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20 September, 2017
The Securities and Futures Commission (the “SFC”) has issued a statement on the 5th of September announcing that digital tokens issued via initial coin offerings (“ICOs”) may be classified as “securities”.
Depending on the terms and features of digital tokens being offered in ICOs, the SFC has observed that although typically, they can be characterised as a “virtual commodity” which is not a security in the eye of the SFC, they are seeing certain digital tokens that would fall under the scope of “securities”. Where digital tokens have similar characteristics as shares, debentures or interests in collective investment scheme, they will very likely be regarded as “securities”. The SFC is taking a substance over form approach in determining whether a digital token would be considered as “securities”.
The SFC also emphasised that dealing in, advising, managing or marketing a fund investing in digital tokens that are within the definition of securities, may constitute a regulated activity that would require the parties involved to be licensed or registered with the SFC. These parties would also include cryptocurrency platforms or exchanges that are engaged in secondary trading of such digital tokens and the SFC’s licensing and conducts requirements would need to be observed. It is however, difficult to foresee how such parties could comply fully with the SFC’s licensing or conducts requirements especially when digital tokens in ICOs are typically transacted or held on an anonymous basis.
The SFC statement is made just a day after the joint statement by the Chinese government which imposed an immediate ban on ICOs.
The Securities Exchange Commission in the U.S. has also announced in July that tokens sold under a group called Decentralized Autonomous Organization are securities, and capital raising or investment facilitated by a distributed ledger or blockchain technology must comply with the U.S. federal securities laws. Taking a similar approach, the regulators in Canada have also echoed that “in many cases when the totality of the offering or arrangement is considered, the coins/tokens should properly be considered securities”.
This latest announcement from the SFC is part of what appears to be a global move by regulators to exercise control over this booming but as yet unregulated market.
The SFC will vigorously pursue parties which they consider are carrying out regulated activities without a licence.
All parties involved in ICOs now need to take stock of the regulatory aspects of their plans in light of the recent announcements.
Paul Moloney, Eversheds
paulmoloney@eversheds.com
