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ICOs in Hong Kong

The last fiscal has seen an explosion in cryptocurrency values and had been major headlines across the globe. You also must have come across a newly coined acronym – ICO. So let’s try and get answers to some of the most common questions arising in your mind, like, what is an ICO? What is the legal nitty-gritty of the same?

ICOs or Initial Coin Offerings are exploding on the global level. Startups and organizations are readying themselves to jump on the bandwagon as It provides an opportunity to reach masses and allows them to collect a large sum of capital to fund their businesses. Furthermore, the Initial Coin Offerings have simple rules and procedures as compared to the traditional method of capital raising through Initial Public Offerings. However, in recent times, several regulators have started to look at this new financing vehicle and some of them have started putting regulations in place whereas, some of them have gone as far as banning the ICOs completely. Let’s try and decode various aspects of the digital currencies.

What is a crypto or token?

People who are familiar with the concept of digital currency can skip this section and move ahead, while for others, this section will provide a brief introduction to the cryptocurrencies and information regarding various terminology utilized in order to better understand the following sections of the article.

In simple terms, the cryptocurrencies can be defined as the digital currencies which are encrypted using cryptography. The most famous of all cryptocurrencies is the Bitcoin. The bitcoin is nothing but the first decentralized cryptocurrency and powered by blockchain technology.

The blockchain term is frequently utilized to describe the public ledger which records and validates all transactions in a chronological order. Another frequently used term is the tokens. The tokens are a representation of a crypto for specific utility or asset. In other words, it is an asset which can be traded and is a fungible i.e. commodity, reward points, cryptocurrency.

What is an ICO?

Just like an IPO, the issuer of the Initial Coin Offering issues “tokens” instead of “shares/stocks” to subscribers in an exchange of “digital/cryptocurrency”. The capital raised through ICOs is then utilized to fund the startup product, platform, or software development. The issued tokens are also made available on crypto exchanges for trading just like stocks on stock-exchanges.

ICOs in Hong Kong

China has completely banned ICOs/Initial Coin Offerings and crypto exchanges, while Hong Kong has emerged as the hub for ICOs. Though it did not see blockbuster campaigns like Singapore & Switzerland, Hong Kong has seen many Initial Coin Offerings from the mainland and has seen an unprecedented rise.

The Simple Token, Hong Kong based startup had raised over $21 million from over 7000 unique purchasers. The company has been founded by Jason Goldberg which allows organizations to create, launch, and manage their own crypto in a highly scalable manner. The Ethereum powered platform will aid the startups without having expertise in blockchain technology. The Airswap – a decentralized token exchange, had raised over $36 million from over 9000 investors in 2017.

A one-stop coin exchange, the CoinMetro had begun its presale in December 2017 and it is expected to drive its ICO in very near future. The Octo3, an existing payment processing network wants to upgrade its present system to blockchain technology and had completed its ICO in October 2017.

A peer-to-peer binary options platform, Betex, had conducted its first round of funding and raised over $1 million. The platform aims to allow binary options trading and add more complicated derivatives in future.

Legal and Regulatory Concerns

Even after successful ICOs in the country, the ICOs market is not without regulatory & legal concerns. The ICOs aims to raise funds through various parts of the world and hence they are subjected to various legal complexities. Also, they are subject to various regulatory treatments in different parts of the world. The legal complexities may arise even if the issuer had incorporated in a benign ICO friendly environment or a country.

The global nature of ICOs further complicates matter as regulator may decide to overlook the geo borders and assert jurisdiction over the final beneficiary or the issuer of an ICO. The SFA (Secretary for Financial Services & Treasury) of Hong Kong had advised that any organization targeting funds from the Hong Kong locals needs to have a license from the Securities & Futures Commission of Hong Kong. This statement had global implications as an organization emanating from an ICO friendly country also needs to take a license from the SFC of Hong Kong if it intends to receive funds from citizens of Hong Kong.

The Securities & Futures Commission of Hong Kong had released a statement in late September 2017 and stated that the cryptocurrencies may be deemed as securities as defined under its ordinance (Cap. 571). The cryptocurrency may be seen as:

  • The tokens or cryptocurrency can be considered as shares if it offers equity or ownership in the company.
  • The tokens or cryptocurrency can be considered as debentures if the issuer of the crypto acknowledges a debt or liability.
  • The tokens or crypto can be considered as the collective investment schemes if it intends to manage funds of the participants in order to share the return provided by the project.

In the above-mentioned cases, the tokens will attract regulatory requirements and needs to adhere to the laws defined by the Securities and Futures Commission. The current law required an issuer to have either authorization or license or both.

The Securities and Futures Commission of Hong Kong has not yet issued any formal guidelines in this regards and the ambiguity prevails in terms of ICOs. Hence, it is advisable to take comprehensive legal advice before engaging in Initial Coin Offerings. There are few litigations pending in the courts of Hong Kong regarding ICOs and hence, the legal advice becomes even more imperative.

Finally

As Hong Kong gets into ICOs action, cryptocurrency preacher indicates that Initial Coin Offerings has potential to regain Hong Kong’s lost glory about being the leader in the financial services across the globe. ICOs issuer must go through the best practices guidelines published by the Fintech Association and comprehensive legal advice before jumping onto the ICO bandwagon.

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