All Tokens Are Securities, Says New Zealand’s Financial Markets Authority

On October 25, 2017, New Zealand’s Financial Markets Authority (FMA) announced that it posted guidance on token offerings (ICOs) and cryptocurrency services in the compliance section of its website.

Token Offerings

The FMA wrote, “The extent to which an ICO is regulated depends on whether a ‘financial product’ is being offered to retail investors in New Zealand.” The Financial Markets Conduct Act 2013 (FMC Act) lists four types of financial product: 1) debt securities, 2) equity securities, 3) managed investment products, and 4) derivatives.

There is an array of disclosure and licensing requirements that must be met in order to make a regulated offer of any of these financial products. “Whether a token offered via an ICO is a particular type of financial product depends on its specific characteristics and economic substance,” wrote the FMA.

The FMA also declared that “All tokens or cryptocurrencies are securities under the FMC Act – even those that are not financial products. A security is any arrangement or facility that has, or is intended to have, the effect of a person making an investment or managing a financial risk.”

Tokens and cryptocurrencies that are not financial products or services must comply with the Fair Trading Act 1986 to the extent that they are “in trade.” Notably, the Fair Trading Act also applies to tokens and cryptocurrencies that are offered in New Zealand but based overseas.

The FMA pointed out that the FMC Act does not cover crowdfunding via ICOs, and encouraged stakeholders to engage in conversation with the regulator “early in the development phase if you’re considering making an offer.”

Cryptocurrency Services

The regulator also explained that New Zealand-based businesses that provide financial services related to cryptocurrencies (i.e., exchanges, wallets, deposits, brokerages) must comply with the Financial Service Provider (Registration and Dispute Resolution) Act 2008.

Financial service providers and New Zealand-based token or cryptocurrency issuers must meet the following registration requirements and obligations:

  • be a member of a dispute resolution scheme if the financial services are provided to retail clients
  • be registered on the Financial Service Providers Register (FSPR) for each category of financial service you provide. Token or cryptocurrency issuers may be ‘operating a value transfer service’ or ‘issuing and managing means of payment’
  • pay the applicable fees and levies for the relevant categories of financial service you provide
  • comply with the fair dealing provisions in Part 2 of the FMC Act. These prohibit misleading conduct and deceptive statements being made in relation to financial services
  • comply with anti-money laundering obligations.

Warning

In conjunction with its guidance, the FMA cautioned against the dangers of cryptocurrency investment. “Things to look out for” included: 1) cryptocurrency value can change quickly, 2) your ‘coins’ may be stolen, and 3) cryptocurrencies aren’t widely accepted.

To reduce risk, the FMA encouraged investors to ensure that any exchange they use is:

  • Based in New Zealand;
  • A member of a dispute resolution scheme; and
  • Holds your New Zealand Dollars in a trust account.

The authority closed with references to other regulators around the globe that have issued warnings, including the US Securities and Exchange Commission, the European Banking Authority, the Monetary Authority of Singapore, and the United Kingdom’s Financial Conduct Authority.