Pham Duy Khuong, managing director at ASL Law

The current wave of IDOs (initial DEX offerings) is sweeping the nation and is gradually replacing the traditional methods of capital raising. However, due to the lack of protection legislation, Vietnam currently confronts numerous obstacles while implementing activities in this type of investment.

In order to attract capital and establish regulations to protect the interests of investors, Vietnam must craft suitable regulations in order to cover this fresh area of funding.

ICO, which stands for initial coin offering, is a method of soliciting investments with cryptocurrencies, and it serves as the foundation for the later methods of capital raising. It is by far one of the most popular crowdfunding techniques and is often used to start a new service or product in the cryptocurrency market, such as a new coin or app.

It is, in reality, quite similar to an initial public offering, which is used by a new business to acquire money when it first enters the stock market, while investors will benefit if the value of the tokens rises over the initial price of the token in the form of ICO.

However, due to a lack of security measures, scams and fraud occur frequently in the system, causing investors to gradually lose confidence in this system. As a result, IEOs (initial exchange offerings), which is the method of selling and listing tokens directly on the exchange, or very stringent management of government bodies, are linked to the development of security token offerings (STOs). IDOs, a new strategy for mobilising investors for digital tokens, are presently emerging and inheriting the IEO and STO paradigm.

An IDO is the first coin issuance on a decentralised exchange (DEX) and is a form of raising capital for a blockchain project by directly selling coins or tokens to the public through the DEX exchange.

Advantages and barriers

The first advantage is that capital raising is transparent and equitable. In fact, when a token is made available for purchase, individual investors can purchase large amounts at a low price and still make a profit after the fundraising event is over. However, companies, particularly startups, are able to launch a fundraising event without going through a centralised exchange or getting any approval from other agencies and entities.

Another benefit of IDO is that tokens can be instantly bought and sold. This means that investors can buy a token quickly and immediately resell it if the token has a high value.

The next benefit is liquidity, which means the ability to convert one asset to another (usually money) in the market. After an IDO, the owner immediately has the right to access and buy and sell tokens, thereby creating high liquidity for the new token.

Most of the current IDO projects are based on cryptocurrencies and games featuring non-fungible tokens (NFTs). However, due to the aforementioned types of projects, blockchain businesses and project investors face many risks when funding these types of projects through an IDO.

The first is that cryptocurrencies and NFT games are currently still in the grey area of ​​the law, meaning that there is currently no specific regulation for cryptocurrencies and NFT games in Vietnam. As a result, the interests and legitimate rights of both investors and blockchain businesses are currently not protected by law. This leads to apprehension when funding or establishing these businesses in Vietnam.

Secondly, according to the State Bank of Vietnam (SBV), cryptocurrencies in general are not recognised as currencies and are not legal means of payment in Vietnamese law. Issuing, supplying, and using cryptocurrencies in general as currency or means of payment is prohibited. Hence, it is difficult or even impossible to issue new cryptocurrencies to participate in IDOs to raise capital from investors.

In addition, cryptocurrency traders may be at risk when withdrawing funds from such trading platforms. Indeed, traders can use credit cards to deposit money into a cryptocurrency trading platform. Withdrawal by card is also possible, but only if the withdrawal is equal to or lower than the amount deposited.

However, late last year, the SBV amended and supplemented several articles of Circular No.19/2016/TT-NHNN on bank card activities. At the same time, the agency also issued Official Letter No.7076/NHNN-TT on ensuring international card transactions in accordance with Vietnamese regulations. Therefore, many traders when withdrawing money were blocked by commercial banks for reasons related to virtual/digital money according to regulations of the SBV.

This amount will be returned to the cryptocurrency platform by the commercial bank, and then the trader will have to work hard to negotiate with the platform on another way to withdraw money.

Being held back

For NFT games, the important barrier that makes investors not interested in blockchain game projects in Vietnam is the fact that Vietnam currently does not have a legal framework in this area. NFT games use tokens by applying blockchain technology and not real money for transactions, and so they may not be legal according to Vietnamese law.

However, the most sensitive problem is that the tokens or virtual currency generated by the game can be exchanged and withdrawn for real money, which is not allowed in traditional games and also is not allowed in NFT games. This may lead to a violation of the law for these games.

Besides this, creating cryptocurrencies from the game to trade, buy, sell, or exchange with other accounts or use as a means of payment is also not allowed by Vietnamese law. That is why there are not any licensed NFT game production companies in Vietnam and is the reason why investors choose Singapore for these actions, because the city-state has many preferential policies, such as simple company opening procedures, tax exemptions, and a sandbox mechanism.

Therefore, the development of blockchain businesses in Vietnam is being held back. Therefore, building a regulatory mechanism for cryptocurrencies and NFT games is extremely necessary.

Firstly, with innovative startups, the government is supporting startup consulting centres. A sandbox legal framework allows startups to easily register, access capital, and at the same time protect investors, create a healthy operating environment, and avoid unexpected consequences as well as violations of the law in fintech activities.

Second, with the aim of being a testing ground for innovative mechanisms for industrial businesses, the government may also create special technology zones and special innovation zones. Therefore, this can create a separate management area that can gradually control and create a more complete legal mechanism for this form of investment.

Third, Vietnam can immediately create a sandbox for raising capital for companies through digital asset exchanges, similar to an IPO of securities, and can employ the laws governing securities and foreign exchange to regulate, control, and promote this activity.

By doing so, a foundation for IDO funding development would be established, which encourages the growth of blockchain businesses and establishes a legal framework to protect investors in Vietnam.