The Monetary Authority of Singapore indicates that various forms of crowdfunding involving the use of digital tokens likely will be regulated if the digital tokens constitute products regulated under the Securities and Futures Act.
Initial Coin Offerings (ICOs) (also known as Initial Token Offerings (ITOs)) are emerging crowdfunding ventures that recently have seen increased interest from blockchain startups. Singapore has emerged as a potential offering venue, due in part to its tax-friendly regulations and fintech “regulatory sandbox.”
Such ICOs/ITOs typically have been categorized and marketed based on the products or services underlying them—including securities, physical commodities, services, or contractual obligations (and hybrids and combinations thereof).
Once issued, a digital token is a cryptographically secured representation of a token-holder’s rights to receive a benefit or to perform specified functions. A virtual currency is one particular type of digital token, which typically functions as a medium of exchange, a unit of account, or a store of value. Tokens issued under an ICO/ITO are not virtual currencies per se (such as Bitcoin or Ethereum) but instead embody the digital tokenisation of some underlying right/obligation.
MAS Clarification on the Nature of Issued Tokens
On 1 August 2017, the MAS issued clarification on the offer or issue of digital tokens in Singapore, recognising that the function of cryptocurrencies has evolved beyond just being a digital currency. Accordingly, the MAS would regulate an offer or issue of tokens in Singapore if such tokens fall within the definition of “securities” under the Securities and Futures Act (SFA). In doing so, the MAS would adopt a principles-based approach that considers the underlying asset rather than a plain reading of predefined instruments.
The broad ambit of what can be defined as a “security” under the SFA includes “shares”, “debentures”, and “units in a collective investment scheme”. Whether a token would be considered a security would depend on its characteristics; if the issued token ultimately is construed as a form of “security”, it will raise potential regulatory issues under the SFA, the Financial Advisers Act, and other laws pertaining to regulation of financial products in Singapore, including issues regarding the following:
- Prospectus lodgement/registration requirements imposed on the issuer for an offer of securities (unless exempted)
- Licensing issues for intermediaries that deal in the tokens or fund managers that manage such tokens
- Applicable requirements on anti-money laundering and countering the financing of terrorism
- If the issuer plans to facilitate the secondary trading of such tokens, it also will need to be approved/recognised by the MAS as an approved exchange or be a recognised market operator, as applicable
The MAS is moving to implement a regulatory framework that aims to protect cryptocurrency, blockchain, and ICO/ITO activities. Readers may recall the US Securities and Exchange Commission’s rejection of a proposal to list the Winklevoss Bitcoin Trust as the first exchange-traded product (ETP) that would track the price of bitcoin—with the agency citing the opaque structure of the cryptocurrency market as a risk that would prevent an exchange from deterring fraud and market manipulation.
In Asia, China and South Korea have banned fundraising through digital currencies outright, citing the risk of financial scams, with China’s central bank reporting 90% of the ICOs launched in China to be fraudulent. The MAS is therefore motivated to maintain Singapore’s reputation as a trusted international financial centre, prevent money laundering, and preserve the integrity of its sandbox policy.
Prospective issuers, intermediaries facilitating or advising on an offer of digital tokens, and platforms facilitating trading of such tokens should consult with their legal advisors to ensure compliance with Singapore’s regulatory framework. In many instances, early interaction with the regulator is encouraged to facilitate a common understanding of how a proposed product or offering is likely to be treated under existing rules.