With billions of dollars worth of investments piling into the ICOs, countries around the world are scurrying to be the first to offer a clear regulatory framework to attract these businesses. As favorable as the governments might want the regulatory environment to be, there is a great risk attached to these projects. According to a recent study in China, an average lifespan of an ICO is under 15 months and only very few get to launch the product successfully. Furthermore, there is a risk of scams and false projects that could greatly harm investors if not regulated properly. This is why countries around the world are taking their time to devise the right regulatory framework. Some are waiting and observing others to see how each approach fairs with the market, while others like the United States, take a very strict stance, effectively barring most project from offering coins. Lithuania seems to be one of the first countries to issue a clearly defined guideline on ICOs.
Lithuania aims to attract projects with clearly defined guidelines for ICOs.
The Ministry of Finance of the Republic of Lithuania published a document titled “ICO Guidelines”. “Lithuania has found itself in the middle of explosion of ICOs and blockchain based projects and in line with other countries – financial incumbents, when total values of all ICOs are being measured,” – read the opening lines of the document. Then it goes on to offer guidelines in four major topics: regulation, taxation, accounting and AML/CFT (Anti-Money Laundering & Combating the Financing of Terrorism).
Regarding the regulatory aspect, the guidelines state: “Organizing ICO is not regulated by specific legislation, however, taking into account different ICO models and different characteristics of tokens, in some cases, such activity may be subject to the requirements of the legislation of the Republic of Lithuania and supervision of the Bank of Lithuania.” The requirements are different for ICOs depending on whether they “grant profits or governance rights” or not. Once this is determined, depending on the characteristic of the product different laws could be applied to each project. These laws range from the AML and CFT law to the law on securities and so on.
“In terms of Corporate Income Tax and Personal Income Tax, according to the substance and economic sense of transactions, the virtual currency is recognized as current assets that can be used as a settlement instrument for goods and services or stored for sale,” – explains the document regarding taxation. For VAT, digital currencies are seen in the same light as other currencies like euros and dollars. One of the more interesting aspects of the regulation for investors is the income tax to be paid on trading income. “Income received from individual purchases and sales of virtual currencies will be taxed standard 15% fixed income tax rate,” – says the guideline.
Accounting and AML/CFT specifications could help businesses better plan their ICOs.
The accounting section is more interesting for businesses involved with ICOs. It is often an issue when deciding how to account for the expenses on these project. The guideline gives different suggestions for various scenarios. Accounting of tokens, as explained by the authority, depends on the type of the token as well as “whether they are attributed to payment, utility and securities tokens”.
AML/CFT is another important aspect of the guideline. Cryptocurrencies, in particular, have long been criticised for facilitating money laundering and terrorist financing. For a country to foster blockchain-based projects and ICOs, it is important to put in place regulations that would make it difficult to use these channels for illegal purposes. “Ministry of Finance of the Republic of Lithuania with Bank of Lithuania and Financial Crime Investigation Service are preparing amendments of Anti-Money Laundering and Counter-Terrorist Financing Law of Lithuania. First round of amendments will concentrate on provisions relevant to virtual currency exchanges and wallet services operators, aiming at increasing transparency and clarity of regulation together with stability and security of the financial market,” – the document explains.