The Security Token Offering (STO) has been referred to as the grown-up version of the Initial Coin Offering (ICO). In fact, in a report released by PricewaterhouseCoopers, it was noted that “STOs are not fundamentally different from ICOs”. In terms of market volume, there were 28 STOs in 2018 with a total volume of US$442 million. With this in mind, let’s consider how STOs are doing in Asia, particularly Oriental Asia, i.e. East Asia.
Prior to its ban on ICOs in September 2017, China was the leading cryptocurrency market in the world with 80% of the global cryptocurrency trading volume being transacted in the Middle Kingdom. One year after its ICO ban, China went a step further by banning STOs as well, effectively putting an end to any hopes that STOs may be treated differently.
South Korea had also banned ICOs in September 2017, but in contrast with the position in China, the option of using STOs remains available in South Korea as the government has not issued any official statement with regard to offering security tokens. Thus, South Korea’s leading blockchain research centers Chain Partners’ CP Research and Coinone Research Center have issued reports in which they expect STOs to run riot on a global scale as regulations are enhanced to accommodate this new mode of offering. In the reports, the research centers have proposed that STOs be regulated under the existing Capital Markets Act.
The option of regulating STOs through existing laws was indeed the choice of regulators in Hong Kong and Japan. In Hong Kong, the Securities and Futures Commission in a public statement issued on March 28th this year stated that security tokens are likely to amount to securities under the Securities and Futures Ordinance (SFO).
Accordingly, the offering of any security tokens carried out in Hong Kong or targeted at Hong Kong investors can only be done by a person who is licensed under the SFO to conduct Type 1 regulated activity, i.e. dealing with securities. As for Japan, the Financial Services Agency announced on March 15th, 2019 that a bill will be submitted to the legislature to amend the Payment Services Act and the Financial Instruments and Exchange Act to accommodate the regulation of security tokens under the existing legal framework. As the saying goes, “if it ain’t broke, don’t fix it”.
Another option is to enact new laws to govern STOs, an alternative which is being pursued by Taiwan’s Financial Supervisory Commission. The Taiwanese regulator is currently in the process of devising a legal framework for STOs expected to be finalized by June this year. The framework — which will put an end to Taiwan’s hands-off policy towards cryptocurrencies — will initially come in the form of a regulatory sandbox. STOs whose funding exceeds the prescribed threshold would fall under the sandbox, with the application of the regulations, such as equity crowdfunding rules, being fine-tuned along the way.
It appears as though most of the countries in Oriental Asia are taking the challenges of regulating STOs in stride, with the notable exception of China, a sleeping dragon we can only hope will awaken from its slumber soon.
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