There have been significant developments across Asia and in the United States in relation to ICOs. In particular, the latest developments reinforce that token offerors must not only consider the application of securities laws but also other requirements including consumer protection obligations and anti-money laundering and counter-terrorism financing regimes. In the US, various class actions have focused on both securities law analysis and misrepresentations to investors suggesting that the application of consumer protection must be a significant consideration for token offerors during an ICO.
- United States: The Securities and Exchange Commission (SEC) has imposed a cease-and-desist order preventing California-based Munchee’s ICO. Munchee sought to raise US$15 million for its blockchain-based food review service, proposing to use the ICO proceeds to create an ecosystem that rewarded users for writing food reviews. The SEC’s contention was that Munchee communicated that investors could expect that the efforts by the company would lead to an increase in the value of the tokens. Munchee also stated an intention to create and support a secondary market for the tokens. The SEC was of the view that, based on these statements, investors would have had a reasonable belief that their investment in the tokens could generate a return and considered that it was a security under the Howey test. The SEC noted that determining whether a transaction involves a security does not turn on labelling but involves an assessment of the relevant facts and circumstances.
- The SEC’s recently created Cyber Unit also announced that it has obtained its first ever emergency asset freeze to stop the continuation of an ICO by PlexCorps. PlexCorps has been accused of fraudulently marketing and selling up to US$15 million PlexCoin since August 2017. Although PlexCoin was marketed as having similar characteristics to a cryptocurrency, the SEC found them to be securities under federal securities law. The enforcement focusses on the allegation that PlexCorps promised to PlexCoin purchasers an unrealistically large 1,354% profit return in less than 29 days. Additionally, PlexCorps advertised a non-existent team and obscured the previous financial crimes of its founder, Dominic Lacroix.
- Following class actions being launched against Tezos (with four separate actions now commenced), a class action has been filed against Centra Tech Inc. (Centra) for alleged violation of securities law during its ICO. Centra proposed creating a cryptocurrency debit card however the class action accuses Centra of selling unregistered securities, misleading investors about partnerships and listing false team profiles.
- United Kingdom: In the feedback statement on its discussion paper on DLT, the Financial Conduct Authority (FCA) indicated that it would further examine developments in the ICO sector to determine whether further regulatory guidance is needed. Previously, the FCA published a consumer warning stating that an ICO could fall within its regulatory boundaries depending on the ICO’s structure.
- Denmark: Denmark’s central bank, Danmarks Nationalbank, has published its conclusion not to issue a central bank digital currency. The rationale for making such a decision is two-fold, firstly, the advantages of issuing a digital currency would not provide greater efficiency as Denmark’s payment structure already provides for immediate payment settlements, and, second, issuing a digital currency would make the central bank a direct competitor to the commercial banks.
- South Korea: The South Korean government has published a statement on a possible policy implementation to combat digital currency speculation and criminal acts using digital currencies. The release indicated that four major digital currency exchanges were currently having their terms reviewed and that the Government intends to periodically review digital currency exchanges for any potential data breaches.
- Malaysia: Malaysia’s central bank, Bank Negara Malaysia, has issued for public consultation a proposal to bring digital currency exchange businesses under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA). Broadly, digital currency exchange businesses will be considered ‘reporting institutions’ under the Act and must comply with transparency obligations. Notably, Bank Negara Malaysia re-asserted that digital currencies are not considered legal tender in Malaysia and are therefore “not covered by prudential and market conduct standards or arrangements that are applicable to financial institutions regulated by the Bank”. Consultation closes on 14 January 2018.
- Hong Kong: The Securities and Futures Commission (SFC) has issued a circular emphasising that Bitcoin futures and cryptocurrency investment products are only to be issued by licensed firms. Noting that Bitcoin futures had been accepted in the US, the SFC stated that business services relating to Bitcoin futures constitute regulated activities under the Securities and Futures Ordinance and that this is irrespective of whether the business is located in Hong Kong so long as the Hong Kong public are targeted.
Beyond this, engagement with DLT continues to grow. As well as the ASX adopting DLT in Australia, the House of Lords in the UK has issued a report highlighting the opportunities offered by DLT and calling on the UK Government to lead “practical application and testing” of DLT. In particular, the House of Lords identified sectors ripe for DLT implementation as being trade and immigration, national security and public safety, taxation, healthcare, food traceability and accountability, cybersecurity and counter-fraud, and payments and asset traceability.
As well as this, British overseas territory Gibraltar has passed a bill extending investor protection to businesses “carrying on controlled activities which are not investment services”. The bill is in line with Gibraltar’s proposed regulatory framework for DLT businesses, which is planned to take effect in January next year. Under the framework, businesses providing DLT services will be required to apply for a licence from the Gibraltar Financial Services Commission.