Singapore mulls putting ICOs in regulatory sandbox

Singapore

SINGAPORE regulators are open to having initial coin offerings (ICOs) sold through a regulatory sandbox, said a senior officer from the Monetary Authority of Singapore (MAS) at a fintech event this week.

If they follow through on this, MAS may be among the first few regulators in the world to take this approach amid the frenzy whipped up by this new form of crowdfunding tied to virtual currencies.

Instead of selling company equity to investors, ICO issuers raise public funds by taking in well-known cryptocurrencies such as Bitcoin and Ethereum, or fiat money, in exchange for their own brand of currencies, known today as digital tokens.

Sopnendu Mohanty, MAS' chief fintech officer, said at the inaugural Fintech Abu Dhabi this week that there are some ideas to ringfence ICOs by using the regulatory sandbox - a concept that enables certain fintechs to test products and services in an unregulated environment, but within experimentation boundaries.

"I'm pushing colleagues to take ICOs into a sandbox and to see if there's something we can do there," he told event participants.

The idea comes ahead of the Singapore Fintech Festival to be held next month.

To be sure, regulators around the world, including those in Singapore, have already stepped up to provide clarity on the ways in which ICOs, a form of fundraising, may fall under the regulatory framework (or not).

China has banned their use for now, but it is more an exception.

Broadly speaking, a handful of regulators have said that ICOs that purport to offer a form of security should come under laws governing securities.

MAS has already issued its guidelines on ICOs, saying that many digital tokens that promise a form of return are, in effect, securities; this means they generally need to follow rules that govern shares, units of real estate investment trusts and bonds.

In certain jurisdictions, including Singapore, ICO players can be exempted from issuing a prospectus if the issue is limited to a small number of investors, or to well-heeled investors.

ICO players have been criticised for issuing what they deem as a prospectus (known as a "white paper"), but which offers scant details of the fundraising activity.

However, this has not stopped hot money from flowing in, with nearly US$800 million said to be raised from ICOs in the second quarter of this year, said a report cited by coindesk last month. (Coindesk is a digital media, events and information services company for the digital asset and blockchain technology community.)

Singapore had said, as early as three years ago, that it would regulate virtual currency intermediaries based within its borders to ensure that they meet anti-money laundering and anti-terrorism financing standards. This means Singapore regulates the fundraising activities linked to virtual currencies, and the potential risks behind such activities.

Abu Dhabi Global Market (ADGM), a tax-free financial centre in the capital of the United Arab Emirates, issued its guidance on ICOs this month, and urged ICO issuers to engage the regulators according to the regulatory scope spelled out by the ADGM regulator, the Financial Service Regulatory Authority (FSRA).

FSRA chief executive Richard Teng told reporters at the fintech event organised by ADGM that a "deep dive" of ICOs and virtual currencies suggests that, while there are cases of misconduct and abuse, ICOs present real uses, and can in certain instances, lower the cost of capital.

"We see ICOs as an innovative way for companies to raise money.

"As a regulator, we note that the market is not without risk; there is a wide range in quality of these ICOs. Many provide very little in terms of disclosure and there have been instances of fraud in others.

"However, when used correctly, for example, to support legitimate and robustly regulated securities issuances, ICOs offer a variety of advantages which impact efficiency and cost for the SME (small and medium enterprise) sector, as well as offer better transparency for regulators."

ICOs can broadly be split into two categories. The first comprises those that sell tradable digital tokens, that is, they are a part of an ongoing blockchain project that, if successful, should increase in value.

The second category of ICOs is made up of those that are selling a fraction of a tangible asset, such as a piece of property, through digital tokens.

To be clear, certain fintech players have been blunt about the cowboy nature of the market. Jimmy Kim, founder of seed-stage fund Sparklabs, quipped during a panel session at Fintech Abu Dhabi: "It's like doing an ICO for my dog."

Yobie Benjamin, co-founder of Token, a start-up selling payment aggregation services that has raised funds through an ICO, told participants of Fintech Abu Dhabi that there are many ICOs that are "less than morally upright".

But he pointed out that there is nothing fundamentally wrong with cryptocurrencies, in the same way there is nothing wrong with exchanging physical bills today just because criminals try to counterfeit them.

"You are going to see a lot of charlatans in the ICO world," said the former chief technology officer at Citigroup.

"But by the same token - excuse the pun - there is opportunity to raise a significant amount of capital."

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