8 November, 2017
Businesses that issue tokens and cryptocurrencies in return for investment in New Zealand will be considered to be issuing securities, the country's Financial Markets Authority (FMA) has said.
In its commentary on initial coin offerings (ICOs), the FMA said all tokens or cryptocurrencies are classed as 'securities' under the Financial Markets Conduct Act in the country even if they are not "financial products".
"A security is any arrangement or facility that has, or is intended to have, the effect of a person making an investment or managing a financial risk," the FMA said. "If appropriate, we can designate any security to be a particular financial product based on its economic substance."
In other cases, tokens and cryptocurrencies could be classed as financial products such as a debt security, an equity security, a managed investment product, or a derivative depending on the "specific characteristics and economic substance" of the offer of that asset. There are different regulatory requirements that businesses in New Zealand have to meet if issuing those products, it said.
If tokens or cryptocurrencies are not a financial product or service, businesses issuing them must still comply with the country's Fair Trading Act, the FMA said. The legislation applies to "overseas-based tokens and cryptocurrencies offered in New Zealand" as well as to domestic offerings, the FMA said.
New Zealand-based token or cryptocurrency issuers must comply with a number of further regulatory requirements, such as the need to formally register, and pay related fees for, the financial services they provide, become a member of a dispute resolution scheme if providing services to retail clients, and comply with 'fair dealing' and anti-money laundering rules. The fair dealing rules "prohibit misleading conduct and deceptive statements being made in relation to financial services", the FMA said.
ICOs are an increasingly popular way for businesses to raise money. Typically, businesses will develop a digital token, such as their own proprietary virtual currency, and look to sell those tokens to investors in a bid to raise capital in return for existing cryptocurrency, such as Bitcoin, Ether or Ripple rather than fiat currency such as dollars, euros or pounds. The trade of these tokens is recorded using blockchain.
Investors can in most cases sell on those tokens for profit on certain peer-to-peer exchange platforms should the value of the tokens increase. They are sometimes further incentivised into buying the tokens by being given the opportunity to share in profits generated from the business ventures that benefit from their investment.
The FMA encouraged businesses considering ICOs in New Zealand to liaise with it "early in the development phase". It said it can help businesses "determine if tokens are ‘financial products’, and, if so, whether any exemptions are appropriate". It said it could exempt some businesses from regulatory obligations in relation to their ICOs "to promote innovation and flexibility in our financial markets".
The FMA said it was open to industry suggestions as to how the regulation of ICOs might be addressed in future.
"We want to play our part in making markets work, and greater regulatory scrutiny of token offers may be necessary to ensure this innovation can become a sustainable method of fundraising," the FMA said. "Our focus is to enhance New Zealand’s reputation by promoting fair, efficient and transparent financial markets."
There has been a mixed reaction to the growth of the market for ICOs from financial authorities across the world.
Regulators around the world have been playing catch-up on ICOs and the way they should be regulated. Regulators in the US and Singapore have offered detailed views on how existing regulations apply to ICOs, and the Hong Kong's Securities and Futures Commission (SFC) has also outlined its view on where they fit into the regulatory environment in the city. The UK's Financial Conduct Authority (FCA) issued a risk warning to consumers over investing in ICOs in September.
ICOs are banned in China and South Korea. Financial services and technology law expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, recently said that banning ICOs is not the way forward for regulators, despite the legal and regulatory risks that could arise if they are not subject to proportionate regulation.
Recently, Swiss regulator the Financial Market Supervisory Authority (FINMA) issued guidance on ICOs and confirmed that it is "investigating a number of ICO cases to determine whether regulatory provisions have been breached".
For further information, please contact:
Yvonne Dunn, Partner, Pinsent Masons
yvonne.dunn@pinsentmasons.com
