Legal aspects of crowdfunding on Blockchain

21 January 2022

Crowdfunding has become an increasingly popular means of raising money by appealing to the generosity of the general public, rather than relying on institutional investors. Although the concept of crowdfunding dates back to at least the 17th century, it has only been in recent years that crowdfunding has exploded in popularity on blockchain platforms. Companies such as Kickstarter are now leading the trend. 

Ever since Kickstarter’s major announcement about launching their latest project through crowdfunding on the blockchain, companies all over the world are now considering making a move in the blockchain industry. Although this is a welcome development for businesses and the economy at large, not everyone understands what it entails. If you’re considering blockchain crowdfunding, here’s an overview of all you need to know about the legal implications of crowdfunding on the blockchain.

Licences and permissions needed to launch crowdfunding on Blockchain

The legal aspect of crowdfunding on the blockchain is a bit complicated and not fully understood by many since it’s new territory in the business industry. The problem comes from being able to raise money from the general public without having to register with the SEC or go through a lot of hoops. However, many policies have been set across European Nations to ensure that companies running their programs on the blockchain platforms would adhere to certain rules and regulations while operating within their jurisdictions.

Recently, the European Union Parliament and the Member States reached an agreement to regulate virtual assets including cryptocurrencies. Under Directive 2015/849 (5AMLD), Virtual Asset Service Providers (VASPs) are obliged to implement effective, risk-based AML/CFT measures. The Law Library of Congress is carrying out a study for Members of Parliament about AML/CFT requirements for DApps and how these requirements affect VASPs.

Europe, AMLs and the Blockchain industry 

In January 2018, U.K.-based research firm Cryptoasset Designated Activity Company (CDAC) published its findings that 72% of European ICO projects failed within four months after launch, with 60% failing before reaching their fundraising target.  Although some of these companies failed due to some technical or managerial issues, other companies deliberately sabotaged their projects by withdrawing the funds invested into the project for fraudulent purposes.  

To do so, they follow several steps. First, they will often work with trusted individuals known as mules, who receive money from their criminal contacts. The mules then deposit that cash in multiple bank accounts under false names and transfer sums of funds back to their sources before withdrawing large amounts over time.

Anti-money-laundering policies are designed to protect against such criminals using blockchain technology and other financial institutions to move ill-gotten gains around or convert them into legitimate assets. 

Financial Action Task Force NPPS guidance

The Financial Action Task Force (FATF) is an intergovernmental body whose purpose is to develop and promote policies to protect the global financial system against money laundering, terrorist financing, and other related threats. In doing so, FATF seeks to foster international collaboration and mutual assistance on criminal justice matters, which will enable governments to identify and pursue those engaging in such activities.

Anti-Money-Laundering policies in Europe

Due to the increasing amount of fraudulent activities in the blockchain industries, many countries’ financial institutions now find new ways to eradicate or minimise money laundering through virtual assets. Europe is not left out of this trend, as most European countries have set up different policies to monitor or regulate cryptocurrency activities within their jurisdiction.  

Because of this development, the European Banking Authority (EBA) issued some recommendations to help monitor and promote the use and safety of investments made through the blockchain industry.  Every policy in this aspect is in line with the national anti-money laundering and counter-financing (AML/CFT) framework.

Factors limiting Blockchain crowdfunding policies in Europe

Cryptocurrencies are decentralised virtual currencies not issued by central banks that allow instant peer-to-peer transactions anywhere in the world. Although most countries are attempting to regulate the activities of the industry, not many countries have recorded much success. The inability of the various authorities and other regulating bodies to control the blockchain industry can be traced to the reasons mentioned below.

The European Union’s General Data Protection Regulation (GDPR) applies to all businesses operating in EU countries, regardless of size or type. All companies must respect data privacy rights and make their customers aware of how their data will be used. However, most blockchain networks do not explicitly require users to provide any personal information when joining and cannot be easily tied back to a person. Due to blockchain’s decentralised nature, it is difficult to apply many of the long-standing financial rules and policies guiding businesses and financial institutions

Challenges of Blockchain crowdfunding within European jurisdictions

Although many entrepreneurs are looking to harness funding from token-based campaigns, not all of them have been successful in the venture.  For instance, small projects with virtually no cash flow might look to blockchain for a way to raise capital quickly and efficiently but will be faced with numerous challenges from their countries. The major challenge is that many countries have already passed legislation restricting or banning investment opportunities depending on how they view crowdfunding as it applies to their local markets.

The regulation of cryptocurrency investment and blockchain crowdfunding varies from country to country. The European Union, for example, has taken a relaxed approach to regulation over cryptocurrency-related activities, opting for voluntary guidelines for ICOs and crowdfunding instead. This however does not mean all issues have been resolved since there are still so many irregularities and inconsistencies in the subject matter.

While we wait for legislative clarifications, and with a lot of uncertainty surrounding whether ICOs will be regulated as security or utility tokens (or neither), there are still plenty of entrepreneurs who are willing to jump into token sales. However, before you do so, it’s important to understand that these regulatory uncertainties can lead to potential problems. 

One such concern is taxation: depending on how an ICO is structured and where it takes place, an investment may be treated as taxable income or capital gains. And if your investors include citizens from several different European countries, each country might have its tax requirements. To make matters worse, while national governments might recognize cryptocurrency transactions subject to value-added tax (VAT) laws when paying for goods and services, they don’t necessarily treat all crypto-currency transactions as VAT-exempt when related to an initial coin offering


Blockchain has been rising in popularity over recent years, due to its many potential applications. The most common application is likely cryptocurrency and blockchain crowdfunding. These can easily be used for decentralised transactions. However, it is important to note that the process of launching a blockchain crowdfunding project is not as straightforward as it may seem, since there are so many legal implications and technicalities you must consider.

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