Which Token Offerings Are Securities? Monetary Authority of Singapore Issues Guidance

As it continues to navigate the waters of regulation in the unpredictable ocean of cryptocurrency enterprise and development, on November 14, 2017, the Monetary Authority of Singapore (MAS) issued a guide explaining its classification of certain tokens as securities.

This is a significant framework, in light of the current global uncertainty about whether or not tokens issued in ICOs and as part of crowdfunding should be regulated as securities, as currency, or viewed as a utility.

The document published by MAS provided details on how entities seeking to use the country as a base of operations for token-based crowdfunding will need to conform to its Securities and Futures Act (SFA) and Financial Advisers Act (FAA). Although it is remarked that the case studies are not exhaustive, MAS presents them as a general guideline for businesses to follow; to ensure compliance, legal advising is advocated by the MAS for any entity seeking to conduct token offerings.

MAS also intends to create rules addressing the risks associated with terrorist financing and money laundering, "the dealing or exchange of virtual currencies for fiat or other virtual currencies." It said that exchanges and other intermediaries in this space must enact "requirements to conduct customer due diligence, monitor transactions, perform screening, report suspicious transactions and keep adequate records."

The MAS presented six case studies demonstrating diverse circumstances applicable to token offerings.

Case Study 1

"Company A" issues "Token A" to investors. Token A provides holders access rights to Company A's platform: in this case, the tokens can be traded to rent computing power from other users. Token A will be available to any investor globally, including those residing in Singapore, and have no other functions associated with it.

For this example case, MAS observed that the token only provides rental of computing power; hence, Token A will not constitute securities and will not be subject to the rules in the SFA or the FAA.

Case Study 2

The next example from MAS involves "Company B's" token offering, which will fund the development of a shopping mall. In this instance, "Token B" is positioned as a share of Company B. In this case, MAS advised that Token B constitutes a security. As a security, Token B will need to comply with requirements from the SFA. Company B will likely require a capital markets services license.

Case Study 3

“Company C" has plans to create a pool of funds which will be invested in a portfolio of FinTech start-ups. Company C will issue "Token C" to investors in Singapore and abroad as a means to gather this pool of funds as well as manage the portfolio. Token holders will receive a share of the profits derived from this portfolio.

The MAS defined this pooled arrangement as a “CIS,” or “Collective Investment Scheme,” and requires that it be authorized under the purview of the SFA. On this basis, Token C will be a unit in a CIS, and constitute securities. Since it’s a security, Token C must comply with Singapore’s securities regulations.

Case Study 4

The next example is "Company D," a Singapore-incorporated firm that operates there also. Company D will issue "Token D" to public investors abroad, but not to residents of Singapore. Company D will invest in a FinTech portfolio, providing holders of Token D with a share of the portfolio’s profits.

MAS notes that since the offer of Token D will only be made to non-residents of Singapore, the rules of the SFA will not apply to the token. However, if Company D is doing business in Singapore it will require a capital markets services licence for carrying on business in fund management.

Case Study 5

“Company E” acts to facilitate crowdfunding for other companies by setting up an "Entity" as an investment vehicle. Investors would loan money to this Entity, in return receiving an equivalent "Token E" unique to the startup supported. Token E represents that holders of it are both creditors and investors. Token E can be freely traded among investors, and per the MAS constitutes securities. Company E as well as the Entity it created may require a capital markets services licence for dealing in securities; it would also likely have to be vetted by MAS as an approved exchange or a recognized market operator.

Case Study 6

The final example from MAS, predictably, is a depiction of "Company F," which will let users exchange cryptocurrencies which are not considered securities for fiat currencies; that is to say, a virtual currency exchange. Initial configurations for the platform's operation will exclude the trading of any cryptocurrency or token that is considered to be a security, a restriction that in coming years may be lifted.

Because Company F’s virtual currency exchange will not allow trading of any products regulated under the SFA, the SFA will not apply. In a nod to future developments, the MAS continued, "Please note that while the activity of exchanging virtual currencies to fiat currencies is presently not regulated by MAS, MAS intends to regulate such activity under the New Payments Framework."