individual. It can be said that this model was very novel at the time. Many people did not understand the difference between investing directly in ETH and using graphics cards to mine.

Of course, the market will always grow and develop. The development of the blockchain industry is naturally accompanied by the emergence of more and more projects. We cannot expect the only few well-known cryptocurrencies in the market at that time to support its future trillion-dollar and non-negligible market. Therefore, token issuance has naturally become a "must-have" in the currency circle, and the emergence of the ERC20 token protocol has solved this rigid demand, so the ICO currency issuance model began to appear.

ICO is mainly the behavior of the project party (which we can think of as a group organization) issuing initial tokens and raising funds in the market. This model is similar to IPO. The project party needs to have its own official website, white paper, smart contract tokens and coin collection address, etc. Of course, the most critical and risky thing is that ICO is issued to the public. As long as it is an individual (person) on the Internet, ETH or BTC can be directly transferred to the project party's contract account, and then a certain number of project tokens can be obtained. There is no need for any information review in the middle. Since the financing method is very simple and has no restrictions, it is also very popular.

Of course, everything has its limits and will turn around, which is an objective law. The money-making effect of ICO has also attracted many scammers to participate. At the same time, this financing method without any threshold has also destroyed the traditional market balance. So 94 came. After 94, although most of this type of financing activities were overseas, various countries began to realize the harm brought by ICO financing, and therefore issued relevant regulatory provisions. This has also caused many such projects to fall or even return to zero in the bear market to a certain extent. The prices of some projects have not reached one-tenth of their peak until this round of bull market.

Since the market demand for token financing has not decreased, the U.S. SEC began to emphasize compliant financing methods, which is what we later heard about STO. STO does exist as a compliant method of functional tokens, but its restrictions are still relatively large, and the process time is relatively long. Therefore, STO has always been tepid. Only a few well-known projects have chosen STO for financing issuance, or changed the financing model to STO midway. For example, Filecoin, etc., are all STO methods.

After the emergence of STO, the SEC did not stop its supervision of the token financing market. The subsequent failure of Telegram token financing and the sky-high fine of EOS were actually mainly caused by irregularities in the financing process. The failure of Telegram token financing is a typical case. After the team raised the money, they chose to return the funds. Some people in EOS believe that the US SEC deliberately turned a blind eye and "fined" the project a huge amount of money after it developed. It can be seen that the compliance of the project is still very critical.

There are many reasons why STO has not become popular. Here we take the first STO blockchain project props as an example. The author has held props tokens for a period of time before. This project is mainly a streaming project that obtains incentives through user staking and sharing. However, in 2021, the project party announced that props was difficult to maintain due to many restrictions of STO rules, so the official announced that the project "failed". It can be seen that the STO model actually mainly imposes many restrictions on the project's new operating methods and methods, which is not conducive to the project's continuous innovation.

So what is the compliance status of most projects in this bull market?

In fact, during the period of 2018-2019, various countries have made a lot of improvements in cryptocurrency policies. The clarity of regulatory policies has enabled many project parties to choose to establish entities (companies, foundations, etc.) in different overseas countries to create and operate projects. For example, countries such as Japan, Germany, Switzerland, Hong Kong, and Singapore are relatively friendly to blockchain. Some, such as Malta, are also the registered places chosen by project parties. For example, taking Singapore as an example, the establishment and token issuance of a project are as follows:

1. The project owner writes a white paper, forms a team, builds an official website, develops tokens and codes, etc.

2. Register a relevant foundation in Singapore and obtain a lawyer's certification document to prove that the token is a functional token rather than a security token

3. When a project is financed, such as private placement or public offering, KYC and AML audits are required for investors.

4. Tokens are listed on mainstream exchanges, market value management, media promotion and community operation, etc.

The main compliance directions of such projects are in two aspects. The first is the nature of the tokens. Currently, most tokens can be classified as functional tokens, which are different from security tokens. Security tokens refer to a type of share represented by the token. The legal conditions applicable here are very strict in any country. Therefore, it is generally very difficult to issue them, and most of them cannot be listed on mainstream exchanges.

Functional tokens are different. They generally refer to tokens that are mainly used for services within the project. For example, we use Filecoin tokens to purchase storage space to store data. This is a typical case. Such tokens have no equity nature, so they are more relaxed in terms of laws. The project party only needs to focus on the registration of the project entity and the KYC of financing.

Finally, we can see that most of the compliance projects in the market are actually operated in this way, because entity registration, KYC and even token public fundraising are all completed by upstream and downstream teams. For example, compliance token issuance platforms like Coinlist are very popular with the market and project parties, and can solve most of the compliance issues that may exist for project parties. Exchanges also tend to prefer projects with compliance characteristics to ensure that investors can avoid unreliable projects. The real project parties will work harder on models or technological innovations, which has become the current common model.

Of course, we will also talk about the compliance challenges posed by DAO in the end. Currently, DAO can be registered as an entity in some countries and regions, which means that the compliance of DAO tokens is not a big problem. Of course, the DAO governance method, such as using tokens to vote on proposals, is still similar to the traditional stock voting model. There may still be some legal disputes in this direction in the future.