201810.25
0

Legal Topic: Blockchain and Cryptocurrencies (6)

Charlotte Wu, Managing Partner, Zhongyin Law Firm

charlotte.wu@zhongyinlawyer.com.tw

An Initial Legal Analysis on the Combined Development of Blockchain, ICO, and Multi-Level Marketing (Direct Selling)

It will be interesting to observe the capabilities and elevated perspective of the competent authority in face of the huge wave of blockchain[1]/ICO[2] projects ranging from well thought out opportunities to your run of the mill future traps. In the government’s attempt to encourage the flexible development of domestic innovative experiments, we hope that interdepartmental coordination will be achieved and that we are not left with only empty words in an established regulation.

As the topic of financial technology/blockchain and ICO (Initial Coin Offering) continues to thrive, there is now a growing discussion revolving around the feasibility and legal compliance of a new business model which combines blockchain/ICO and structured selling and direct selling.

Entrepreneurs with innovative experiments raising such topics may originate from the insurance industry or was part of a direct selling team and have taken immense interest that such innovative topics such as blockchain/ICO may promulgate changes to the existing model of traditional industries. Some entrepreneurs may even be technologically experienced in blockchain/ICO. However, the success or failure of promoting such technology/ICO resides primarily on the level of acceptance and participation in the market by the general public. Particularly, when ICO projects abound and the quality of the cases vary greatly, technologically solid ICO projects are most concerned with being able to obtain the most participation and attention from the public within the shortest time frame possible. Hence, the timing becomes ripe for utilization of structured marketing and bonus distribution concepts derived from multi-level marketing/direct selling to various degrees affording all participants an opportunity to share in the profit.

Intriguing Common Origin of Direct Sales and Block Chain

On further thought, there is an intriguing common origin of the token concept of blockchain and the conversion of purchases, specific purchases or an act of consumption, made by a distributor or participant to a virtual value, i.e. PV or SV, by the structured marketing/direct selling industry. While each industry player may have a different name for such virtual value, however, the operational method is similar.  The PV values will be calculated pursuant to an established bonus calculation method, whether binary or otherwise, which ultimately becomes commissions for such distributor or participant. In practical terms, the PV value represents a virtual value backed by real economic value.

In some companies, a PV value for certain products may be fixed on a global basis and the PV value may be tied to a real dollar value such as 1 PV = 1 USD to facilitate the maintenance of a consistent pricing policy for different countries and to provide a calculation standard when participants are promoting the development of the organization globally. These virtual symbols represent a definite value of accumulated economic activity and bonus ratio. Therefore, it is hardly surprising that the token concept within blockchain/ICO is easily accepted within the direct selling structure.

As such there remains a need to continuously research how the development of various transformative business models will be received by the typical participant/consumer, impact legal compliance for the industry players and appraised by the competent authorities.

Standards Established by Competent Authorities Remain Ambiguous

In terms of legal compliance for the innovative entrepreneur, the financial competent authorities of Taiwan maintains an ambiguous attitude towards blockchain/ICO.   Under the Financial Technology Innovation Act, the 3 bills which have been promulgated are the Regulations Governing Financial Technology Innovative Experimentation[3], the Regulations Governing the Operations of Financial Technology Innovative Experimentation Review Meetings[4], and the Evaluation Meetings and Regulations Governing Fees for Handling Civil Disputes Arising from Financial Technology Innovative Experimentation[5]. In principle, after the bills have been approved and enacted, the innovative entrepreneur may adhere to the provisions of the regulation and apply for approval for an innovative experimentation. An approved innovative experimentation may be exempted from certain regulatory requirements for a maximum experimental period of 3 years. The innovative experiment may be exempted from penalties provided for in designated articles[6] of the Banking Act of the ROC, the Act Governing Electronic Payment Institutions, the Act Governing Issuance of Electronic Stored Value Cards, the Trust Enterprise Act, the Act Governing Bills Finance Business, the Securities and Exchange Act, the Futures Trading Act, the Securities Investment Trust and Consulting Act, and the Insurance Act. Furthermore, the experiment may also be exempt from other regulations, orders or administrative regulations and obligations, in whole or in part, if discussed and agreed with the competent authority and other relevant authorities provided that no exemptions shall be available for violations of the Money Laundering Control Act or the Counter-Terrorism Financing Act, and orders or administrative regulations associated therewith[7].

Notwithstanding the above regulatory provisions, industry players are not exempt from any obligations which have not been expressly provided for in the regulations.  For example, if the project involves transactions within the nature of securities trading, it may be possible that adherence to non-exempt provisions of the Securities and Exchange Act is required. If the project consists of multi-level marketing acts, then a report must be filed for record in compliance with the Multi-Level Marketing Supervision Act. If fraud exists, then the relevant provisions of the Criminal code of the ROC on fraud and criminally liable fraud may be applicable. All those conducting innovative experiments need to be especially wary of such regulations and its implications. Much room for discussion still exists regarding how the various regulations are applicable and interconnected.

As a further example, Article 6 of the Multi-Level Marketing Supervision Act provides that “prior to engaging in multi-level marketing operations, a multi-level marketing enterprise, should prepare a report containing the following items, and apply for record [to] the competent authority…. 5. the evidence of marketing practice in compliance with laws or regulations other than this Act, or having ex-ante approval issued by other authorities, where the compliance or the ex-ante approval is imposed by such laws or regulations.” However, it remains unclear which competent authority’s approval is required for the marketing and sales of products or services which may consist of blockchain technology. At present, the regulations clearly provide no direction which makes it next to impossible to obtain approval from a competent authority.

The general consensus among many countries is that establishment of regulations and provision of approvals as a first step to new ventures utilizing financial technology is not feasible. Hence, these countries create regulatory sandboxes to create a definitive procedure within a pre-defined scope enabling new innovative experiments to take place in real markets without the potential for legal risks for a set amount of time, thereby not jeopardizing an innovative project at inception.

However, the Financial Technology Innovation and Experiment Act does not take into consideration nor does it pay sufficient attention to the new business model which adopts specific characteristics of multi-level marketing currently prevalent within the market.  Rumors are that cryptocurrency exchanges are offering multi-level marketing bonuses to designated member and other projects are providing incentives for participants. Whether these projects comply with the regulations provided for in the Multi-Level Marketing Supervision Act, for example what are the requirements to market and sell an actual “product” or “service”, remains to be seen.

While the concepts stated above are feasible, there still remains much room for development and leaves much to the imagination. It will be interesting to observe the capabilities and elevated perspective of the competent authority in face of the huge wave of blockchain/ICO projects ranging from well thought out opportunities to your run of the mill future traps. In the government’s attempt to encourage the flexible development of domestic innovative experiments, we hope that interdepartmental coordination will be achieved and that we are not left with only empty words in an established regulation. It will be noteworthy to see if the government has the ability to coordinate the various competent authorities responsible for the different regulations and achieve an effective balance between “motivation for development” and “protection of consumers.”


[1] What is blockchain? Simply put, blockchain is a new digital ledger technology which enables each ledger entry of every specific detail within a transaction to be transparent, cost-saving and safely recorded.  In comparison with the traditional model of utilizing banks as a medium for transactions, blockchain provides such features as “decentralization”, “anonymity”, “incorruptibility”, “traceability”, and “encrypted security”. It establishes a mechanism for trust in a situation where none of the participants know each other. The cost is also lower than transaction models using banks as a medium and it allows data to be transparent, traceable and yet at the same time protect the client’s privacy.  Furthermore, it records transaction data in chronological order. Therefore, the formal name given to blockchain is “distributed ledger technology”.  Its real contribution is not only limited to the financial industry, but it may change the entire transactional behavior of mankind.  As Andrey Sharov, the Vice Chairman of Russia’s Sberbank predicts: banks may disappear within the next 10 years due to blockchain technology.

[2] What is an ICO ? The acronym ICO stands for an Initial Coin Offering and has also often been referred to as an initial coin issuance or blockchain crowd funding. It is a fund raising method combining user rights with cryptocurrency to develop, maintain, and exchange relevant products or services.

[3] For the Regulations Governing Financial Technology Innovative Experimentation, please refer to: Notification of the Financial Supervisory Commission on the bills titled the 「Regulations Governing Financial Technology Innovative Experimentation」 and the「Regulations Governing the Operations of Financial Technology Innovative Experimentation Review Meetings」March 9, 2018. Web address:

https://www.fsc.gov.tw/ch/home.jsp?id=133&parentpath=0,3&mcustomize=lawnotice_view.jsp&dataserno=201803090001&aplistdn=ou=noticelaw,ou=chlaw,ou=ap_root,o=fsc,c=tw&dtable=NoticeLaw.

[4] Same as Footnote above.

[5] Notification of the Financial Supervisory Committee on the 「Evaluation meetings and Regulations Governing Fees for Handling Civil Disputes Arising from Financial Technology Innovative Experimentation」March 9, 2018 web address:

https://www.fsc.gov.tw/ch/home.jsp?id=133&parentpath=0,3&mcustomize=lawnotice_view.jsp&dataserno=201803090002&aplistdn=ou=noticelaw,ou=chlaw,ou=ap_root,o=fsc,c=tw&dtable=NoticeLaw.

[6] Please refer to Article 25 of the Financial Technology Innovation and Experiment Act.

[7] Please refer to Article 25, paragraph 1 of the Financial Technology Innovation and Experiment Act.