Today, the Chinese authorities made an official ICO related statement, which brought panic to the market and provoked a number of news publications about a total ban for ICO in China.
However, the actual translation of the Chinese announcement made by Coindesk
suggests that only certain ICO activities are prohibited in China, particularly, the token fundraising activities, which are further defined as a “process where fundraisers distribute digital tokens to investors who make financial contribution in the form of cryptocurrencies such as bitcoin or ether.”
Although there is no word “securities” used in the announcement, the definition of the token sale activities provided by the Chinese regulator is limiting the ban to the fundraising activities only, which make us to believe that the sale of utility tokens through the ICO shall not be affected. During the sale of the utility token, the company essentially is selling its product to the worldwide customers rather than raising capital. The later constitutes a sale of securities in many jurisdictions and, therefore, is illegal if not performed in accordance with the relevant regulations. While the former is subject to consumer laws.
However, even utility tokens that do not fall under the statutory definition of securities could be considered regulated activities if the token sale proceeds are used to fund the development of the product that is being sold through the ICO. However, in some instances, keeping funds in escrow until the product is developed can help to avoid regulation.
Written by Katrina Arden
Attorney and founder of Blockchain Law Group