Some ICOs Now Ban Americans – Who Should Expect More Ostracism

Initial Coin Offerings (ICOs) or token sales are a surging trend to raise funds quickly. In May, for example, the Monaco Visa ICO raised $3 million in 3 days. Debate ensued on whether Monaco Visa was a good gamble, but one category of investors didn’t have to worry: Americans. That’s because Monaco Visa, like a growing number of other ‘foreign’ ICOs, refused to deal with U.S. citizens. [Note: in some cases the ban is on the broader category of “U.S. Taxpayers.”]

Also read: How Hackers Stole $7 Million in Ether From Coindash ICO

American financial policies have circled the world through tax and compliance treaties that are enforced to varying degrees by signatory nations. Americans are required to disclose income earned and wealth held abroad to the IRS. To maximize the tax grab, the policies also impose onerous reporting requirements on financial institutions with stiff penalties for non-compliance.

And, so, Monaco Visa asked every applicant a question: Are you a citizen of the United States? Those who checked the “yes” box were directed to a page that stated, “sorry, your citizenship excludes you from participation in this ICO due to excessive regulatory risk from your SEC [Security and Exchange Commission]”.

Polybius Bank had a similar reason for excluding Americans from its recent ICO.

Right now, American fiscal legislation does not allow citizens of the United States to participate in ICOs. One of the biggest law firms in the world, Hogan Lovells…recommended to restrict sales to American residents. Now, everyone who registers on polybius.io sees a strict warning, stating that American citizens are not allowed to take part in the ICO….After the release onto the crypto-market, citizens of every country will have the opportunity to purchase tokens without restrictions….

State Agencies are Eyeing ICO’s

State agencies are finally paying attention to cryptocurrencies and to businesses based on them; that’s an unpleasant but predictable aspect of the increased ‘respectability’ so many people have been seeking. And, to a now attentive SEC, ICOs resemble equity offerings; this category of investment is permitted only to accredited investors. To become an accredited investor, an individual or entity must file a regulatory disclosure form with the SEC in order to demonstrate what is called “financial sophistication” in one of three ways. The individual (or entity) must have an annual income of $200,000 or a joint one of $300,000; he must have a net worth of over $1 million; or, he must be a general partner, executive officer, or somehow in business with whomever is issuing the security.

A financial advisor explained further, “[T]he onus is on the issuer (in this case, the token sale dev team) to ensure that only accredited investors take part, lest they [the issuer] expose themselves personally and their company to potential criminal liabilities in the United States.” In short, the issuer is responsible for verifying the status of American customers as well as for filing appropriate documents with U.S. authorities. Failing to do so incurs legal risk not only from the U.S. but possibly from the nation in which the issuer is based. For example, a company could be denied a required license or be fined.

The SEC, FATCA (the Foreign Account Tax Compliance Act), the IRS, FBAR (Report of Foreign Bank and Financial Accounts)…an alphabet of legal obstacles to Americans investing abroad are catching up with cryptocurrencies – at least, in those nations with a tax treaty which includes most of the nations to which investors gravitate.

At this point, sidestepping an ICO’s ban on Americans can be a trivial matter. For example, investors can simply avoid unwelcoming ICOs. Or they can deal with ICOs that do not vigorously enforce their own ban; I expect some bans are in place only as a way to provide legal cover. With such issuers, the wrong box can be ticked. Location-neutral payments are easy to arrange and non-U.S. funds to use. American IP addresses can go through Tor. Of course, if the American investor is unmasked, then he may lose tokens or have accounts closed.

As cryptocurrencies acquire the state recognition that some equate with legitimacy, however, they will be more tightly regulated. Companies based on cryptocurrency will increasingly resemble traditional institutions, such as banks.

What would that future look like? A glimpse at the present is a good indication.

Unpacking Just One Of The Alphabet Obstacles

Consider traditional bank accounts. Many Americans, living abroad or in the U.S., are flatly unable to open foreign ones. Two of the main reasons are FBAR and FATCA, which are U.S. tax laws. FBAR requires Americans to disclose any foreign accounts that total more than $10,000. But capturing money that has fled relied too heavily on the voluntary compliance of the foreign-account holders. Therefore, FATCA supplemented FBAR.

Reporting requirements by financial institutions soared and were enforced by draconian threats. Law professor Alan Appel provided an example of one “incentive” for financial institutions to comply with reporting requirements.

These foreign banks, which are called foreign financial institutions, or FFIs, and also foreign entities that are not banks…have to enter into a compliance agreement with the IRS starting Jan. 1, 2013 … they’ll agree to basically [disclose] the names, Social Security numbers and account balances of U.S. [account holders] every year. … And if they don’t enter into this agreement and they invest in U.S. stocks or securities, or have any U.S. source income, then there’s going to be a 30 percent withholding tax on all payments, including interest, rents, royalties, and things like that.

No wonder so many financial institutions around the world refuse American clients. [Note: for the specific countries involved and for a sense of how extensive the FATCA reporting is, click here.] An excluded American commented on Steemit, “It’s not because they don’t like us. Both projects [Monaco Visa and Polybius] are seeking licensing from the appropriate financial regulators in the EU, since both projects are trying to bridge the gap between traditional financial systems and cryptocurrencies. FATCA requirements are so restrictive and obtrusive that many foreign banks and financial institutions just refuse to do business with American customers.”

A crypto developer explained the likely impact on smaller businesses. “[I]f I happen to create a service in the crypto world, I am sure to exclude USA citizens because I don’t have money to pay lawyers and then [be] offered a deal to plead guilty” over an unforeseen or obscure requirement. Excluding Americans is self-preservation.

Conclusion

The dubious legitimacy of state recognition comes at a high price, especially for Americans. They already need to maneuver to access many foreign opportunities and financial avenues that are freely available to others. As bitcoin goes mainstream, the cost of respectability will rise.

Do you believe foreign ICO’s should continue excluding American customers? Should government be involved with regulation over ICOs?  Let us know in the comments section below.

Images via Shutterstock and Monaco Visa

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