All of a sudden, words like ‘blockchain’, ‘bitcoin’, and ‘mining’ have become part of the mainstream culture and society in Ukraine. And no wonder! These days, taxi drivers use fluctuations in the value of bitcoin as a topic for a small talk and cryptocurrencies receive the widest-ever coverage in the national media. Besides, they say that any event containing the magic ‘blockchain’ word in its title gathers a wider audience than any homegrown pop star has ever managed to woo. By the end of 2017, bitcoin price has reached its historic UDS 20,000 maximum, while the total capitalization of all cryptocurrencies (700 billion dollars) is swiftly approaching that of the US dollar (1,5 trillion dollars).
An ICO, which is a simple and convenient tool for fundraising, has become one of the main causes of cryptocurrency market unprecedented growth. Roughly speaking, an ICO is a small IPO, where cryptographic tokens are issued instead of equity shares and then can be sold for cryptocurrencies, with no regulatory restrictions. The concept itself has been long and successfully used, but it’s 2017 that has become a big break year for companies that came out of nowhere and managed to raise millions of dollars. Investments raised in 2017 during ICOs are variously estimated at approximately 6 billion US dollars.
At first, initial coin offerings were handled in the midst of a legal limbo. However, as investments were growing, regulatory authorities became more and more interested in this whole ICO thing. Apart from economic growth, from a legal standpoint, cryptocurrencies and ICOs are a Wild West world, where there are no unified rules and where there is a lot of space for creativity. While some countries have been restricting the use of cryptocurrencies and some, including China, have banned the ICOs, others, such as Gibraltar, are trying to build crypto-friendly environments. At the same time, some countries and even jurisdictions within certain countries are starting to compete aiming to create the most favorable regulatory framework for a crypto economy. The canton of Zug in Switzerland that covers an area of 239 square kilometers, has become the world’s most popular place to incorporate ICO projects.
Many people used to look at crypto markets as if they were some financial pyramids or Forex. However, in a matter of months, cryptocurrencies started to excite the interest of conservative financial institutions and law firms. While trying to blend into it, lawyers started claiming to be experts in cryptocurrencies and blockchain. Meanwhile, law firms started building crypto, blockchain, and fintech practice sections. However, some conservative lawyers are not ready to work with projects like that. To provide legal advice for crypto companies, you should use a different approach when offering your services, billing yourself as an expert, when working and communicating with your clients. Clients want to get ready-to-go solutions, and all too often, you have to invent these solutions even provided that you’ve never done anything like that before and there’s no regulatory framework to guide you. These clients don’t want to pay for endless legal opinions. They want solutions. They hate long emails and want to keep in touch with their lawyers using Telegram or Slack. This is the world where no one actually cares whether or not you’re from a top-something law firm and whether or not you have powerful friends. On top of that, most clients involved in a cryptocurrency business want to pay in cryptocurrencies. For now, not all of our local law firms are ready for that.
Well, there’s more to come. The market that has grown very fast is currently changing at a breakneck speed. ICOs are moving towards venturing and structuring, while marketability of cryptocurrencies remains a pending issue. Anyway, one won’t be able to build a bridge between the real world and the world of crypto unless there’s a reasonable regulatory framework. For big players from the real economy, this bridge is the only way to get to the cryptocurrency market, which they’ve been sizing it up for some time now. Without them, it’s very likely that our crypto economy is going to turn into a financial bubble.
Although local politicians try to bill Ukraine as a technologically advanced country, it has nothing to do with crypto revolution. There are only a few experts and teams in Ukraine who are actually trying to move the “crypto” needle, but they are not working for the government. We’re lagging behind other countries, which includes even our neighbor Belarus, where the government has recently established a special regulatory regime for cryptocurrencies and ICOs, on a pilot basis. In Ukraine, crypto businesses have moved underground. It’s a common knowledge that people from the law enforcement wearing balaclava masks may any minute knock on your door saying you’re suspected of money laundering and terrorist financing and seize all your crypto assets without putting it on the record.
It looks like jurisdictions are going to vie to create favorable environments for crypto businesses. Unfortunately, Ukraine is not going to make it. For one thing, you can’t build a crypto heaven in a country where property rights are insecure. In Ukraine, it’s rather a general concept than a legal doctrine. For another thing, if our lawmakers try to draw up some laws for cryptocurrency market, they are definitely going to overregulate it with endless sets mandatory provisions and complicated administrative procedures. So, we’d be better off without any regulation at all.
Nazar Polyvka, co-founder and partner at Axon Partners