New Funding Models in the Blockchain World
Technology startups operating in the blockchain space increasingly rely on alternative forms of raising capital. Instead of traditional financing (e.g. venture capital or business angels), they choose to issue tokens and use crowdfunding models based on distributed ledger technology. The most common models include Initial Coin Offering (ICO), Security Token Offering (STO), and Initial DEX Offering (IDO). Although all of them rely on tokenization and blockchain, they differ in legal status, level of regulatory oversight and potential regulatory implications.
With the entry into force of the Markets in Crypto-Assets Regulation (MiCA), a unified regulatory regime becomes available across the European Union for a significant portion of token issuances that do not qualify as financial instruments. According to Wojciech Ługowski, attorney-at-law and managing partner of Lawarton law firm, this is an important step toward stabilizing and professionalizing the crypto-asset market.
ICO – Simplicity with Potential Pitfalls
Initial Coin Offering (ICO) was originally the most popular method of raising capital for blockchain projects. Under this model, tokens are issued and sold to investors in exchange for funds. These tokens may have a utility character (e.g., granting access to a platform, enabling the purchase of certain services, or allowing participation in governance) or an investment character. The final legal classification of a token depends on its economic design and the scope of rights granted, which in practice means that ICOs may also involve tokens that meet the characteristics of financial instruments.
The boundary between a utility token and an investment token is often fluid. If a token meets the criteria of a financial instrument under the Markets in Financial Instruments Directive (MiFID II), its issuance may require:
- A prospectus,
- Notification to the competent supervisory authority,
- Compliance with regulations governing public offerings.
In the European context, it is also necessary to consider MiCA, which introduces uniform regulatory rules across the EU for the issuance of crypto-assets that are not financial instruments. Although MiCA does not formally apply to crypto-assets classified as financial instruments under MiFID II, it imposes numerous disclosure, organizational, and operational requirements for other categories of crypto-assets (e.g., utility tokens).
MiCA obliges issuers to prepare offering documents (whitepapers) that include a description of the project, the characteristics of the token, the operating model, and risk disclosures. For tokens within MiCA’s scope, the whitepaper generally must be filed with the competent authority before the token is made publicly available. Issuers must also comply with requirements regarding transparency, fair communication with the market, management of conflicts of interest, and consumer protection mechanisms.
Combined with parallel AML regulations, the MiCA package strengthens obligations around customer identification and anti-money laundering, limiting the possibility of anonymous token offerings and facilitating the prosecution of abuses and criminal financing.
STO – Compliance and Greater Investor Confidence
A Security Token Offering (STO) involves issuing tokens that are treated as financial instruments. They most commonly represent shares, bonds, rights to future revenues, or other property rights. STOs are generally subject to the legal regime applicable to capital markets: they require the preparation of a prospectus (or reliance on an exemption), notification of the offering to the supervisory authority, and adherence to AML/CFT rules.
Although STOs offer greater transparency and legal certainty for investors, they come with:
- Higher legal and compliance costs,
- The need to meet formal regulatory requirements,
- Longer preparation timelines.
Due to their classification as issuances of financial instruments, STOs fall under capital markets regulations, particularly MiFID II. MiCA generally does not apply to tokens that are financial instruments; therefore, the issuance and trading of security tokens are primarily governed by traditional securities law.
Crypto-assets that qualify as financial instruments remain outside MiCA’s scope, although guidelines issued under MiCA help with their proper classification. Issuers and platforms organizing STOs may also require authorization as an investment firm or as an operator of a multilateral trading system.
A CASP license becomes relevant if the same entity simultaneously provides services related to crypto-assets that are not financial instruments and thus fall under MiCA’s regulatory regime.
IDO – Decentralization with Risks
An Initial DEX Offering (IDO) is a newer funding model in which tokens are issued directly on a decentralized exchange (DEX). This model assumes the absence of central intermediaries, which accelerates issuance, reduces costs, and provides immediate token liquidity.
From a legal perspective, however, IDOs are the most risky model: lack of institutional oversight, often the absence of formal KYC/AML procedures, difficulty identifying the responsible entity, and susceptibility to manipulation mean that regulators are increasingly scrutinizing such offerings.
Under the EU legal framework, MiCA is particularly relevant, as it covers, among other things, services involving the operation of crypto-asset trading platforms. If a decentralized exchange effectively has an identifiable operator (e.g., a company managing the user interface, protocol, or liquidity), that entity may be recognized as a crypto-asset service provider and become subject to the CASP licensing regime, along with the associated disclosure, organizational, and AML/KYC requirements.
At the same time, services provided in a fully decentralized manner, without any intermediary, are not currently explicitly covered by MiCA. As a result, some DeFi solutions continue to operate in an environment of regulatory uncertainty.
In the EU-level regulatory debate, calls for clarifying the rules applicable to decentralized finance (DeFi) are increasingly common. As of today, however, there are no detailed, universally binding EU regulations that would require all decentralized protocols or DEXs to implement full KYC/AML procedures. It is expected that as the market matures and new regulatory initiatives emerge, the legal framework will be expanded and refined, which in practice may gradually reduce the possibility of conducting IDOs in the “grey zone” and require greater transparency and regulatory compliance.
Conclusions and Recommendations
In practice, choosing between ICO, STO, or IDO should be preceded by an in-depth legal analysis. Token issuance may fall under different regulatory regimes depending on how the token is structured, what its purpose is, and who offers it.
Ługowski recommends:
- Assessing the token’s legal nature under MiFID II and MiCA,
- Analysing whether the project falls under the Prospectus Regulation,
- Considering AML obligations and the potential need to obtain a CASP license,
- Preparing offering documentation compliant with local and EU requirements,
- Adapting information policies to market and supervisory expectations,
- Evaluating the risks associated with the IDO model and their potential legal implications.
For investors, choosing the issuance model also means choosing a level of transparency, legal protection, and enforceability of claims. In fully decentralized models (e.g., IDO), rights may be practically unenforceable.