Initial Coin Offerings - the tension between innovation and regulation in Singapore

Warning shots have been sounded by regulators amidst the rising phenomenon of “initial coin offerings” (ICOs). Whilst global regulators mull over how they should address and ring-fence the phenomenon (see our related article here, outlining the approach taken by regulators in other countries), the Chinese regulators have recently declared ICOs to be illegal, requiring those who have completed ICO fundraising to make arrangements to return funds raised.

What is an ICO?

Whilst the technical know-how may seem confusing, the general idea is that an ICO is a blockchain-related method used to raise funding (typically to fund a project) through the sale of tokens in consideration for payments in cryptocurrencies. The tokens are liquid, meaning that investors can make money by speculating on tokens that increase in value following an ICO.

Though an ICO may be similar to an initial public offering (IPO) in certain ways, there are certain intrinsic differences. For example, an IPO allows the public to purchase shares of a listed company, which typically carry rights to dividend and voting. Conversely, most tokens issued in an ICO do not carry any of those benefits. Amongst other possible functions, some tokens may merely give its holder a right to access a network.

Changing regulations

In the wake of the increasing number of ICOs and the Securities and Exchange Commission’s ruling that some of the tokens sold during an ICO are actually securities (and therefore, subject to regulation), the Monetary Authority of Singapore (the MAS) has flexed its regulatory muscle in recent statements.

On 1 August 2017, the MAS elaborated on its earlier view (that it does not regulate virtual currencies per se because these are neither securities nor legal tender) by clarifying that it views virtual currency as one particular type of digital token. Accordingly, the MAS would regulate an offer or issue of tokens in Singapore if such tokens are construed to be “securities” under the Securities and Futures Act (Cap. 289) (the SFA).

On 10 August 2017, the MAS issued a joint statement with the Commercial Affairs Department cautioning the public of the risks of taking part in ICOs, and asking the public to report suspected fraudulent schemes involving digital tokens to the Police.

Implications

Though legislative reform in respect of ICOs (e.g. the proposed AML/CFT regulations for ICOs) have not been formally introduced, an ICO may still be regulated by the MAS if the tokens offered or issued fall within the SFA definition of “securities” (which include, amongst others, debentures, shares and units in a collective investment scheme).

To ascertain whether an ICO would be regulated under the SFA, one should consider the functions of the tokens offered and issued. For example, where the tokens carries a “buy-back” option – also occasionally called burning of tokens – that allows purchasers to “burn” their tokens for an increased value (cryptocurrency or otherwise), such feature arguably strengthens the characterisation of such tokens as securities.

Yet, the task of ascertaining whether a token is subject to the SFA is often fraught with uncertainty, particularly where such token carries novel features which do not fit neatly within the existing SFA definitions. Where in doubt, it would be advisable to seek legal advice and consult the MAS.

Comment

ICOs are part of the disruptive technology in this digital age which do not fit neatly the existing regulatory boxes in Singapore (whether under the SFA, the Financial Advisers Act, the Payment Systems (Oversight) Act or otherwise). Notwithstanding this, as regulators attempt to come to terms with the phenomenon, persons looking to carry out ICO activities in Singapore should exercise careful due diligence to ascertain whether they may be subject to the regulatory reach of the MAS or even regulators elsewhere.