Initial Coin Offerings

Article on Cryptocurrency

The Basics

The term “Bitcoin” rose to prominence ever since April 2017 when this online currency experienced an unprecedented price surge. You may have been one of the millions of people all over the world feeling baffled by how strangers got rich overnight by simply selling off “imaginary” money which they bought years ago. You may have even toyed with the idea of buying Bitcoin yourself.

However, what is Bitcoin?

Bitcoin is one of the numerous virtual currencies available online. What makes virtual currency unique is the fact that it is decentralized; meaning that it is not issued by a single, central body or authority. Control lies in the hands of the users and complicated algorithms. Moreover, cryptocurrency, as the name suggests, utilities cryptography as a security measure. This feature ensures that cryptocurrency is nearly impossible to counterfeit and users can spend their virtual currency without having their identities being exposed.

Society may be too used to the feeling of paper notes between our fingers such that the concept of an untouchable medium of exchange may seem unconventional, but with the rapid advance of technology, we must learn to adapt to these new payment methods if we do not want to be left behind.

However, what makes cryptocurrency so attractive is the secrecy and anonymity shrouding it. Users are shielded by anonymity when carrying out transactions using cryptocurrency. This has led to cryptocurrency becoming the currency of choice for many surfing the underbelly of the internet. The deep dark web hosts a myriad of illegal activities, and what better way to remain anonymous when making your ‘not so innocent’ transaction than with a currency which literally prides itself on its anonymity. Nevertheless, with such encryption, users feel protected when using cryptocurrency as it eliminates the risk of fraud and identity theft.

Focusing on Initial Coin Offerings

Governments all around the world have also been keeping a close eye on cryptocurrency. In Singapore, the Monetary Authority of Singapore (“MAS”) is the authority in charge of monitoring and regulating activities surrounding the use of virtual currency. In October 2017, the MAS reported that the use of cryptocurrency was not common in Singapore, with only twenty or so retailers accepting Bitcoin as payment. Similarly, in the financial sector, use of cryptocurrency had not caught on.

However, fast-forward one year to 2018 and Singapore has been dubbed “one of the new kids on the blockchain”. Singapore has adopted a welcoming attitude towards ICOs coupled with the recent hubbub on the Initial Coin Offering (“ICO”) has put Singapore on the map as an ICO destination. This is partly due to the fact that China implemented a ban on ICOs, resulting in companies flocking to Singapore and Hong Kong as an alternative.

Simply put, an ICO is a crowdfunding vehicle using blockchain technology. Investors are issued “tokens” in exchange for cryptocurrency, but unlike the traditional Initial Public Offering, the issue of tokens in an ICO does not involve the issuer giving up their rights of ownership to investors. Moreover, these tokens can represent any particular asset or utility that usually resides on top of another blockchain. Tokens can represent basically any assets that are fungible and tradeable, from commodities to loyalty points to even other cryptocurrencies. Tokens are a digital asset for decentralised applications within the blockchain ecosystem, but they actually have no inherent value themselves, only representing the value of the decentralised application.

The Securities and Futures Act

On 1 August 2017, the MAS announced that the offer or issue of digital tokens in Singapore would be regulated by the MAS if the tokens constituted products regulated under the Securities and Futures Act (“SFA”).

The MAS will examine the “structure, characteristics of, including the rights attached to, a digital token in determining if the digital token is a type of capital markets product under the SFA”. Moreover, offers of tokens which constitute as capital market products (e.g. a security, debenture of the issuer, or a unit in a collective investment scheme) will be subject to disclosure obligations under the SFA. This includes registering a White Paper or prospectus with the MAS when issuing these digital tokens to investors in Singapore.  A White Paper will minimally need to set out the nature of the service or product which the ICO was launched for, the resources required and the amount of funds needed to develop the said service or product.

The Prevention of Money Laundering and Countering the Financing of Terrorism requirements may also apply to ICOs. As such, despite digital tokens not being completely in the regulatory purview of the MAS, they are still subjected to other regulations for countering money laundering and terrorism financing.

Concluding Remarks

Currently, Singapore has not been adverse towards the launch of ICOs and the use of cryptocurrency, as long as interested companies remain aware of how the SFA applies. It will be interesting to watch how cryptocurrency continues to assimilate itself in Singapore and what other regulatory frameworks or legislation will be specifically imposed to control this mysterious and volatile virtual currency.