Recently, I set out to analyze the terms of various initial coin offerings (ICOs), aggregate the results and make them public. This was harder than I expected.
It turns out that very often ICO terms and conditions are not publicly available immediately after the token sale is completed. This is true even in the case of some of the most successful, very prominent ICOs. A token holder cannot even read the terms unless he or she remembered to save them on a hard drive during the ICO.
This is but one example of a standard that I think most of us would prefer not to take hold in the market. And it underscores the need for more engaged lawyers, openness towards clear communication of legal topics and more legally aware entrepreneurs in a promising but fraught young industry.
The old world is watching
It’s hard to keep up with ICOs, with more than 100 such sales completed so far this year, raking in well over $1 billion, according to CoinDesk’s ICO Tracker. But it’s not just about the surge of funds raised through token sales. One sign pointing to the growing maturity of this market is the interest it receives from the old world.
By “old world,” I mean mainstream institutions and firms, as well as their representatives. While previously cryptocurrencies and various blockchain applications also have stirred up a lot of hype (e.g. among banks), it seems that tokens and ICOs have triggered another large wave of interest.
Venture capital is just one example of that. Within a year, ICOs and tokens have become one of the major topics in the industry. A slightly different example is regulators, who have issued a series of positions in several important jurisdictions in recent weeks.
Additionally, there is also another group in the old world experiencing a growing fascination with ICOs: lawyers. The trend can be measured by the unbelievable number of new legal publications, the opening of blockchain practices and departments in numerous law firms, the number of lawyers who include the word “blockchain” in their LinkedIn profiles, and so on.
This has happened for at least a few reasons, the first being that blockchain by itself is a captivating subject for lawyers; the concept of smart contracts, for example.
But there is also a very practical reason why lawyers want to deal with tokens and ICOs: it’s a new market for their services. While still a niche subject of expertise, there is serious money involved and huge potential for continued growth.
There is also a huge demand for legal services. Legal support is usually needed in all major transactions, but in the case of ICOs, this is particularly important because the demand for lawyers is fueled by legal uncertainty and regulators’ approaches.
Any lawyer who’s dealt with blockchain issues knows that legal uncertainty is nothing new here. But in the case of ICOs, it has become particularly evident.
Now, after the announcement of regulator positions in some major jurisdictions (the U.S. and China included), it may seem that the regulatory situation is starting to become much clearer. And in a way it is.
But when we look into the details, very often the general conclusion is that “tokens might or might not be securities.” Not very edifying, is it?
I don’t judge the regulators here. It’s not new that a general, functional approach is being applied to complex, unprecedented technologies that are not specifically regulated.
I just want to underline that, so far, the “case-by-case” approach dominates – you have to conduct an extensive legal analysis of an ICO and its underlying tokens, and so on, in each individual case, and sometimes seek a dialogue with the regulators.
In practice, the case-by-case approach means that you need to involve lawyers in each case. Good for lawyers, but not necessarily for entrepreneurs.
Lawyers should not, however, just rest on their laurels.
In the ICO market, we need to develop legal standards. My anecdote about searching in vain for legal documentation for ICOs is a stark illustration of this. Who should craft these standards, if not lawyers?
Without such standards, the ICO market might never really take off. Despite technological development, entrepreneurs might be stuck in swamp of legal uncertainty. Developing those standards requires good legal analysis that goes beyond a particular use case, but also a willingness to share knowledge, cooperate with competitors (which pays off over the long term) and sometimes spend unbillable hours on community work.
Many lawyers already do that job well.
But this development won’t happen without strong cooperation between lawyers and market participants. After all, legal standards are just a subset of market standards. The lawyers’ work will not make much sense beyond particular business cases if entrepreneurs aren’t open to speaking about legal aspects of their business openly.
The market also needs lawyers to effectively talk to policymakers.
Lawyers are well-suited to becoming transmitters of know-how from the market to lawmakers and regulators. They should clearly define market needs and regulatory issues, educating policymakers and proposing appropriate regulations.