SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC

NOVEMBER 2020 CONTENTS Terminology and classification of tokens...... 3 Overview of local regulation...... 6 Country-specific analysis of STO regulation across Asia-Pacific...... 7

Australia ...... 7 ...... 8 CONTENTS ...... 9 1. LoremThe People’s ipsum Republic dolor sit of amet animal (PRC) ...... ocurreret qui 10x 2. MollisSingapore blandit ...... fastidii id ius. Ea audire adversarium est, quo ei sumo suscipit ...... 10x 3.Glossary No erant ...... delicatissimi eum, saepe...... convenire sed ea 12xx 4. Vis etiam utamur ea, vis epicuri efficiendi ex xx Navigate the disruption: your fintech toolkit...... 13 5. Ei mel iuvaret facilisi, no vim nonumes xx 6.Contacts Accusamus...... eloquentiam cum et, pri quem intellegebat te 14xx 7. Eos fugit deleniti no, et duo omnes iisque xx 8. Sit no habeo veniam. Cu usu essent splendide, qui mentitum suavitate cu xx 9. Pro cu alia legimus xxx 10. Omnesque mnesarchum constituam pri cu xxx SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC Security token offerings or STOs, the issuance of digital tokens using or distributed ledger technology, are increasingly being seen as an alternative to mainstream debt and equity fundraisings. An evolution of the (supposedly) unregulated initial coin offerings or ICOs, STOs are typically structured to sit within securities law frameworks. This means much greater certainty for both fundraisers and investors, resulting in enhanced liquidity. In this report we consider how STOs are structured and some of the benefits and challenges, and explore the evolving regulatory landscape for STOs across key financial centres in Asia-Pacific.

TERMINOLOGY AND number of fraudulent issuances, ICOs Summary CLASSIFICATION OF ultimately drew the scrutiny of • STOs involve the issuance of digital regulators globally. SECURITY TOKENS tokens which are classed as or STOs are the market response to this; a What are security token represent securities to investors. product offering many of the advantages offerings (or STOs)? • Tokens issued under an STO will of ICOs without the risks entailed by STOs are a form of fundraising involving typically entitle holders to rights seeking to remain outside the regulatory the offering or issuance of digital tokens similar to those of a conventional perimeter. In some jurisdictions, the form to investors, which either are themselves security, e.g., an equity token may and process adopted for an STO may be or represent a security under the laws grant voting or dividend rights, while similar to an ICO. However, in most where they are issued. Typically, a debt token may grant rights to jurisdictions, subject to exemptions under distributed ledger technology (DLT), coupon and principal payments. applicable securities laws, the process for such as blockchain, or other digital issuing security tokens should be no • There is currently no uniform infrastructure which permits tokenisation, different to a primary public or private global taxonomy for categorising is used to constitute or record the offering of equity or other traditional or defining cryptoassets, and interests in the securities. Such use of security offering, i.e. a regulated process STOs are not regulated at an DLT can provide greater flexibility, speed with significant documentation international level. and functionality, reduce costs and, in requirements, and in practice often still some cases, enhance compliance with • National approaches to the effected through a chain of intermediary legal and regulatory obligations in the regulation of STOs vary banks and other financial services issuance of securities. This can open up considerably. In most cases, STOs providers. The ecosystem of regulated markets for fundraisers and options for service providers capable of performing are primarily regulated under investors, providing enhanced liquidity, traditional securities law. However, the traditional functions required to effect particularly for asset classes traditionally an STO in compliance with local there are differences in both viewed as illiquid. securities laws is emerging, although at substance and application. Market participants may be familiar with varying speeds in different jurisdictions. • At one end of the spectrum the “initial coin offerings” (or ICOs) seen What is a token? countries like Japan have amended in 2017-18, typically conducted through A token is the common term applied to securities legislation to specifically an online platform maintained by the the digital entry where a person is regulate STOs. Conversely, STOs issuer that any investor can access recorded as owning a unit or other and similar token offerings have directly through a computer or smart- entitlement through a DLT-based register been banned in China since 2017. phone. ICOs were sometimes seen as a or other digital infrastructure which quick and easy way to fundraise outside permits tokenisation. The token may, in the scope of traditional regulatory its simplest form, amount to a permission frameworks for debt and equity to control a resource native to DLT (for issuances. However, the structuring of example, or Ether), it may grant many ICOs fell short, and they often certain rights to the holder (for example, unintentionally triggered legal and use of office space or rights to share in regulatory obligations that were not profits of a company) or it may represent complied with. Combined with a an offline “real world” asset, such as a

3 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC stock, , commodity or interest in infrastructure which permits tokenisation real estate. The latter is commonly will be used to issue coins or tokens. referred to as the “tokenisation” of such However, in contrast to an ICO, the underlying assets. tokens distributed are, represent or provide a right to a specific class of DLT tokens can be differentiated from financial assets that are legally other forms of electronic register as a “securities”, such as shares, bonds, DLT platform typically permits holders to warrants or options, or otherwise provide verify their holdings on a public chain, to the same rights as “securities” (including send direct instructions to the relevant for example, interests in a collective network to transfer their tokens, and to investment scheme). The definition of use their tokens in other ways, e.g., to what constitutes a security will vary from interact with a smart contract or to jurisdiction to jurisdiction. Therefore a implement sophisticated computing logic. particular token may be a security token As the real name of the owner is not under the laws of one jurisdiction but not necessarily recorded in the DLT registry, in another. “holding a token” often means controlling the key or other access credentials In many jurisdictions, a token will amount needed to send the instructions to the to a security when it represents a right to network authorising the transfer of the any financial return and claim on the token, in effect making them bearer issuer – even where such financial return assets. In the case of tokenised is entirely dependent on the success of a securities, many investors will need or particular project. This is different from prefer to use a custodian or other service ICOs or other cryptoasset offerings with provider to hold the keys for them. In the purpose of fundraising, but which some cases this may be undertaken by take the form of a sale or pre-sale of the issuer of the securities. specific goods and services (for example, a real world asset, a licence or a use DLT provides enhanced functionality right), rather than any interest in the compared with traditional systems of issuer itself, such as a claim on its recording ownership of assets by being revenues or the right to participate in globally acknowledged as the true source its governance. of information on the holdings of the tokens by all members of the network, The tokens issued under an STO will allowing them to individually verify the typically entitle holders to rights similar to validity of token transfers on their own, those of a conventional security, without needing to trust a central depending on the nature of the security authority or each other. However, the flip represented by the token or the specific side is that (subject to the underlying rights granted by the token. For example, features of the DLT) instructions may be an equity security token may represent irreversible once sent to the network in ownership over an underlying share or respect of the tokens – creating risks by otherwise grant a claim to the equity in a reducing ownership and other rights over company, voting rights or the right to tokens to whoever holds that key. dividends, while a debt security token may represent ownership over an DLT tokens may also be referred to as underlying bond or grant a right to “cryptoassets” as they are seen as rights predefined coupon or principal payments. in respect of what a person holding a token can do (claim underlying assets, In this report, we generally use the term update a network etc), with crypto as a “STO” to refer to security tokens that reference to the cryptographic technology have been intentionally structured to used to structure and operate a DLT confer the types of rights granted in platform. An STO generally refers to the conventional securities, i.e. tokenised issuance of a subset of cryptoassets, debt and equity. In some cases, the virtual assets or other digital assets tokens issued in ICOs or other which constitute, represent, or confer the cryptoasset offerings might also rights associated with, traditional constitute securities. In the US, for financial securities. example, the Securities and Exchange Commission has taken the position that What is a security token? certain issuers of “utility tokens” in ICOs In an STO, the form of the token will be offered securities for the purposes of US similar to those issued to participants in law, and accordingly violated the an ICO in that DLT or other digital

SECURITY TOKEN OFFERINGS – 4 THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC registration and disclosure provisions of taken a new approach under a the federal securities laws. pre-existing regulatory regime in relation to how it applies to STOs and other Regulation of STOs virtual assets. In Japan, the Diet Due to the legal status of security tokens (parliament) has gone a step further as securities, the generally more onerous and specifically amended the existing regulatory regimes applicable to securities securities law to regulate STOs. will typically apply to STOs in addition to any more recent regulations specific to The People’s Republic of China is issuing tokens or other cryptoassets. something of an outlier – ICOs, STOs and similar token offerings have been banned In contrast, ICOs may be structured there since 2017. without the need to register or comply with securities regulations and regulatory Our approach bodies. However, as noted above, this In this report we have focused on is not always clear-cut and, in several securities and related regulations; jurisdictions, ICO issuers have however, there are a range of legal and inadvertently triggered and been in regulatory provisions that may also be breach of securities laws. relevant to participants in an STO over and above the frameworks that we A variety of approaches have been taken describe. For example, in relation to data globally as to the regulation of STOs. privacy, tax and other levies, cyber- There is now considerable opportunity for resilience, corporate governance, and regulators to adapt existing securities systems and controls. How these apply regulation to the unique features of STOs will depend significantly on the specific while also maintaining similar protections STO and, in some cases, the corporate for investors and the financial system that form and status of the service provider underpin securities regulation. (i.e. regulated or not and, if so, how) and Regulatory themes across so are beyond the scope of this report. Asia-Pacific The focus of this paper is on STOs, i.e. There is currently no uniform global primary market offers of tokens that have taxonomy for categorising or defining been intentionally structured to confer the cryptoassets, and STOs are not currently types of rights granted in conventional regulated at an international level. securities. As such, this paper does not In most of the jurisdictions we have consider in detail the regulatory treatment considered, a technology-neutral of other types of cryptoassets (such as approach is taken which means that, stablecoins, which may in some cases subject to meeting any relevant qualify as e-money or cryptocurrencies conditions, STOs would generally be under applicable regimes). A detailed covered by existing securities legislation consideration of the regulatory and frameworks. This also means that requirements that may apply when existing licensing and product carrying on other activities relating to authorisation requirements in relation to security tokens (such as secondary such frameworks apply to participants in market trading or providing investment an STO. While there are often similarities, advice or custody services in relation to for example, in terms of disclosure or security tokens) is outside the scope of prospectus requirements, securities law this paper. obligations and licensing requirements It is also worth noting that the analysis vary between jurisdictions and so has broadly been undertaken on a participants will need to carefully consider domestic basis, i.e. in relation to an STO obligations in each relevant jurisdiction that is conducted and also marketed to in Asia-Pacific and internationally. investors solely in that jurisdiction and/or This analysis is more complicated that in relation to an STO by an issuer based one might expect, given it will involve in that jurisdiction. However, where there digital assets promoted online and are regulatory requirements in a certain securities law frameworks may jurisdiction, these may also apply to an apply extraterritorially. STO conducted elsewhere and/or by a A number of regulators have looked foreign issuer where there is active closely at the existing regulatory regime marketing of security tokens to investors for securities and issued guidance or in that regulated jurisdiction.

5 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC OVERVIEW OF LOCAL REGULATION We have drawn together some of the high-level conclusions from this report by ranking each relevant jurisdiction on its approach to the regulation of STOs, as well as considering whether a regulatory sandbox might be available for STO participants and the general level of crypto market activity.

Level of crypto market activity

Least active

Active

Most active

Jurisdiction Does the usual Do licence requirements Is there specific local Does a regulatory regulatory framework apply to investors in an regulation or guidance sandbox exist? for securities apply to STO? relevant to STOs? STOs?

Australia Yes, if certain conditions Generally no, but will ASIC has issued specific Yes. are met. depend on the nature of guidance on STOs and when the investor and whether security tokens will constitute on-selling is contemplated. securities.

Hong Kong Yes, if certain conditions Generally, no. The SFC has issued circulars, Yes. are met. statements, position papers and guidelines on virtual assets that would apply to STOs.

Japan Yes, if certain conditions Generally no, but will The Japanese securities law Yes. are met. depend on the nature of FIEA has been specifically the investor and how the amended to regulate STOs. offering is contemplated. The Japan STO Association has issued Security Token Offering Guidelines.

People’s No, STOs are prohibited Not applicable. Not applicable. Not applicable. Republic of in China. China

Singapore Yes, if certain conditions Generally, no. The MAS has issued general Yes. are met. guidance on digital token offerings. Offers of digital tokens which constitute securities or securities-based derivatives contracts are subject to the same regulatory regime as offers of securities, or securities-based derivatives contracts made through traditional means.

Note: Consideration of whether a licence will be required for investors in an STO has been based on a simple STO issuance made directly to investors. This analysis does not constitute legal advice. Other licence requirements (whether or not securities related) are likely to apply to other participants; for example, an underwriter of an STO, or a custodian/ trustee where tokens are issued into a custody/ trust arrangement. There may also be a statutory requirement for the involvement of other authorised intermediaries for the settlement and/or transfer of security tokens.

6 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC COUNTRY-SPECIFIC security token ecosystem (such as ANALYSIS OF STO issuers, intermediaries, exchanges and trading platforms) may also need to hold REGULATION ACROSS an Australian Financial Services Licence ASIA-PACIFIC (AFSL) and to comply with the licence AUSTRALIA conditions and increased legislative Australia has not implemented a specific obligations placed on AFSL holders. legal or regulatory regime covering STOs. On-selling restrictions may also be The Australian Securities and Investments triggered in relation to security tokens, Commission (ASIC), Australia’s corporate depending on the nature and regulator, has instead taken the approach characteristics of the on-seller and those of regulating offerings of security tokens to whom the security tokens are being generally in the same way as other types on-sold. of “financial products”. A security token Characterisation as a managed will typically be regulated and subject to investment scheme ASIC’s remit in Australia as a “financial Security tokens may alternatively qualify product” if it is either a security, an as an “interest in a managed investment interest in a managed investment scheme”. A managed investment scheme scheme, or another type of financial is a form of collective investment vehicle. product. It has three elements: (i) people Characterisation as a security contribute money or assets to obtain an ASIC has issued guidance that security interest in the scheme, (ii) any of the tokens may be regulated as “securities” contributions are pooled or used in a for the purposes of the Corporations Act common enterprise to produce financial depending on their nature and benefits or interests in property for characteristics. Securities under the purposes that include producing a Corporations Act generally encompass financial benefit for the contributors, and instruments such as shares, debentures, (iii) the contributors do not have day-to- stocks and bonds. day control over the operation of the scheme, but at times may have voting Whether a security token constitutes a rights or similar rights. “security” is to be assessed on a case- by-case basis, with such assessment Where the issuer of a security token is looking in particular at whether the operating a managed investment bundle of rights attached to the security scheme, it will need to hold an AFSL. token are similar to those commonly Further, if the managed investment attached to a security. For example, a scheme is aimed at retail investors, the security token that gives its holder rights issuer will also need to register the analogous to a share (such as an scheme with ASIC, establish a ownership interest in a company, voting constitution and compliance plan, and rights in decisions of a company or some prepare and issue disclosure right to participate in the profits of a documentation such as a product company) is likely to be a security and disclosure statement. regulated as a share under the Characterisation as another type of Corporations Act accordingly. Similarly, if regulated financial product a security token gives the purchaser a If a security token does not qualify as a right to acquire shares in a company at a security or managed investment scheme, time in the future then that token may be it may still be a “derivative” for the a security analogous to an option. purposes of the Corporations Act, which If a security token does constitute a is a type of regulated financial product. A security, the issuer of that security token security token may be a derivative where will need to comply with the relevant it is priced based on an underlying factor, capital raising provisions of the such as by reference to the performance Corporations Act associated with that of another financial product or a market type of security. This includes, for index. Where a security token is a example, the requirement to provide a “derivative”, the issuer will need to prospectus when issuing a share style prepare and issue disclosure token. Various stakeholders in the documentation such as a product

SECURITY TOKEN OFFERINGS – 7 THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC disclosure statement if the tokens are looking to develop and implement a aimed at retail investors, and various regulatory framework and requirements stakeholders in the security token based on the intrinsic characteristics of ecosystem (such as issuers, the relevant activities or transactions and intermediaries, exchanges and trading the risks arising from them. The Hong platforms) may also need to hold Kong Securities and Futures Commission an AFSL. (SFC) has issued various circulars, statements, position papers and A security token may also be a “non- guidelines to further clarify its regulatory cash payment facility” (NCP Facility), approach with respect to virtual assets. which is another type of regulated financial product. An NCP Facility is an Characterisation as a security arrangement through which a person Virtual assets are not regulated makes payments, or causes payments to instruments by default but, depending be made, other than by the physical on their terms and features, such virtual delivery of currency. A security token assets and related activities may be arrangement may involve an NCP Facility treated as a form of regulated instrument where it allows (i) payments to be made or service. in the form of the token to a number of Where virtual assets fall under the payees, and (ii) payments to be started in definition of “securities” or “futures the form of the token and converted into contracts” under the Securities and fiat currency to enable completion of the Futures Ordinance (SFO), such assets payment. The provider of an NCP Facility and related activities would fall within the may need to hold an AFSL. SFC’s ambit. In this respect security Other regulatory considerations tokens are generally regulated in the Stakeholders in security token same way as other types of securities arrangements should also be aware of with similar substantive characteristics. other general regulations and legislative The SFC considers virtual assets as a requirements under Australian law. For digital representation of value. STOs are example, obligations exist not to mislead typically structured to have the features or deceive consumers under Australian of traditional securities offerings, but consumer law and the ASIC Act, as well involve digital representations of the as anti-money laundering and “know your ownership of assets or economic rights client” obligations. utilising DLT or other digital infrastructure. Potential participants in a security Firms offering security tokens in Hong token arrangement should also be aware Kong will therefore need to consider and of the ASIC regulatory sandbox. On ensure they comply with the product 1 September 2020, ASIC implemented authorisation and licensing requirements an expanded version of its regulatory under the SFO, just as they would when sandbox, dubbed the “Enhanced offering other types of securities. Regulatory Sandbox” (ERS). The ERS Service providers involved in an STO allows financial technology businesses would also need to consider carefully the to test certain services without needing nature and features of the tokens being to hold an AFSL or credit licence. The offered in order to determine whether or ERS replaces the previous 2016 sandbox not the tokens would be categorised as and allows for a longer testing period for securities or another type of regulated a broader range of financial services and instrument. Depending on the legal credit activities, and for a wider range categorisation of the tokens and the of businesses. particular services offered by the provider, HONG KONG service providers may also trigger The regulators in Hong Kong have regulatory licensing requirements. adopted a technology neutral regulatory Changing approach to the approach and are seeking to regulate regulation of virtual assets virtual assets and related activities based As has been seen with other securities on the existing legislative framework. The regulators in major jurisdictions, the overall theme is that rather than seeking SFC’s initial approach was to clarify how to implement a technology-based virtual assets and some specific activities regulatory framework, the regulators are involving these assets would fall under its

8 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC existing regulatory regime. This approach Virtual asset trading platforms requires the classification of each and The second aspect tackles centralised every token based on its terms and virtual asset trading platforms. The SFC features, which may evolve over time. In proposed the initial regulatory framework this regard, the SFC has published a in its Statement on regulatory framework number of statements and circulars for virtual asset portfolio managers, fund clarifying its regulatory stance. distributors and trading platform The SFC’s approach has evolved to operators in November 2018. The SFC specifically bring some virtual asset subsequently issued Position Paper: activities in which the investing public is Regulation of Virtual Asset Trading involved into its regulatory net under its Platforms in November 2019, which existing powers. provided further clarity on the regulatory framework covering virtual asset trading Virtual asset portfolio managers platforms. The regulatory framework and fund distributors targets centralised virtual asset trading The first aspect of this approach tackles platform operating in the management and distribution of Hong Kong which trade virtual assets funds which invest wholly or partially in including at least one security token. In virtual assets (whether or not being the initial exploratory stage, an interested securities). SFC-licensed portfolio virtual asset trading platform operator will managers which intend to invest more be placed in the SFC Regulatory than 10% of a mixed portfolio in virtual Sandbox. The SFC would discuss its assets will need to observe the additional expected regulatory standards with the requirements as part of their licensing platform operator and observe the live conditions. The SFC also set out the operations in light of these standards. expected standards for licensed Once the platform operator obtains the corporations which distribute virtual asset relevant licences, it will be moved to the funds. The combined effect of these next stage of the SFC Regulatory measures is that investor interests will be Sandbox. This would typically mean more protected either at the fund management frequent reporting, monitoring and level or at the distribution level, or both. reviews. After a minimum 12-month period, the platform operator may apply The SFC has subsequently developed a to the SFC for removal or variation of the set of standard terms and conditions for licensing conditions and exit the SFC virtual asset portfolio managers in the Regulatory Sandbox. “Proforma Terms and Conditions for Licensed Corporations which Manage JAPAN Portfolios that Invest in Virtual Assets”, In Japan, the Financial Instruments and issued in October 2019. These terms and Exchange Act (the Japanese securities conditions are principles-based and act or FIEA) was amended in 2019 to should generally be appropriate to be regulate STOs in an attempt to facilitate imposed on virtual asset portfolio capital formation in this manner while managers as licensing conditions, subject protecting investors. The amendment to minor variations and elaborations came into force in May 2020. depending on the business model of the individual virtual asset portfolio manager. Characterisation as a security Some of the key terms and conditions Under the amendment to the FIEA, that a virtual asset fund manager should tokens representing (i) a conventional comply with include: (i) it should only class of financial assets listed as Type I allow professional investors to invest in Securities under the FIEA (such as shares the virtual asset fund; (ii) it should take all and bonds) or (ii) an interest in a reasonable measures to ensure collective investment scheme would be compliance with all applicable legal and deemed to be “securities”. regulatory requirements; and (iii) it should Tokens representing a conventional provide the fund and fund investors with class of financial assets adequate information about its business The amendment to the FIEA introduced a and financial conditions. new private placement framework for the situation where a conventional class of financial assets (i.e. Type I Securities) is

SECURITY TOKEN OFFERINGS – 9 THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC recorded and transferable electronically lesser extent than a Type I FIBO licensed by means of blockchain or DLT. The entity). Or, if the investors to whom the tokens representing such electronically tokens are marketed are limited to a recorded and transferable securities may group comprised of at least one QII and be offered for sale without registration if fewer than 50 experienced investors, the the tokens are, in the primary market, issuer of the tokens may seek to rely on offered only to qualified institutional the FIEA Article 63 exemption from the investors (QIIs) or to a small number Type II FIBO licensing requirement to (fewer than 50) of investors, and a conduct the marketing of those tokens. technological restriction is implemented In terms of the management of the funds to limit transfers in the secondary market. raised by way of an offering of these Such restriction is that, for example, (i) tokens, the issuer must be registered as only QIIs can acquire the tokens or (ii) a an Investment Manager, otherwise, the transferor can only transfer the tokens it issuer would need to rely on the FIEA holds all together to one transferee. A Article 63 exemption for investment person who visits the website on which management license. an STO is announced or reported could Other regulatory considerations be deemed as an offeree of the STO, and If you design the financial asset that the therefore, in practice, it will be important tokens represent so that it does not fall to limit the persons with access to any within any of the definitions of Type I marketing website to ensure that Securities or interest in a collective applicable restrictions are complied with investment scheme, the tokens may be when conducting a private STO without able to be sold without these regulatory registration. constraints under the FIEA. This is A Type I Financial Instruments Business because the definition of Type I Securities Operator (FIBO) licence will be necessary is provided by means of a limited list of to conduct an STO (whether it is private specific instruments and does not include or public) of tokens representing a a catch-all category to capture conventional class of financial assets and instruments that do not fall within any of to act as broker of token sales. the specific instruments but have the Tokens representing an interest in general nature of securities. collective investment scheme However, such tokens might fall within The legal treatment of tokens the definition of cryptoassets under the representing an interest in a collective Japanese Payment Services Act, which investment scheme differs depending on imposes registration requirements for whether certain technological restrictions dealers of cryptoassets. Therefore, in on transfer apply or not. determining your strategy in Japan, you must consider not only the definitions of Without a satisfactory technological Type I Securities and a collective restriction that makes (i) the tokens investment scheme under the FIEA but capable of transfer only to QIIs or certain also the definition of cryptoassets under experienced investors and (ii) each the Payment Services Act. transfer of tokens require an offer by the transferor and consent from the issuer, THE PEOPLE’S REPUBLIC the tokens representing an interest in a OF CHINA (PRC) collective investment scheme will qualify PRC regulators do not particularly as “FIEA Security Tokens” and will be distinguish between ICO and STO and regulated in the same manner as tokens may use these terms synonymously. In representing a conventional class of 2017 China imposed a comprehensive financial assets as explained above. ban on ICOs and similar token offerings, However, satisfaction of the technological characterising these activities as illegal restriction conditions above will mean the fundraising or illegal securities offering. A tokens are not classified or regulated as general understanding thus is that STOs, “FIEA Security Tokens”, which means like ICOs, are illegal and prohibited in that they can be offered and sold more China. easily. The marketing of those tokens must be handled by a Type II FIBO In Singapore, there is no specific licensed entity (which is regulated to a regulatory regime applicable to security

10 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC tokens. Security tokens are generally on business in one or more regulated regulated in the same way as other types activities under the SFA. This, in turn, Global regulation of traditional securities. In this respect, triggers a requirement to hold a capital of STOs the Singapore regulatory regime is markets services licence, unless an technology-neutral. exemption applies; This report is the second of a series of reports published by Characterisation as a security b) a person who operates a platform on Clifford Chance on the global The Monetary Authority of Singapore which security tokens are traded (MAS) considers there to be three main (Trading Platform) may be regarded as regulation of STOs. types of digital tokens – securities tokens, establishing or operating an organised Click here for the first report payment tokens and utility tokens – and market, and as such, may need to be in the series: Security Token has published guidance on digital token approved by the MAS as an approved Offerings - a European exchange or recognised by the MAS as offerings. In that guidance, the MAS perspective on regulation. has expressly stated that offers of a recognised market operator; and digital tokens may be regulated if the c) a person who provides any financial digital tokens are “capital markets advice in respect of any security token products” under the Securities and that is an investment product, must be Futures Act (Cap. 289) (SFA). The authorised to do so in respect of that term “capital markets products” type of financial advisory service by a encompasses “securities”. financial adviser’s licence, or be an In determining whether a security token is exempt financial adviser, under the a type of “security” and in turn, a type of Financial Advisers Act (FAA). “capital markets product”, the MAS Intermediaries subject to MAS’s would examine the structure and supervision are typically required to characteristics of, including the rights comply with MAS’s rules on anti-money attached to, the security token. laundering and counter financing Generally, instruments conferring or of terrorism. representing a legal or beneficial A person who operates a Primary ownership interest in a corporation, Platform or Trading Platform partly in and partnership or limited liability partnership, partly outside of Singapore, or outside of are regarded as “securities”. As such, Singapore but the activities of which have security tokens that confer or represent a substantial and reasonably foreseeable an ownership interest in a corporation, effect in Singapore, may nevertheless partnership or limited liability partnership, trigger the requirements under the SFA may be regarded as “securities” under due to its extra-territorial provisions. the SFA. Likewise, the FAA also has extra-territorial Both primary and secondary offers of provisions. A person who is outside of securities must comply with the offering Singapore and engages in any activity requirements under Part XIII of the SFA, or conduct that is intended to or likely unless an exemption applies. The to induce the public in Singapore to use provisions of Part XIII of the SFA require any financial advisory service provided that an offer of securities be made in or by the person, is deemed to be acting accompanied by an offering document as a financial adviser in Singapore. (i.e. prospectus and/or product highlights sheet) that is prepared in accordance While a security token is generally distinct with the SFA and lodged (and, in the from a payment token, it should be noted case of a prospectus, registered) with that tokens which are structured to the MAS. function as a medium of exchange as payment for goods or services may be Licence requirements regarded as a type of digital payment Additionally, intermediaries who facilitate token. Digital payment token services are offers of security tokens should note the regulated under the Payment Services following: Act 2019 (PS Act). A person who carries a) a person who operates a platform on on a business of dealing in digital which one or more offerors of security payment tokens or facilitating the tokens may make primary offers or exchange of digital payment tokens issues of security tokens (Primary triggers the licensing requirement under Platform) may be regarded as carrying the PS Act, unless an exemption applies.

SECURITY TOKEN OFFERINGS – 11 THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC GLOSSARY

AFSL Australian Financial Services Licence ASIC Australian Securities and Investments Commission ASIC Act Australian Securities and Investments Commission Act 2001 (Cth) China or the PRC People's Republic of China, exclusive of Hong Kong, Macau and Taiwan Corporations Act Australian Corporations Act 2001 (Cth) ERS Australian Enhanced Regulatory Sandbox FAA Singapore Financial Advisers Act (Cap. 110) FIEA Japanese Financial Instruments and Exchange Act FIBO Japanese Financial Instruments Business Operator under the FIEA ICO MAS Monetary Authority of Singapore PS Act Singapore Payment Services Act 2019 QII Qualified institutional investors under the FIEA SFA Singapore Securities and Futures Act (Cap. 289) SFC Hong Kong Securities and Futures Commission SFC Position Paper The position paper on "Regulation on virtual asset trading platforms" issued by the SFC on 6 November 2019 SFO Hong Kong Securities and Futures Ordinance (Cap. 571) STO Security Token Offering

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Fintech Guide This comprehensive online guide will provide you with the information you need on global regulatory initiatives and legislative developments, including the latest developments on global stablecoins such as Facebook’s Libra, as well as access to our comprehensive range of market-leading thought leadership articles, events and presentations on market developments. financialmarketstoolkit.cliffordchance.com/fintech

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For more information on Clifford Chance’s global fintech capability and our value- add resources, or to be added to our weekly global fintech regulatory round-up, please email [email protected]

Join us on social media:

@Clifford Chance

@TalkingTech_CC

@cliffordchancetechgroup

SECURITY TOKEN OFFERINGS – 13 THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC CONTACTS

Australia Hong Kong

Mark Currell Isabelle Cameron Lachlan Conroy Mark Shipman Partner Associate Associate Partner Sydney Sydney Sydney Hong Kong T: +61 2 8922 8035 T: +61 2 8922 8041 T: +61 2 8922 8505 T: +852 2825 8992 E: mark.currell@ E: isabelle.cameron@ E: lachlan.conroy@ E: mark.shipman@ cliffordchance.com cliffordchance.com cliffordchance.com cliffordchance.com

Japan

Rocky Mui Mark Chan Jason Hitch Eiichi Kanda Partner Partner Registered Foreign Lawyer Partner Hong Kong Hong Kong Hong Kong Tokyo T: +852 2826 3481 T: +852 2826 3424 T: +852 2826 3430 T: +81 3 6632 6643 E: rocky.mui@ E: mark.chan@ E: jason.hitch@ E: eiichi.kanda@ cliffordchance.com cliffordchance.com cliffordchance.com cliffordchance.com

The People’s Republic of China

Yusuke Abe Chihiro Ashizawa Kimi Liu Jessy Cheng Partner Counsel Counsel Associate Tokyo Tokyo Beijing Beijing T: +81 3 6632 6332 T: +81 3 6632 6414 T: +86 10 6535 2263 T: +86 10 6535 4935 E: yusuke.abe@ E: chihiro.ashizawa@ E: kimi.lui@ E: jessy.cheng@ cliffordchance.com cliffordchance.com cliffordchance.com cliffordchance.com

Global fintech Singapore knowledge coordinator

Paul Landless Lena Ng Sheena Teng Laura Nixon Partner Partner Senior Associate Senior Associate Knowledge Lawyer Singapore Singapore Singapore London T: +65 6410 2235 T: +65 6410 2215 T: +65 6506 2775 T: +44 207006 8385 E: paul.landless@ E: lena.ng@ E: sheena.teng@ E: Laura.Nixon@ cliffordchance.com cliffordchance.com cliffordchance.com cliffordchance.com

Find more of our global fintech team at www.cliffordchance.com/fintech

14 SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. www.cliffordchance.com

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© Clifford Chance 2020

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