Regulatory authorities around the world are grappling with the rapidly spreading phenomenon of issuers raising funds by selling cryptocurrency ‘coins’ or ‘tokens’ (coins), which may give holders certain rights, or may only have purely speculative value.
Most regulators now take the firm view that if coins function like a security or other investment product, they will be brought into the ambit of existing securities laws. In this Client Alert, we examine the recent regulatory response to Initial Coin Offerings (ICOs) in Australia as well as other jurisdictions in the Asia-Pacific region.
The way you structure your coin offering and the rights attaching to the coins will be the difference between having to comply with onerous regulatory requirements, and having little intervention
The evolution of ICOs
The cryptocurrency phenomenon sweeping through the internet owes much of its fame to Bitcoin, the godfather of all coins. The value of Bitcoin fast gained momentum in 2017, barreling through US$6,000 in October and US$7,000 in November.
The high profile rise of Bitcoin has led to the emergence of other offerings in the form of coins, which build on the pure cryptocurrency idea and attach additional rights to confer value on the holder, for example a right to receive a portion of the issuer's profits, or the right to use a specified motor vehicle.
An ‘initial coin offering’ (ICO), also called 'token pre-sale' or similar, has the potential to be a flexible structure by which investors may take part in a project for other than purely monetary returns, such as a right to access data or as a way to crowdfund a new product launch by pre-selling rights to receive the product.
Recently though, some coins offered to the public have investment characteristics that are (in substance) like those which were traditionally subject to securities laws in many jurisdictions.
As ICOs hit the mainstream and the amounts being raised from the general population collectively soar into the billions of dollars, the evolving features of such coins have caught the eye of securities regulators around the world.
Regulatory response to ICOs
Where the substance of a coin represents, for example, a right to share in profits and to vote on business matters, the coin is likely to be seen as functioning like a security, regardless of its form, and the ICO will be regulated in the same manner as an offer of the traditional form of such securities.
The way you structure your coin offering and the rights attaching to the coins will be the difference between having to comply with onerous regulatory requirements, and having little intervention from securities regulators to raise funds for your project. Of course, offerings will otherwise need to comply with all relevant laws, including consumer protection laws, tax regulations and privacy and data protection obligations.
The following overview sets out recent statements by regulators on their approaches to ICOs in some of the major markets in the APAC region.
The Australian Securities and Investments Commission (ASIC) view is that exchanging one cryptocurrency for another in an ICO is an investment of value just like money. In this respect, ASIC takes a broad approach to regulation.
ASIC considers that in looking at whether an offering would be required to comply with Australian securities laws, an assessment of the rights attached to the coins issued under an ICO is the key consideration.
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