Singapore and Hong Kong are fast emerging as the leading hubs for Initial Coin Offerings (ICOs) in Asia thanks to government support and local private sector bodies – the Singapore Fintech Association and the Fintech Association of Hong Kong – that have been contributing to their respective country’s fintech development.
ICOs are a fundraising method in which a company or start-up sells a predefined number of digital tokens to the public, typically in exchange for major cryptocurrencies like bitcoin and ether, which are created and disseminated using distributed ledger or blockchain technology.
ICOs surged in popularity in 2017 with global investment volumes growing exponentially. More than US$4.5 billion was raised worldwide through ICOs in 2017 – US$1.838 billion in October and November alone – almost 20 times the US$236 million that was raised in 2016.
While Hong Kong has yet to host a high-net ICO above US$100 million, Singapore had several notable token sales in 2017. This included QASH, which raised US$106.4 million, and TenX, which raised US$83 million.
With such huge amounts of money moving in the ICO space – much of it involving buyers and sellers outside the ambit of accredited investor and securities trading rules – it was only a matter of time before regulators stepped in. The People’s Bank of China effectively banned ICOs last September and South Korea’s Financial Services Commission (FSC) followed suit.
In contrast, Singapore and Hong Kong are being more permissive. Last August, the Monetary Authority of Singapore (MAS) issued its first guidance note on ICOs, noting that “the function of digital tokens has evolved beyond just being a virtual currency” to the point that some coins “may represent ownership or a security interest over an issuer’s assets or property”.
As such, sellers of tokens with these characteristics are required to register a prospectus with MAS prior to their ICO. Along with secondary market operators set to trade the tokens, these sellers are also subject to Singaporean licensing requirements for securities vendors and need regulatory approval from MAS. This closely follows the line adopted by the US Securities & Exchange Commission.
In November, MAS issued a follow-up paper reiterating that it will regulate ICOs resembling equity and debt offerings, but also outlining exemptions for certain token sales of lower value.
In a move to spur more experimentation and collaboration in the fintech space, MAS and the Singapore FinTech Association announced in November that a new 100,000 sq ft fintech innovation hub, 80RR Fintech Hub SG, is to be set up in the heart of the central business district at 80 Robinson Road.
Hong Kong’s Securities & Futures Commission issued a statement in September that whilst digital tokens offered in typical ICOs are usually characterised as a ‘virtual commodity’, it had observed that certain ICOs had terms and features that could mean that the digital tokens fell under the definition of ‘securities’ and accordingly should be subject to the securities laws of Hong Kong.
Where the digital tokens involved in an ICO fall under the definition of ‘securities’, dealing in or advising on such digital tokens, or managing or marketing a fund investing in them, may constitute a regulated activity. Parties engaging in a regulated activity targeting the Hong Kong public have to be licensed by or registered with the SFC, irrespective of where they are located.
In Hong Kong, government support includes Hong Kong Science & Technology Parks, the Design Incubation Programme and, last September, it launched a US$256 million Innovation and Technology Venture Fund for co-investment in growth-stage start-ups. In December, the Fintech Association of Hong Kong issued the ‘Best Practices for Token Sales’, which provides insights and suggested general practices for the Hong Kong fintech community on issuing digital tokens.
Progressing the journey for DLT will mean navigating a complex matrix of law and regulations if the full potential of your business is to be realised and any regulatory risk mitigated. This is particularly true in the high value and highly regulated arena of the capital markets.
From our global network of offices, Sovereign creates practical solutions wherever your business takes you. Our teams are ready to help both start-ups and established players to navigate the legal and regulatory implications of blockchain and other distributed technology using our knowledge and experience of both financial services regulation and the wider commercial context.
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