Canadian Regtech Company Offers ICOs Securities Law Compliance

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By Lydia Beyoud

As the $4 billion global ICO market buckles up for what could be a bumpy ride along the road to more regulation, one company is launching software solutions it hopes will smooth the way by automating the industry’s legal compliance.

iComplyICO, a Vancouver-based software company, launched its first two ICO regtech products Feb. 7 to help companies looking to raise funds through token offerings comply with myriad global securities, banking, and cybersecurity rules.

Though its software is two years in the making, iComplyICO’s launch comes at a pivotal moment: U.S. regulators look to strengthen compliance requirements around what has been a red-hot sector of the cryptocurrency market.

ICOs typically take investments in fiat or digital currency in exchange for other cryptocurrencies, securities, or utility tokens, which can be redeemed for products or services at a later date.

The industry boomed in 2017 with hundreds of ICOs offered around the world, despite a certain amount of regulatory uncertainty and even crackdown in various countries. Analysts for ICOData.io estimate ICOs globally raised between $4 billion and $6 billion through hundreds of offerings in 2017.

Built-In Smart Contracts, KYC

iComplyICO’s “Prefacto Compliance Protocol” adds smart contracts into the ICO process as well as the secondary cryptocurrency trading market before a trade executes. Smart contracts are generally automated legal contracts that use computer code to verify, carry out, or enforce specific provisions in an agreement.

The second product, iComplyID, is a “know your customer” solution intended to help cryptocurrency investors securely verify their identities to execute trades or other activities on the blockchain without sending their passport photo to “some 13-year-old in their basement,” as the company said on its site.

“We’re really requiring ICOs using our process to raise their standards to what’s required” of traditional financial institutions, iComplyICO CEO Matthew Unger told Bloomberg Law.

Companies using the software can customize it to fulfill the different requirements of the type of security they believe their tokens to be, and more easily comply with future changes to those regulations, Unger said.

The software could also help regulators trace trading activity back to individuals or more easily flag suspicious transactions, he said.

To date, more than 200 ICOs have submitted applications to use the software, as have several legal and accounting firms and consultants, Unger said. The company has also attracted investment from Conrad Whelan, one of Uber Technologies Inc.'s founders.

Regulatory Ramp-Up

Though two years in the making, iComplyICO’s product launch comes at what could be an inflection point for ICOs, particularly those looking to reach U.S. investors.

The chairmen of the SEC and the CFTC are asking lawmakers to grant them expanded authority to plug what they view as some gaps in their authority over the broader cryptocurrency space, most recently at a Feb. 6 Senate Banking hearing.

“There’s a patchwork here, but there’s not a comprehensive structure,” in terms of consumer protection and other regulations, Commodity Futures Trading Commission Chairman J. Christopher Giancarlo said at the hearing.

At the same time, Securities and Exchange Commission Chairman Jay Clayton further delineated his view of the regulatory requirements of ICOs: “I believe every ICO I’ve seen is a security — we have jurisdiction and our federal securities laws apply,” Clayton said.

As regulators look to integrate cryptocurrencies into the mainstream financial system, more companies like iComplyICO may soon be looking to sell their legal compliance “pickaxes” to the digital ICO gold rush.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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