Cayman Islands Legal Perspective on the Regulation of Initial Coin Offerings (ICOs)

Introduction

Initial Coin Offerings (ICOs), used during the past few years as a source of raising capital for early stage blockchain projects, have started to appear so frequently in the financial and/or IT media during the last couple of years that they now seem to be part and parcel of the new social economy. Ethereum launched itself in 2014 by way of an ICO and is now the second largest crypto-currency. According to an ICO-tracking initiative by Coindesk.com, coin and/or token sales worth in excess of US$2.2 billion have been recorded to date.

In brief, ICOs represent a type of unregulated crowdfunding built on blockchain technology and use of cryptocurrencies. Coins or tokens may be issued to represent virtual currencies, equity interests, voting rights, units which are part of a company-wide reward or bonus scheme, membership interests, pre-paid services or products, etc.. However, together with all legitimate ICOs came over 2,000 phishing, hacks or Ponzi schemes, which led to rising interest and warnings from regulators worldwide, especially since another criticism related to ICOs is that investors rush to buy coins/tokens in the hope of “flipping” them later in the market without any due diligence or regard to the value of the underlying product, project or company.

In the first issue of our series dedicated to FinTech-specific risk factors which may impact the Cayman Islands fund industry, we focused on risk factors related to bitcoin and other cryptocurrencies in general (see Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands). In this second issue, we will take a closer look at ICOs, including views from regulators in various countries, and discuss certain provisions of the existing Cayman Islands laws which may be triggered in connection with an offering of coins / tokens.