This document discusses regulations around blockchain applications and initial coin offerings (ICOs). It outlines how ICOs have evolved from digital currencies to crowdfunding models. There are different types of tokens like access tokens and virtual securities tokens, with the latter subject to tighter regulations. The document recommends a compliant approach to ICOs through know-your-customer verification and a whitelist function. It also suggests proportionate and scaled regulation initially through anti-money laundering requirements for both digital currencies and virtual securities tokens.

1. Regulations &
Tokens
Regulatory Support
DIACLE.COM

2. Introduction
● Blockchain applications and regulatory matters
● First application digital currency
● Second application crowdfunding Initial Coin Offerings
(ICOs)
● Blockchain Securities
● Tellochain Method
● Compliant ICOs
● ICOs and Policy making

3. From currency to crowdfunding
● First application is digital currency
● Bitcoin is the first
● Success meant replication, the so-called Alt-coin
explosion
● Pre-mining of tokens. Ripple as an example
● New protocol layers - Counterparty. ICOs started to
become commonplace
● Mastercoin ICO, Maidsafe raising millions

4. Types of tokens
● You have the ‘access token’ this is to access services
or software provided via a network
● Virtual Securities token. This:
○ Share of profits or revenue stream or clear
investment proposition
○ Not actual shares on a blockchain
○ Nor structured as a traditional financial instrument
● Virtual Securities subject to tighter regulations

5. Substance over form
● Ethan Burnside set up a ‘Virtual’ Stockmarket
● It was intended as a game
● Bitcoin accepted
● Could issue ‘virtual’ securities on the site
● The securities were not supported by a legal structure
● Shut down and SEC fined Ethan

6. Virtual Securities regulations
● In the US securities are required to be registered with
SEC
● In the EU there is the Prospectus Directive
○ Requirements of registration of a prospectus for a
security offering under certain conditions
● Virtual Securities are also ‘bearer assets’. ERC20 a
standard Ethereum token is completely transferable.
Regulations prohibit bearer assets in many countries

7. 2 Types of Virtual Securities
● Model 1: not defined by Issuer as a security
● Model 2: explicitly acknowledged by the Issuer as a
security
● Lykke and Blockchain Capital had done best efforts to
issue a Model 2 Virtual Security

8. Virtual to Blockchain Securities
● Shares are typically issued in ‘certificated’ form
● There is a share register and share certificate
● For stock market trading paperwork would be
impractical
● Regulations introduced to make legal transfer of a
security possible without paperwork
● Uncertificated Securities Regulations 2001 (USR2001)
● Uncertificated Securities can only be held by approved
Operator

9. Blockchain as an ‘Operator’
● In Delaware proposal to allow for the issuance of
Blockchain shares
● For the EU it would require an existing Operator such
as CREST to use blockchain
● Cannot dispense with role of Operator without primary
legislative change
● Euroclear who owns CREST is fairly keen and have
been advised that no further permission is required for
them to use a blockchain

10. Blockchain Companies
● The direction we are heading that companies will be
incorporated on the blockchain
● Model Articles exist today to facilitate incorporation of
companies
● Model Incorporation, Issuance and Transfer Smart
Contracts will be created by a country for download
● Once the incorporation published on-chain the
company now exists
● Sounds ambitious but only from a legal point of view.
May take a while before the law can catch up

11. Immediate Leverage of blockchain
● Factom uses blockchain’s feature of immutability to
make records immutable. Strong business model.
● My thoughts are that you can leverage immutability to
make counting immutable
● This would have no regulatory consequences
whatsoever and so can be done today
● Tellochain Method: numbers are abstract. Originally
counting was done with physical tokens. With
blockchain we revive the use of tokens for counting.

12. Tellochain & Share Registers
● Issue 10 tokens representing shares
● They now existing onchain and are permanent and can
never be destroyed
● Create addresses for the shareholders in your
blockchain share register
● Transfer the tokens to them
● Allow them to transfer the tokens to other people
● Tokens would be completely valueless
● Just an administrative tool for counting
● No need to wait for the law to catch up

13. Regulation of ICOs
● Regulation of ICOs
● US requires a licence with FinCEN
● Ripple fined for issuing XRP without a licence
● EU - ICOs likely to be regulated by 4AMLD. Exchanges
and custodian activity regulated
● Japan digital currency are now regulated completely

14. ICO Havens
● Switzerland and Singapore are the hotspots
● Swiss route is non-profit foundation
● Singapore route is the perceived pragmatism of MAS

15. Trends in regulation
● There is NO AML on ICOs at the moment
● Position is unsustainable
● 4AMLD will force registration requirements
● Singapore and Switzerland will most likely follow suit
● Swiss authorities made clear that blockchain
companies should enter SRO and comply with AML
● In Singapore, DigixDAO has since suggested that they
will do KYC on their clients
● ICOs will be subject to standard AML

16. Towards a Compliant ICO
● Reviewed a lot of the ICO contracts
● No compliance whatsoever
● Freeze function added due to theDAO loss
● Simply need to add a ‘Whitelist’ function in the smart
contract
● This is not complicated
● Purchasers pre-register their ETH address and does
basic KYC. ICO then starts and they have a
pre-allocation in the ICO.

17. Policy making
● Doing an ICO will be the equivalent of setting up a
Wordpress
● In the next 2 months there will be 2 ICOs that will make
ICOs easier. I love the irony of this industry.
● We suggest a basic AML registration framework for
ICOs
● In the Isle of Man this is already in place
● This should apply to digital currencies and also Virtual
Securities
● Virtual Securities should NOT be regulated

18. Policy should be proportionate
● Scaled regulation is important
● Define all the Virtual Securities as digital currency and
require AML
● When the industry reaches critical mass then enhance
the framework
● This is the stance of Singapore

19. Conclusion
● Crowdfunding is the biggest application of blockchain
at the moment
● So many tokens
● Needs lighttouch AML laws imposed
● Sufficient for both ‘access tokens’ and Virtual
Securities
● Use the tech - Tellochain Method no regulation
required whatsoever
● Work on long term policy - Blockchain Companies and
Blockchain Shares