On 19 March 2018 the Securities and Futures Commission ("SFC") announced that it had halted an initial coin offering ("ICO") to the Hong Kong public by Black Cell Technology Limited ("Black Cell").

The ICO

Black Cell had promoted an ICO to sell digital tokens called Kropcoins to investors. The proceeds from the sale of the coins would be used to develop a mobile application for the agriculture industry purportedly aimed at "bridging the gap between the farmers and the market".

In exchange, the holders of the tokens would be eligible to redeem equity shares in Black Cell. The website for the ICO was available for access in Hong Kong.

The action

The SFC decided that making the tokens available to Hong Kong investors constituted "potential unauthorized promotional activities and unlicensed regulated activities" and that the sale of digital tokens through a website accessible by the Hong Kong public in the manner proposed "may constitute a [collective investment scheme] under the circumstances".

While the language used conveys uncertainty, the SFC had clearly reached a preliminary conclusion that applying existing laws and regulations to this ICO entitled it to take action. It considered the ICO to be a collective investment scheme ("CIS") as defined in the Securities and Futures Ordinance ("SFO") and the availability of the website to the Hong Kong public to be an invitation to invest in a CIS. The SFC therefore required the ICO to be withdrawn from Hong Kong investors.

Black Cell has now given purchasers of Kropcoins until 29 March 2018 to request a refund of the Ether they used to purchase the coins. It has also placed a notice on its website's landing page that the token sale is "not open for American citizens (and/or US residents), Hong Kong citizens or any citizen or resident of a country that does not allow participation".

Applying existing regulation to the digital world

The SFC has previously issued statements on ICOs.

On 5 September 2017 it indicated that existing regulations could be applicable to ICOs and certain features of ICOs may make the digital tokens 'securities' for the purpose of the SFO.[1] On 9 February 2018 the SFC warned that it was closely monitoring ICOs and had taken action against "a number of cryptocurrency exchanges and issuers of ICOs."[2]

The SFC has now given warning that it is prepared to intervene in a timely manner where it believes a proposed ICO constitutes unlawful regulated activity under the existing legal and regulatory scheme, even without a full investigation and formal sanction.

Comment

While Black Cell and Hong Kong investors in Kropcoins will no doubt hold a different view, the market generally should welcome this development.

There is currently a lack of regulations in Hong Kong designed specifically for cryptocurrencies and ICOs. In the absence of specific regulation, statements by the SFC about the manner in which it will evaluate ICOs provide guidance to issuers and investors. Such statements also show that the SFC is developing its views on the forms in which digital financial products should be permitted.

Ultimately, issuers of digital tokens and companies involved in the cryptocurrency markets need to ensure their structures and products comply with the existing legal and regulatory framework in all jurisdictions in which they are being offered.