Digital tokens involved in an initial coin offering (ICO) could fall “under the definition of securities, dealing in or advising on the digital tokens, or managing or marketing a fund investing in such digital tokens”, and therefore would be subject to regulatory authority, the SFC said in a statement yesterday.
“Securities” may be in the form of shares, debentures and interests in a collective investment scheme (CIS).
For example, if digital token proceeds are managed collectively by the ICO scheme operator to invest in a product for returns, the digital tokens may be regarded as an interest in a CIS.
Parties engaging in a regulated activity targeting the Hong Kong public are required to be licensed by the SFC irrespective of whether the parties involved are located in Hong Kong, the SFC added.
Parties engaging in the secondary trading of such tokens, such as cryptocurrency exchanges, may also be subject to SFC regulation.
The SFC’s stance is similar to Singapore’s, where its financial regulator said that the issue of digital tokens will be regulated by the Monetary Authority of Singapore if the digital tokens constitute products regulated under the Securities and Futures Act. Such products include collective investment schemes, debentures and shares.
The SFC also warned the public about the risks in ICOs. Since digital tokens involved in ICOs are transacted on an anonymous basis, they may pose inherent and significant money laundering and terrorist financing risks. Investors are also warned of heightened risks of fraud as most of the ICO arrangements are operated online and may not be regulated.
The SFC’s move came after the People’s Bank of China (PBOC) said ICOs are illegal and asked all related fundraising activity to be halted immediately.
Following China’s ban, Bitcoin fell to $4,350 from $4,584 on Monday, and hit $4,037 on Tuesday – a 20% fall following the coin’s $5,000 high over the weekend, according to a report from CNBC.
Commenting on the PBOC’s move, Mark Mobius, executive chairman of Templeton Emerging Markets Group, said at a media briefing yesterday that China has moved fast in the ICO area, making sure that they have regulatory control over digital currencies.
Chinese authorities may have realised the danger of cryptocurrencies, which could be used by terrorists and illegal operators, he said.
“I believe that other countires will probably follow at some point.
“The same thing with Hong Kong, the government will probably follow,” he said just hours before the SFC released its statement.
Chinese authorities have been tightening regulation of digital currencies. In February, the central bank warned Bitcoin exchanges against margin trading and money laundering. In January, the central bank investigated the country’s bitcoin exchanges and looked into payment and settlement, money laundering, foreign exchange, as well as information and fund security.
Last month, two of China’s biggest Bitcoin exchanges were alleged to have put client money in risky wealth management products and are under investigation by the PBOC.
Besides China, Singapore and Hong Kong, Korea also recently took a stance on the use of cryptocurrencies.
Korea’s financial regulator, the Financial Supervisory Commission (FSC), held a joint task force meeting on Sunday with digital currency-related institutions and regulators to discuss increasing regulatory oversight of digital currencies, according to a BusinessKorea report.
According to the report, the regulators will punish ICOs that raise funds in the form of stock issuance using digital currencies, which would be in violation of regulations.
Digital currencies in Korea cannot be considered money or financial products, the report said, quoting Kim Yong-beom, FSC’s secretary-general.