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11 October, 2017
Use of initial coin offerings (ICOs) as a means of raising money via virtual currencies will be banned in South Korea, the country's financial regulator announced last week.
The decision by the South Korea Financial Services Commission, which was reported by Reuters, follows a similar move by China earlier this month. Other international regulators, including the UK's Financial Conduct Authority (FCA) and the US Securities and Exchange Commission (SEC), have issued warnings about the rapid growth in ICOs and the potential risks that they pose to consumers.
The finance ministry announced the ban following a meeting with the Bank of Korea and the country's National Tax Service. "Stern penalties" will be issued to financial institutions and individuals involved in issuing ICOs in breach of the ban, Reuters reported.
The ban comes in response to "market funds … being pushed into a non-productive speculative direction", according to The Register, which translated part of the commission's announcement. ICOs may also be used as a means of laundering money and to carry out fraud, it said.
ICOs are increasingly been used by businesses as a means of raising money. A typical ICO involves a business developing a digital token, such as its own proprietary virtual currency, and seeking to sell the tokens to investors in return for existing cryptocurrency such as bitcoin, ether or ripple rather than fiat currency such as dollars, euros or pounds. The trade of the tokens is recorded using blockchain.
Investors can in most cases sell on the tokens for profit on certain peer-to-peer exchange platforms should the value of the tokens increase. They are sometime further incentivised into buying the tokens by being given the opportunity to share in profits generated from the business ventures that benefit from their investment.
Earlier this month, the FCA warned UK consumers against investing in ICOs unless they were experienced investors who were prepared to lose their entire stake and "confident in the quality of the ICO project itself". It described ICOs as "very high-risk, speculative investments", many of which were based overseas and therefore not UK regulated.
Although some global regulators have clarified that ICOs can be subject to regulation in some circumstances, China has taken a much tougher stance. The People's Bank of China (PBC) banned ICOs in China earlier this month and ordered businesses that had already engaged in the fundraising exercises to return the money to their investors.
Financial services and technology expert Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said that many regulators were struggling to respond quickly enough to the explosion of ICOs as a means of raising funds.
"There is a real need to balance the interests of investigating and preventing the use of new ways of funding for illegal means on the one hand, and to ensure that regulatory efforts do not prevent legitimate businesses from finding new ways to fund their businesses on the other," he said.
This article was published in Out-law here.
For further information, please contact:
Luke Scanlon, Partner, Pinsent Masons
luke.scanlon@pinsentmasons.com
