Japan Unveils Guidelines for Allowing Initial Coin Offerings

(Bloomberg) -- Japan is moving toward legalizing initial coin offerings, even as countries such as China and the U.S. restrict the fundraising technique because of their risks for investors.

A government-backed study group laid out basic guidelines for further adoption of ICOs, including rules for identifying investors, preventing money laundering, tracking progress of projects and protecting existing equity and debt holders, according to a report published on Thursday. The proposals will be deliberated by Japan’s Financial Services Agency later this month, and could eventually become law in a few years.

The ICO-friendly guidelines are in contrast to positions taken by China and South Korea, which last year banned the practice, citing fraudulent fundraising and excess speculation. The report also avoids clearly identifying ICOs as financial securities, a point which the Securities and Exchange Commission in U.S. has argued makes some ICOs fall under strict securities laws.

“ICOs are groundbreaking technology, so if we can implement good principles and rules, they have the potential to become a new way to raise funding,” said Kenji Harashima, a researcher at Mizuho Research Institute.

The study group’s general adviser is Takuya Hirai, a member of the ruling Liberal Democratic Party and an architect of last year’s law that legalized cryptocurrency exchanges. The group also included Yuzo Kano, head of the nation’s largest bitcoin exchange bitFlyer Inc., and members from the nation’s largest banks Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. It was led by Toshifumi Kokubun, a professor at Tama University in Tokyo.

The report says ICO issuers should clearly lay out how raised funds, profits and assets will be distributed among owners of tokens, equity and debt. It also calls for project plans to be tracked and changes documented. Cryptocurrency exchanges should define and adopt industrywide standards for listing ICOs and insider trading should be prohibited, the group said.

“The ICO Business Research Group proposes the above principles as the minimum principles that should be satisfied at this time,” the report said. “To enable ICOs to be used safely by a wide range of issuers and investors and to be accepted well in the society, more detailed rules may be required.”

ICOs have emerged as a favored way for blockchain startups to get funding, with $8.8 billion raised since the start of last year, according to coinschedule.com. But with little accountability or regulatory oversight, many projects have turned sour as managers walk away or fail to deliver on promises to backers. That hasn’t dented investor appetite, much of which is driven by short-term speculators who can sell their tokens on exchanges.

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