Hong Kong Securities and Futures Commission statement on initial coin offerings

By Jonathan Lawrence

The Hong Kong Securities and Futures Commission (SFC) issued a statement about initial coin offerings (ICOs) on 5 September.  The SFC noted an increase in the use of ICOs to raise funds in Hong Kong and elsewhere. The SFC said that, depending on the facts and circumstances of an ICO, digital tokens that are offered or sold may be “securities” as defined in the Hong Kong Securities and Futures Ordinance (SFO), and therefore subject to the securities laws of Hong Kong. ICOs typically involve the issuance of digital tokens, created and disseminated using distributed ledger or blockchain technology.

Digital tokens offered in an ICO may represent equity or ownership interests in a corporation (ie “shares”) or a debt or liability owed by the issuer (ie a “debenture”) or an interest in a “collective investment scheme” (CIS). Shares, debentures and interests in a CIS are all regarded as “securities”. In such circumstances, dealing in or advising on the digital tokens, or managing or marketing a fund investing in such digital tokens, may constitute a “regulated activity”. Parties engaging in a “regulated activity” are required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public. Parties engaging in the secondary trading of such tokens (eg, on cryptocurrency exchanges) may also be subject to the SFC’s licensing and conduct requirements.

As digital tokens involved in ICOs are transacted or held on an anonymous basis, the SFC statement says that by their nature they pose inherent and significant money laundering and terrorist financing risks which must be mitigated against with proper safeguards. The SFC also warns investors of the potential risks involved in ICOs and investment arrangements involving digital tokens.

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