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MAS to regulate crowdfunding involving digital tokens

Digital tokens can represent debt or an offer of units in a collective investment scheme, and these fall under the Securities and Futures Act, it says

WongPartnership's Low Kah Keong said: 'Just by electronically syndicating an investment product and requiring payments in Bitcoin or Ether instead of legal currencies in an offering exercise should not render our Securities and Futures Act inapplicable.'


MOST emerging forms of crowdfunding in Singapore involving the use of digital tokens, including cryptocurrencies such as Bitcoin, will likely be regulated by the Monetary Authority of Singapore, which stepped in on Tuesday to clarify its stance on these newfangled methods of fundraising.

The authority said it is responding to the recent rise in number of initial coin offerings (ICOs) launched as a way of raising funds, and that such digital tokens may be considered an offer of shares or units in a collective investment scheme under the Securities and Futures Act (SFA). Digital tokens may also represent debt owed by an issuer and be considered a debenture under the SFA, it added.

Such tokens are secured through cryptography, or the use of code to protect digital information and process instructions. Online sites launching these so-called ICOs have digital tokens representing rights such as membership into an investment pool, a fractional value of an asset or the promise of a return.

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WongPartnership's head of the asset management and funds practice Low Kah Keong said many recent ICOs in Singapore have purportedly issued digital tokens that are collective investment schemes or securities, and would fall squarely within the ambit of the SFA.

"Just by electronically syndicating an investment product and requiring payments in Bitcoin or Ether instead of legal currencies in an offering exercise should not render our Securities and Futures Act inapplicable."

TSMP Law's joint managing director Stefanie Yuen-Thio said the MAS is sending a strong signal to the market that it is focused on the substance of the transaction, and will apply current regulations accordingly.

"Sexy terms like 'cryptocurrency' and 'blockchain' may mask the fact that underlying the ICO is a transaction that falls into one of the regulated baskets - shares, debt instrument, or a collective investment scheme," she said.

MAS's clarification means that under the SFA, companies looking to issue digital tokens that are in effect structured as forms of securities must issue a prospectus as part of the offer. Issuers may skip doing this if existing exemptions apply, such as if theirs are small offers, private placements or offers to accredited or institutional investors.

If such tokens are then traded on secondary platforms, such platforms must be approved or recognised by the MAS.

Issuers or intermediaries of such tokens would have to hold relevant licences and uphold applicable requirements on anti-money laundering and countering the financing of terrorism.

MAS is still assessing ways it can regulate money laundering and terrorism financing risks linked to activities involving digital tokens that do not function solely as virtual currencies.

The authority had said earlier that while virtual currencies are not regulated, intermediaries in virtual currencies would be regulated for money laundering and terrorism financing risks.

The nascent ICO market is roughly estimated at US$250 million globally, reported tech magazine Wired. This amount is small by many standards; for example, it is roughly only an eighth of this year's NetLink Trust initial public offering.

But MAS said ICOs are vulnerable to money laundering and terrorist financing risks because of the anonymous nature of the transactions and the ease with which large sums of monies may be raised quickly.

TSMP's Ms Yuen-Thio said MAS's position is aligned with those in major markets, including the US Securities and Exchange Commission, which clarified that ICO offerings must fall in with federal securities laws.

MAS itself has not identified any particular platform here that will not come into the regulatory fold, but a handful of start-ups have latched onto the digital token trend.

The Business Times reported late last month that "proptech" firms FundPlaces and Reidao plan to create tokens backed by property in which investors can invest, by buying digital tokens that hold a right to the cashflow of an underlying real estate investment. BT also reported last month that another platform, FundYourselfNow, is to launch a platform for entrepreneurs to raise funds for their projects by issuing tokens sold for virtual currencies. These digital tokens entitle project backers to a share in the profits of the venture or rewards.

Darvin Kurniawan, co-founder of Reidao, said: "I think it is good news in a way that MAS has taken a stance on the ICO situation... We will revisit our model and structure to make sure that we are working within the regulatory boundaries."

A Russian company has also said it would set up a Singapore-based special-purpose vehicle called Cross Coin to raise some US$5 million via an ICO; the money is to go into an accelerator to fund eastern European frontier-technology companies seeking expansion into the US.

Cross Coin, which called Singapore an "ICO-friendly jurisdiction" on its website, said each digital token is issued at US$1. The company plans to use the net profit from investing in the accelerator's portfolio companies and the assets remaining to buy back the tokens at market price.