Security Token Offerings – the Shape of Regulation Across Asia-Pacific
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SECURITY TOKEN OFFERINGS – THE SHAPE OF REGULATION ACROSS ASIA-PACIFIC NOVEMBER 2020 CONTENTS Terminology and classification of security tokens ...................................................................... 3 Overview of local regulation ......................................................................................................... 6 Country-specific analysis of STO regulation across Asia-Pacific .............................................. 7 Australia ........................................................................................................................................... 7 Hong Kong ....................................................................................................................................... 8 CONTENTS Japan ............................................................................................................................................... 9 1. LoremThe People’s ipsum Republic dolor sit of amet China 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 blockchain 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, Bitcoin 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, bond, 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