To Regulate or Not to Regulate? – That Is No Longer the Question
In a press release issued on Tuesday, August 1, the Monetary Authority of Singapore (“MAS”) provided its most direct guidance yet on how it intends to treat “token offerings.” For those looking for concrete rules, unfortunately, the answer is “it depends,” but the message behind the statement could not have been clearer: a warning shot that a token offering may well be subject to regulation if the features of the token are such as to bring it within the scope of existing laws. Consequently, issuers and their intermediaries should not assume that no regulatory constraints apply and are encouraged by MAS to seek legal advice.
The MAS guidance comes less than a week after the U.S. Securities and Exchange Commission (“SEC”) issued its first formal statement on token offerings. However, although many current token issuers may be alarmed – and some potential token issuers deterred – by the MAS announcement, well-advised token issuers potentially may welcome MAS’s appetite to tackle head-on some of the perceived grey areas around token offerings in Singapore.
To date, several issuers have launched token offerings from non-U.S. jurisdictions. Prior to the SEC’s recent token offering guidance, some token issuers have taken the position that, so long as the token being offered was not a security under the laws of the jurisdiction of its issuance, there was no need to consider whether the token constituted a security in any of the jurisdictions in which such token may ultimately be purchased or resold. The SEC report last week, which focused on the 2016 Switzerland-based token offering by The Decentralized Autonomous Organization via a Swiss foundation, confirmed that the existing U.S. securities law framework applies to token offerings and must be considered even in the case of token offerings occurring primarily outside of the U.S.
Over the past few years, Singapore has come to be seen by many in the token community as a “model” jurisdiction with respect to token offerings. MAS’s public statement in 2014 regarding anti-money laundering/terrorist financing measures, as well as its response to a parliamentary question concerning the regulation of virtual currencies, was widely (mis)interpreted by many token issuers to mean that MAS had no desire to regulate token offerings. Perhaps as a result, Singapore has attracted several high-profile token offerings – for example, one recent Singapore-based token offering purportedly raised US$80 million of funding in seven seconds – and countless other potential token issuers have been incorporated in the city-state.
MAS’s statement may be one of the first governmental regulatory statements that formally recognizes the role of token offerings as a potential new capital-raising strategy for emerging and established companies or a Blockchain-based key technological innovation that is here to stay. In this respect, MAS’s message was relatively consistent with the approach taken by the SEC: although token technology may not always be subject to full financial services regulation, existing regulatory frameworks remain relevant in the token offering context and must be considered. This may signal the beginning of a maturation in the token offering market.
While many questions remain unaddressed, for now MAS has clarified that issuers and their advisers must, at a minimum, be cognizant of the following:
However, MAS has also stated that it “is currently assessing how to regulate ML/TF risks associated with activities involving digital tokens that do not function solely as virtual currencies.” This may imply that so-called “usage”- or “app”-based tokens that have an “incidental” intrinsic value may not be subject to the same level of regulation in this area.
This aspect of MAS’s announcement, therefore, removes one of the central positions on which many token offerings launched from Singapore seek to rely in order to escape SFA regulation (i.e., by analogizing issued tokens with virtual currencies). However, MAS does acknowledge that “the types of digital tokens offered in Singapore and elsewhere vary widely. Some offers may be subject to the SFA while others may not be.” This suggests that MAS could take an open view around “usage” or “app” tokens that are sufficiently distinct from equity or debt interests in the issuer or its assets.
One potential difference between last week’s SEC guidance and Tuesday’s MAS announcement may be that the MAS announcement raised the possibility that a token may be a debt instrument, similar to a debenture.
As the regulator of one of Asia’s leading financial sectors, MAS’s role requires it to uphold the integrity of the Singapore financial system. However, MAS’s announcement could also signal its continued desire to nurture and develop in Singapore a functional FinTech ecosystem and to become a regional and global FinTech hub in which token offerings and virtual currencies can still have a role as a medium underpinning future technology. For instance, MAS’s announcement does not appear to be overly prescriptive as a measure of formal law. Instead, MAS seems to be issuing a wake-up call to token issuers, emphasizing that token issuers have certain regulatory responsibilities even if they have already engaged in token offerings for the express purpose of conducting a “regulation-lite” general securities offering.
Similar to MAS’s launch of Asia’s first FinTech regulatory sandbox, the MAS announcement may be interpreted as a challenge to those in the token community and their advisers to design token offerings that are either truly outside of MAS’s regulatory scope or otherwise comply with applicable financial sector regulations.
In light of MAS’s announcement, token issuers that have already completed Singapore-based token offerings, and parties that act as their intermediaries, may need to consider restructuring the token issuer in order to comply with MAS’s guidelines or face potential sanctions under the SFA. In any event, the MAS announcement may be seen as part of a trend of financial regulators’ increased scrutiny of token offerings, whether in the jurisdiction of issuance or the jurisdictions in which they are marketed or resold.
The authors are not admitted to practice in Singapore and are grateful to Eric Chan of Shook Lin & Bok LLP for his input into this article.
 We use the term “token offering” as shorthand to describe initial token offerings, token launches, token sales and initial coin offerings, which represent a new capital-raising method being explored by entrepreneurs, investors, large and well-established companies and others hoping to raise significant amounts of money from a broad base of potential participants.
 Under SFA s240(17), the sanctions for making a securities offering for which a prospectus is required are a fine of up to SGD150,000, imprisonment of up to two years and a daily fine of up to SGD15,000 for as long as the offense continues after conviction.