Extra-territoriality of initial coin offerings
Jamari Mohtar 

Under its guidelines on digital token offerings issued on Nov 15, the Monetary Authority of Singapore (MAS) says a trading platform like Luno, which is a cryptocurrency exchange, will not be regulated in the city-state unless it introduces the trading of securities tokens.

Securities tokens are digital tokens that can be construed as capital-market-like products based on the commonalities with the products of a capital market in their structure and characteristics, says a MAS guide on digital token offerings.

Luno Pte Ltd, a Singapore-registered company, has a subsidiary incorporated in Malaysia – BitX Malaysia Sdn Bhd – that runs the only cryptocurrency exchange in Malaysia which deals with the activity of exchanging your bitcoin to ringgit directly through your bank account. It also accepts deposit in ringgit directly from your bank account in order for you to trade in bitcoins. Last month, it introduced the trading of the cryptocurrency ether.


New payments framework

An online trading platform like Luno that deals in secondary trading of cryptos like bitcoins and ether will remain unregulated in Singapore, as these are not considered securities tokens and hence, the republic’s Securities and Futures Act (SFA) does not apply.

However, MAS still intends to regulate the activity of exchanging virtual currencies to fiat currencies in such trading platform in the future under a new payments framework that “will include rules to address money laundering and terrorism financing risks relating to the dealing or exchange of virtual currencies for fiat or other virtual currencies”.

The financial regulator considers a trading platform as one of the two intermediaries that facilitate the offering or issuance of digital tokens in initial coin offerings (ICOs). The other intermediary is a primary platform on which one or more issuers of digital tokens may make primary offerings of the tokens.

Both kinds of intermediaries “will be required to put in place policies, procedures and controls to address such risks”. These will include conducting customer due diligence, monitoring transactions, performing screening, reporting suspicious transactions and keeping adequate records.

Some of these intermediaries are already practising some of these requirements under the Know Your Customer (KYC) guidelines.


Operating a market

The moment a trading platform that trades in cryptos introduces the trading of securities tokens including futures contracts, it may come under the SFA, as the operator of such platform is seen as establishing or operating a market.

Such operator which “establishes or operates a market, or holds himself out as operating a market” needs the approval of MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA, unless exempted.


This has the following implications:

• An existing crypto exchange which wants to expand its trading business by introducing securities tokens or crypto-based derivatives or other capital-market-like products may be subject to regulation under the SFA.

• Similarly, an operator of a primary platform which deals with securities tokens may be considered as carrying on business in one or more regulated activities under the SFA, and thus must hold a capital markets services licence for that regulated activity under the SFA.

Such operators will also have to contend with the provision of the Financial Advisers Act (FAA) pertaining to financial advisory services, which requires a financial adviser’s licence, as an authorised provider of financial advisory services. 

Moreover, they have to be mindful of the extra-territoriality of the SFA and the FAA. The implications are as follows:

• Operators of a primary or trading platform, whose operation is partly in or partly outside of Singapore, or outside of Singapore, may have the requirements of the SFA applicable extra-territorially to their activities under section 339 of the SFA.

• Where they are based overseas and engage in any activity or conduct that is intended to, or likely to induce the public, or a section of the public, in Singapore to use any financial advisory service provided by them, they are deemed to be acting as a financial adviser in Singapore and thus, may come under section 6(2) of the FAA.

MAS highlighted the following case in which capital markets services licence under the SFA and a licence for financial advisory services under the FAA are a must:  

• A firm in the business of developing properties and operating commercial buildings plans to raise funds to develop a shopping mall by offering digital tokens to any person globally, including in Singapore. The tokens are structured to represent a share in the firm and will be a digital representation of a token holder’s ownership in that firm. The firm also intends to provide financial advice in relation to its offer of the tokens.

Since the tokens will be a share, they are securities under the SFA and thus, the firm will need to comply with the prospectus requirements under the SFA.

The firm will likely require a capital markets services licence for carrying on business in the regulated activity of dealing in securities under the SFA. To provide financial advice in relation to the offering of its digital tokens, the firm will need
to be a licensed financial adviser under the FAA.

MAS also highlighted the case of extra-territoriality in the following example:

• A Singapore-incorporated firm with operations in the city-state intends to offer digital tokens to members of the public, but not to persons residing in the country. It will pool the funds raised from the offer and use the funds to invest in a portfolio of shares in fintech start-up firms. It will manage the portfolio of shares. Token holders will have no power relating to the daily operations or management of the portfolio of shares. Profits arising will also be pooled and distributed as payments to token holders. This enables token holders to receive profits arising from the portfolio of shares.

Since the tokens will only be offered to persons based overseas (i.e. it will not be offered to any person in Singapore), Part XIII of the SFA will not apply to the offer.

But the firm may nevertheless be carrying on the business of fund management in Singapore ala collective investment scheme (CIS) if it operates the management of portfolio of shares in Singapore. If so, it will require a capital markets services licence for carrying on business in fund management. As the firm is not providing financial advisory service in respect of the tokens issued, the FAA will not apply.

In summary, it looks like the end for any firm, especially start-ups, to apply technology in an innovative way through the issuance of securities tokens via ICOs to fund the project, but a way out is provided through applying for the regulatory sandbox administered by MAS.

Jamari Mohtar is a veteran journalist who used to work in Singapore. Comments:

This article first appeared in Focus Malaysia Issue 263.