When Initial Coin Offerings (ICOs) took the world by storm in 2017, no one could have expected them to raise nearly $5.6 billion. Regulators, however, contributed in slowing down the speed of increase in the ICO size by clamping down on them in some cases. With the tightening of compliance procedures in the ICO space. In 2019, companies began shifting their focus towards a new form of fundraising that is supposed to be fully compliant: Security Token Offering (STO).
An STO offers investors security tokens in exchange for their investments. These security tokens, unlike conventional digital tokens utilised for ICOs, are backed by real financial securities. What this means is that a security token allows an investor to have a fraction of equity ownership in the issuing company; however, what differentiates it from traditional security is its links with the digital ledger, the blockchain that is a key to the power of cryptocurrencies and digital tokens.
STO Regulatory Frameworks In Asia
Since STOs follow the similar structure to IPO, they must comply with the security laws, which vary widely from region to region. There are no explicit exemptions for STOs in the current scheme of things. Consequently, the issuance of security tokens needs to follow the recommended registration procedures.
The Monetary Authority of Singapore (MAS) is tasked with approving digital tokens– however, reports confirm no STO had been approved by the regulator as of September 2018. The Securities and Futures Act (SFA) establishes the local security laws with which any security token issuance must comply without exception. The MAS considers every digital asset as security unless it falls under one of the set exemptions which include small and private solicitation with specified parameters, for instance.
The region’s regulators permit institutional investors to invest in STOs which follow the compliance procedures specified. Like Singapore, Hong Kong considers those digital tokens that act like debentures and shares securities. These must comply with the regulations specified by the Securities and Futures Commission (SFC). The participants in STOs are required to be registered with the regulator or licensed by it if the business venture targets the Hong Kong public.
The Financial Services Agency (FSA), Japan’s financial regulator, expressed interest in moving the licensed cryptocurrency exchanges under the Financial Instruments and Exchange Act (FIEA) which will increase protection for customers. The move also indicates how the Japanese regulator might facilitate security tokens, allowing them to list themselves on cryptocurrency exchanges. This would only serve to enhance the country’s reputation as a crypto-friendly nation. The FSA might begin considering cryptocurrencies as financial assets which will also boost the market for other crypto-derived products.
While the Philippines Securities and Exchange Commission (PSEC) has not yet released the finalised regulations for digital tokens, the proposed draft by the regulator considers all ICO tokens securities. It necessitates the registration of such tokens with the commission with the exemption of those security tokens that will be offered to less than 20 people in one year or those that are sold to entities including pension funds, banks, investment houses, and insurance companies. The Philippines government has expressed interest in the technology and are optimistic about future possibilities.
STOs are not regulated yet in Vietnam. However, existing laws might not permit residents from participating in token offerings outside the country. Furthermore, if a token is deemed security, the existing legal framework would prohibit the Vietnamese from purchasing them. However, with the growing popularity of the blockchain technology and cryptocurrencies in Vietnam, it is highly probable that the country would soon adopt a legal framework permitting compliant STOs and ICOs.
The Securities Commission Malaysia and the Bank Negara Malaysia recently expressed their intent to clarify the regulatory compliance procedures for digital tokens in a press release. The regulators aim to bring digital tokens under securities laws which serve to protect investors. The country does not recognise cryptocurrencies as legal tender, but it doesn’t ban them either. The Malaysian Finance Minister promised the release of cryptocurrency regulations in the early months of 2019.
Indonesian regulators have given mixed reactions to digital tokens in general. The central bank of Indonesia, Bank Indonesia does not recognize cryptocurrencies as legitimate modes of payment and teamed with the National Police to enforce the ban at this time during the previous year. However, the Badan Pengawas Perdagangan Berjangka Komoditi (BAPPETI) or the Commodity Futures Trading Supervisory Agency expressed a view considering cryptos as commodities that could be traded on futures exchanges. However, no official enactment was subsequently released.
The Thai Securities and Exchange Commission is yet to clear their official stand on Security Token Offerings. The regulator is yet is to figure out whether STOs would be subject to the Digital Asset Act or the SEC Act. However, officials have stated that it all depends on the STO’s specifications and white paper details. The regulator has also expressed concern over various issues including voting rights, dividend, and share ownership when it comes to security tokens.
The Taiwanese lawmaker recently proposed the establishment of a new category for security tokens altogether. It is also suggested to specifically define security tokens as well as clarify the legal framework surrounding them. It is reported that Taiwan could introduce these new regulations in mid-2019. These will help usher in a new era of blockchain development in Taiwan.
The Securities and Futures Bureau of Taiwan also stated that a token behaving in the manner of security would be defined as a ‘securities token’ and will need to comply with the Securities and Exchange Act. The issuers of securities tokens would also be required to disclose information in the same way as publicly traded companies.
The Australian Financial Market Authority (FMA) considers security tokens similar to traditional debts or equities. The FMA also mandates that the issuers of security tokens ensure that their tokens comply with the Australian Capital markets Act. In this regard, the issuer might also be required to obtain a license to comply with the legal framework.
China and South Korea
There are broadly two categories of nations when it comes to STO regulations: on the one hand, there are countries such as China and South Korea that prohibit token sales, on the other hand, many Asian regulators match their US and European counterparts in forming legal compliance procedures for Security Token Offerings.
Security Token Offerings (STOs) offer favourable prospects in 2019. Governments in Asia and across the world are beginning to ponder over the legal frameworks for STOs which will secure investments and allow this path-breaking technology to be fully recognised. 2019 appears to be a defining year which will be seen as a significant milestone in the path to STO regulation.