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12 September, 2017
China's central bank has banned all initial coin offerings (ICOs), Bloomberg has reported, while Hong Kong's financial regulator has warned that the sales constitute 'securities' and need to be controlled as such.
The Chinese central bank has announced that ICO fundraising must be stopped immediately and refunds paid to all investors in completed ICOs, Bloomberg said.
Digital token financing and trading platforms cannot convert their currency into government-backed currencies, digital tokens can’t be used as currency on the market, and banks are forbidden from offering services to ICOs, Bloomberg said.
Digital tokens can take the form of virtual currency such as ether or bitcoin, but the tokens are also being marketed as investment opportunities. The tokens can represent ownership of assets of property, or over a debt owed by the seller.
These investment tokens are typically sold to consumers in exchange for virtual currency or cash, with details of the business proposal set out in a 'white paper' published online.
China's central bank did not mention virtual currencies, Bloomberg said.
Hong Kong's Securities and Futures Commission (SFC) said it has "noticed an increase in the use of initial coin offerings (ICOs) to raise funds in Hong Kong and elsewhere".
Whilst digital tokens offered in ICOs are usually categorised as a virtual commodity, some recent ICOs have terms and features that may mean that they are securities, it said.
Digital tokens that represent equity or ownership interests in a corporation may be regarded as shares, while others used to create or to acknowledge a debt or liability owed by the issuer may be considered as a debenture, the SFC said.
If token proceeds are managed collectively to invest in projects where token holders participate in a share of the returns, this may be regarded as an interest in a collective investment scheme (CIS).
Shares, debentures and interests in a CIS are all regarded as securities and are therefore regulated activities, the SFC said.
Consumers should seek legal advice before taking part in these ICOs, and "should also be mindful of the potential risks involved in ICOs and investment arrangements involving digital tokens. As these arrangements and the parties involved operate online and may not be regulated, investors may be exposed to heightened risks of fraud," the SFC said.
Technology expert Paul Haswell of Pinsent Masons, said: "China is suspicious of ICOs for two reasons. The first is that they are a means of capital outflow out of China, which the Chinese government is clamping down on, and the second is because ICOs are unregulated, an unreliable investment, and in many cases seem to be nothing more than a glorified Ponzi scheme. A digital currency has no value unless it is widely adopted, and ICOs seem to be riding a hype train generated by the increase in value of bitcoin. There is an urgent need for regulation of ICOs not just in China but globally, as many investors are unaware of the risks involved."
Singapore recently issued a warning to consumers on the potential risks of digital token and virtual currency-related investment schemes.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
