MAS clarifies when digital token offers will be regulated

Such offers face regulation if structured like securities under Securities and Futures Act

The issuing of digital tokens such as virtual coins will face regulation here if they are structured like securities coming under the Securities and Futures Act (SFA), the Monetary Authority of Singapore (MAS) said yesterday.

The clarification comes in the wake of a rise in initial coin offerings (ICOs) here as a means of fund raising. The US Securities and Exchange Commission last week also issued a report that virtual coins or tokens may be securities - subject to the federal securities laws.

ICOs are prone to money laundering and terrorism financing risks, given the anonymity of transactions and the ease of quickly raising large sums, MAS said.

Some digital tokens can confer on holders certain rights such as services, non-monetary rewards and physical assets such as gold. A virtual currency is a type of digital token, which typically functions as a medium of exchange, a unit of account or a store of value.

Previously, MAS had said that while virtual currencies per se were not regulated, the offerors of such currencies would be regulated in relation to money laundering and terrorism financing risks.

But now, MAS has said offers of digital tokens will be regulated if they are structured like securities, debt, or units in a collective investment scheme under SFA.

MAS' position of not regulating virtual currencies is similar to that of most jurisdictions. But it noted the function of digital tokens has evolved. For example, digital tokens may represent ownership or a security interest over an issuer's assets or property.

Issuers of such tokens would be required to register a prospectus with MAS prior to the offering of such tokens, unless exempted. They would also be subject to licensing requirements under the SFA and Financial Advisers Act, unless exempted, and to the applicable requirements on anti-money laundering and countering terrorism financing. Platforms offering secondary trading of such tokens have to be MAS-approved as a recognised market operator under SFA.

The regulator is also assessing how to regulate money laundering and terrorism financing risks associated with activities involving digital tokens that do not function solely as virtual currencies.

Angel investor David Lee said this is "positive because MAS has issued clear statements on what constitutes a token offering. The key thing is the token must not be backed or linked to an underlying security or debt''. He added: "If you try to do a Reit through an offer of tokens, then that is a security offering. If you are offering rights like a right to vote, or using certain facilities in a software, then that is not regulated by MAS. There are a lot of token offerings in that category."

Mr Nizam Ismail, partner and head of regulatory practice of RHTLaw Taylor Wessing, said ICOs are a "cost-efficient way to raise funds".

"But the issuer will have to get independent legal advice on whether their coins or tokens are securities, because the offer of securities without a prospectus where required is a criminal offence."

He warned: "The moment there is a fraudulent offer, that will affect investor confidence, and kill the entire market."

A version of this article appeared in the print edition of The Straits Times on August 02, 2017, with the headline 'MAS clarifies when digital token offers will be regulated'. Print Edition | Subscribe