Global regulators have begun actively commenting on ICOs following regulators in the US and Singapore releasing statements last month (discussed in an earlier update). Now, regulators in the UK, Canada and Hong Kong have followed suit, echoing the notion that cryptocurrencies offered in ICOs could fall within the scope of securities regulation. In contrast, Chinese regulators have implemented an outright ban. In Australia, ASIC has yet to release an official statement but recent reports indicate ASIC will soon release a light-handed guiding statement on ICOs that supports the US approach.
Regulatory developments in the UK, Canada and Hong Kong
In the UK, the Financial Conduct Authority (FCA) has released a consumer warning on ICOs citing the significant risks attached including no investor protection, price volatility, the potential for fraud, the lack of a prospectus, the usually experimental nature of ICO projects and the lack of regulation in the sector. Significantly, the FCA indicated an ICO could fall within its regulatory boundaries depending on how the ICO is structured. If an ICO involves arranging, dealing or advising on regulated financial investments this may be a regulated activity. The FCA noted the operation of digital currency exchanges, facilitating the exchange of certain tokens, may require FCA authorisation in order for services to be delivered.
In their Staff Notice 46-307: Cryptocurrency Offerings, the Canada Securities Administrators (CSA) noted that “many” of the token sales investigated by Canadian regulators fell under the definition of a security following consideration of the “economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind.” CSA’s Staff Notice also outlined the requirements for issuers wishing to launch ICOs and cryptocurrency exchanges wishing to trade in the tokens under current Canadian securities law. Importantly, noting that ICOs launched in Canada or targeting Canadian investors would fall within the jurisdiction.
The Securities and Futures Commission (SFC) in Hong Kong has also issued a statement that depending on the facts and circumstances of the ICO, the offered tokens may constitute securities as defined in the Securities and Futures Ordinance which will trigger certain obligations. While tokens are usually characterised as virtual commodities in Hong Kong, the SFC has outlined scenarios where ICOs have terms or features that may result in tokens being classified as securities.
The SFC considers that tokens that represent equity or ownership interests in a corporation may be regarded as shares, while tokens used to create or to acknowledge a debt or liability owed by the issuer may be considered debentures. Similarly, token proceeds managed collectively by the ICO scheme operator to invest in projects with an aim to enable token holders to participate in a share of the returns provided by the project may constitute a collective investment scheme. These are all regarded as securities by the SFC and would require licensing or registration with the SFC irrespective of where the business is located. Notably, if business activities merely target the “Hong Kong public”, this is enough to trigger requirements under Hong Kong securities law.
The Chinese position: a ban on ICOs
Chinese regulators outlawed ICOs in their jurisdiction. In a joint statement issued by seven key financial regulators including the People’s Bank of China and the State Administration for Industry and Commerce, China has asserted that ICOs are illegal under domestic law. From September, all types of currency issuance financing activities are expected to cease and currency trading platforms will not be allowed to swap fiat for virtual currency or even provide information regarding virtual currency trading. Most notably, the regulators have called for completed ICOs to refund investors with a warning of investigation and severe punishment for those refusing to refund investors or cease ICO activity. Certain projects have cancelled their ICOs and refunded investors as a result.