Finance:Security token offering

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A security token offering (STO) / tokenized IPO is a type of public offering in which tokenized digital securities, known as security tokens, are sold in security token exchanges. Tokens can be used to trade real financial assets such as equities and fixed income, and use a blockchain virtual ledger system to store and validate token transactions.[1][2]

Due to tokens being classified as securities, STOs are more susceptible to regulation and thus represent a more secure investment alternative than ICOs, which have been subject to numerous fraudulent schemes.[3][4][5] Furthermore, since ICOs are not held in traditional exchanges, they can be a less expensive funding source for small and medium-sized companies when compared to an IPO.[6] An STO on a regulated stock exchange (referred to as a tokenized IPO) has the potential to deliver significant efficiencies and cost savings, however.

By the end of 2019, STOs had been used in multiple scenarios including the trading of Nasdaq-listed company stocks,[1] the pre-IPO of World Chess, FIDE's official broadcasting platform,[6][7] and the creation of Singapore Exchange's own STO market, backed by Japan's Tokai Tokyo Financial Holdings.[2]

Controversy regarding ICOs

Though sharing some core concepts with ICOs and IPOs, STOs are in fact different from both, standing as an intermediary model. Similarly to ICOs, STOs are offerings that are made by selling digital tokens to the general public in cryptocurrency exchanges such as Binance, Kraken, Binaryx and others.[8][9] The main difference stands in the fact that ICO tokens are the offered cryptocurrency's actual coins, entirely digital, and classified as utilities. New ICO currencies can be generated ad infinitum, as might in some cases their tokens. Additionally, their value is almost entirely speculative and arises from the perceived utility value buyers expect them to provide.[10] Security tokens, on the other hand, are actual securities, like bonds or stocks, tied to a real company.[11]

In terms of legislation, some jurisdictions do treat STOs, ICOs, and other cryptocurrency-related operations under the same legislative umbrella.[12] In general, though, STOs are placed under securities legislation (together with traditional IPOs), and ICOs under utilities, with the differentiation being made mostly on a case-by-case basis.[13]

The main debate surrounding security tokens is, thus, the legal differentiation of what can be qualified as a utility instead of a security. Generally, legislation understands that if a passive financial return is expected from the investment, then it is classified as a security. This way, even if the offering company understands their tokens are merely a utility asset with no expected return investment, if it can be proven otherwise then the ICO becomes an unregulated STO, passive of legal punishment. Moreover, this assumption of utility has been abused by some STO offering companies to sell securities without regulatory compliance (maliciously labeled as ICOs).[14]

This legal ambiguity has led to some ICO offerers being prosecuted by the SEC as a security offering part, though their tokens were announced as utilities. Such companies include messaging apps Kik and Telegram, the former being sued by the SEC for over $100 million and the latter delaying their offering plans after similar prosecution.[15][16][17]

Regulation

One of the main selling points of cryptocurrencies such as Bitcoin has been the decentralization aspect, by which no government can influence or control the currency. By extension, a cryptocurrency is not directly affected by a specific country's jurisdiction, sociopolitical environment, or economic events.[18] Such a lack of regulation has led to the rising of large-scale crypto-related criminal activity, ranging from terrorist funding to tax evasion, most of which go untracked and unpunished.[19][20] Similarly, ICO scams have been an increasingly troublesome matter, causing billions of dollars in losses and damaging the cryptocurrency market's value as a whole.[21][22]

So far, STOs have been regulated and legalized in many countries where ICOs have not, due to fitting in many already pre-existing regulations regarding securities.[23][24]

Jurisdiction Status Comments
European Union Regulated Regulated by MiFID II. Newly issued security tokens must fulfill requirements of the Prospectus Directive.[25]
Germany Regulated MiFID licenses are issued by BaFin.
United Kingdom Regulated Categorized by the FCA under the category of Specified Investments.[26]
Switzerland Regulated Regulated by FINMA and subject to the same laws as traditional securities.[27]
United States Regulated Security tokens are subject to the SEC under the same laws as traditional securities.[23]
Canada Regulated Must obtain approval from the CSA.[24]
Brazil Regulated STOs must be registered and approved by the CVM.[28]
Australia Regulated Legal under the regulation of ASIC. Traditional and tokenized securities are treated differently.[29]
Israel Regulated Must follow the legal framework provided by the ISA and are subject to the same laws as traditional securities.[30][31]
United Arab Emirates No Regulation No federal regulations, but very well-defined legislation at regulator-level. Both ADGM and DFSA have provided some form of guidance on Security Tokens.[32][33]
Thailand No Regulation Legal approval of ICOs has already been made by Thailand's Securities and Exchange Commission. STO application criteria expected to be released soon.[34]
Singapore Regulated Must receive approval from the MAS and be compliant with the Securities and Futures Act.[35]
Japan Regulated Regulated under the FIEA.
Hong Kong Regulated Regulated under a framework provided by the SFC.[36]
China Banned STOs and ICOs are banned and constitute illegal financial activity.[12]
South Korea Banned Security tokens are under the same prohibition as standard ICOs.[37]
Malaysia Regulated Must receive approval from the Securities Commission Malaysia and Labuan Financial Services Authority[38][39]

See also

References

  1. ↑ 1.0 1.1 Browne, Ryan (8 January 2019). "Apple and Tesla shares on the blockchain could be the next big thing in crypto". https://www.cnbc.com/2019/01/07/bitcoin-security-token-and-sto-explained.html. 
  2. ↑ 2.0 2.1 Shimada, Yu (14 November 2019). "Singapore brings Japan into Asia's first digital securities market". https://asia.nikkei.com/Business/Markets/Singapore-brings-Japan-into-Asia-s-first-digital-securities-market. 
  3. ↑ Chen, Qian (21 November 2019). "The good, the bad and the ugly of a Chinese state-backed digital currency". https://www.cnbc.com/2019/11/22/chinese-crypto-beijing-sees-opportunity-but-concerns-linger.html. 
  4. ↑ Allison, Ian (26 November 2019). "Tokenized Real Estate Falters as Another Hyped Deal Falls Apart". https://finance.yahoo.com/news/tokenized-real-estate-falters-another-090000644.html. 
  5. ↑ Michaels, Dave (26 November 2019). "Crypto Startup Calls It Quits After a Regulatory Reprieve". https://www.wsj.com/articles/crypto-startup-calls-it-quits-after-a-regulatory-reprieve-11574783559. 
  6. ↑ 6.0 6.1 Murphy, Hannah (21 November 2019). "World Chess announces plans for 'hybrid IPO'". https://www.ft.com/content/46547c2e-0c3b-11ea-bb52-34c8d9dc6d84. 
  7. ↑ Jolly, Jasper (21 November 2019). "World Chess to issue digital tokens in stock market flotation". https://www.theguardian.com/sport/2019/nov/21/world-chess-to-issue-digital-tokens-in-stock-market-flotation. 
  8. ↑ "Binaryx: Crypto Exchange. Bitcoin Exchange and Digital Assets". https://binaryx.com/. 
  9. ↑ "Blockchain & Cryptocurrency Laws and Regulations | Hong Kong | GLI" (in en). https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/hong-kong. 
  10. ↑ Wolf, Martin (12 February 2019). "The libertarian fantasies of cryptocurrencies". https://www.ft.com/content/eeeacd7c-2e0e-11e9-ba00-0251022932c8. 
  11. ↑ "Security token offerings: The next phase of financial market evolution?". https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/audit/deloitte-cn-audit-security-token-offering-en-201009.pdf. 
  12. ↑ 12.0 12.1 França de Mello, Leandro (24 November 2019). "Desvendando a extensão das regulações impostas às criptomoedas na China" (in pt-BR). https://moneytimes.com.br/desvendando-a-extensao-das-regulacoes-impostas-as-criptomoedas-na-china/. 
  13. ↑ "Guidance on Cryptoassets" (PDF) (Press release). United Kingdom. Financial Conduct Authority. January 2019. Retrieved 2019-11-26.
  14. ↑ Rooney, Kate (6 June 2018). "SEC chief says agency won't change securities laws to cater to cryptocurrencies". https://www.cnbc.com/amp/2018/06/06/sec-chairman-clayton-says-agency-wont-change-definition-of-a-security.html. 
  15. ↑ Badkar, Mamta (4 June 2019). "SEC sues messaging app Kik over $100m ICO". https://www.ft.com/content/3cc0a036-86e7-11e9-97ea-05ac2431f453. 
  16. ↑ McIntosh, Rachel (18 October 2019). "SEC vs. Telegram: Will Gram Tokens Ever Be Distributed?". https://www.financemagnates.com/cryptocurrency/news/sec-vs-telegram-will-gram-tokens-ever-be-distributed/. 
  17. ↑ Rooney, Kate (16 November 2018). "In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings". https://www.cnbc.com/2018/11/16/in-crackdown-of-crypto-sec-goes-after-unregistered-coin-offerings.html. 
  18. ↑ Baldwin, Rosecrans (26 November 2019). "Cryptocurrency Will Not Die". https://www.gq.com/story/cryptocurrency-will-not-die. 
  19. ↑ Popper, Nathaniel (18 August 2019). "Terrorists Turn to Bitcoin for Funding, and They're Learning Fast". https://www.nytimes.com/2019/08/18/technology/terrorists-bitcoin.html. 
  20. ↑ Helmore, Edward (27 July 2019). "IRS warns crypto holders: dodge tax and we'll hand out stiff punishments". https://www.theguardian.com/technology/2019/jul/27/irs-tax-cryptocurrency-bitcoin-income. 
  21. ↑ "Cryptoqueen: How this woman scammed the world, then vanished". 24 November 2019. https://www.bbc.com/news/stories-50435014. 
  22. ↑ Morris, David (27 November 2019). "Crypto Needs Journalists More Than It Wants to Admit". https://fortune.com/2019/11/27/crypto-needs-journalists-more-than-it-wants-to-admit/. 
  23. ↑ 23.0 23.1 "The Laws That Govern the Securities Industry" (Press release). U.S. Securities and Exchange Commission. 1 October 2013. Retrieved 2019-11-27.
  24. ↑ 24.0 24.1 "Canadian securities regulators provide additional guidance on securities law implications for offerings of tokens" (Press release). 11 June 2018. Retrieved 2019-11-27.
  25. ↑ Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC
  26. ↑ "Cryptoassets: our work" (Press release). United Kingdom. Financial Conduct Authority. 23 January 2019. Retrieved 2019-11-26.
  27. ↑ "FINMA publishes ICO guidelines" (Press release). Swiss Financial Market Supervisory Authority. 16 February 2018. Retrieved 2019-11-26.
  28. ↑ "Initial Coin Offerings (ICOs)" (Press release) (in português). Securities and Exchange Commission of Brazil. 16 November 2019. Retrieved 2019-11-27.
  29. ↑ "Initial coin offerings and crypto-assets" (Press release). Australian Securities & Investments Commission. May 2019. Retrieved 2019-11-27.
  30. ↑ "Israel market regulator sees room for cryptocurrency trading". 6 March 2019. https://www.reuters.com/article/israel-crypto/israel-market-regulator-sees-room-for-cryptocurrency-trading-idUSL5N20T31V?rpc=401&. 
  31. ↑ Beedham, Matthew (6 March 2019). "Israel regulators support 'heavily regulated' cryptocurrency trading platform". https://thenextweb.com/hardfork/2019/03/06/israel-regulated-cryptocurrency-trading-platform/. 
  32. ↑ "ADGM Publishes Detailed Guidance on Digital Securities". 5 September 2019. https://www.adgm.com/media/announcements/adgm-publishes-detailed-guidance-on-digital-securities. 
  33. ↑ "DFSA Starts 30 Day Public Consultation on Security Token Regulations". 29 March 2021. https://www.thenationalnews.com/business/markets/dfsa-starts-30-day-public-consultation-on-security-tokens-regulations-1.1193255. 
  34. ↑ Chudasri, Darana (13 March 2019). "SEC approves first ICO portal, still unnamed". https://www.bangkokpost.com/business/1643532/sec-approves-first-ico-portal-still-unnamed. 
  35. ↑ "Securities and Futures Act" (Press release). Singapore Statutes Online. 1 April 2019. Retrieved 2019-11-27.
  36. ↑ Lee, Georgina (7 November 2019). "Hong Kong sets out regulatory framework for virtual asset trading platforms, emphasises investor protection". https://www.scmp.com/business/banking-finance/article/3036632/hong-kong-sets-out-regulatory-framework-virtual-asset. 
  37. ↑ Lee, Jung Min. "Blockchain & Cryptocurrency Regulation 2020 Korea". https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/korea. 
  38. ↑ "Securities Commission Malaysia Act 1993 - Acts | Securities Commission Malaysia". https://www.sc.com.my/regulation/acts/securities-commission-malaysia-act-1993. 
  39. ↑ "Legislation - Legislation | Labuan FSA". https://www.labuanfsa.gov.my/legislation-guidelines/legislation/legislation. 



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