China: Twice In Two Days: China And Hong Kong Weigh In On Token Sales

Twice in as many days, powerhouse jurisdictions in Asia have weighed in on token sales.  China has halted them altogether, while Hong Kong has, in many ways, followed the path tread recently by the United States, Singapore and Canada, announcing that certain tokens may be securities.1  Given token sales' global reach, many, including the author and her colleagues, have predicted that more and more jurisdictions would provide guidance concerning token sales and that such guidance may, in some ways, be consistent with the SEC's statements and acknowledgement that certain tokens may be securities.2 The more jurisdictions around the world that weigh in on token sales and provide legal guidance, the fewer and fewer places would-be fraudsters and scam artists will be able to launch deceptive or fraudulent token sales. From that perspective, the Chinese ban on token sales and the announcement this week by Hong Kong may, in some ways, be viewed as a way to clear the path for those issuers that wish to launch legally compliant and responsible token sales. As nations around the globe weigh in and provide legal guidance concerning token sales, a more legitimate, responsible and sustainable token sale market may emerge.

Below are some thoughts regarding the Chinese and Hong Kong guidance, respectively:

Bull in a China Shop?  China Reportedly Halts Token Sales and Will Investigate Prior Chinese Token Launches

This year, token sales have been a big business in China, with Chinese media outlets reportedly stating in July that over US$397 million in the aggregate had been raised from 65 token sales, as reported by CNBC.3  On September 4, 2017, the Chinese government reportedly put a halt to token sales and announced that it will be investigating certain token sales that launched previously.4

Over the prior week or so, there had been rumblings on the Internet and elsewhere that Chinese regulators were looking closely at token sales and that the National Internet Finance Association of China had expressed concerns regarding fraudulent and misleading sales tactics, as well as sales of tokens that arguably were securities without complying with applicable securities laws.5 On August 31, 2016, Duncan Riley reported "China's Securities and Futures Commission, the China Banking Regulatory Commission and other regulators have held a number of meetings to discuss 'appropriate regulatory measures.' Those measures are said to include controls on how much an ICO can raise, regulations pertaining to information disclosure, supervision of ICOs and compulsory investment risk disclosure. The report adds that if ICOs are found to be considered too risky across the board, they make [sic] consider banning all ICOs outright until the concerns were addressed."6 Reports earlier this week that the Chinese government will require token issuers to return money to investors follow recent news in the United States regarding the SEC reportedly having contacted token issuer Protostarr, leading to the shutdown of the Protostarr token sale.7

While this author cannot speak or read Chinese and, accordingly, is reliant on media reports, the message from China – that some token sales may be sales of securities, that investors need to be wary of fraudsters and bad actors, and that token sales are not somehow exempt from the need to consider and comply with regulatory frameworks and laws – sounds somewhat consistent with the messages that the United States Securities and Exchange Commission (the "SEC"), the Canadian Securities Administrators (the "CSA") and the Monetary Authority of Singapore (the "MAS") recently have released.  Although China appears to have taken an additional step to ban token sales8 – at least for the time being – while the U.S., Canada and Singapore have not done so, China's actions this week may be an example of another government trying to understand, regulate and educate the public of the risks involved in this new form of capital raising.

It is interesting to consider whether the Chinese token sale stoppage will be a permanent one. A moving target often is more difficult to hit, and it is worth considering whether the Chinese government may be "pressing pause" on token sales in order to explore ways to assess and regulate future token sales, rather than issuing a permanent ban on all token sales. Perhaps this may lead to the maturation and development in China of legally compliant token sales under applicable law.

Hong Kong Joins the Pack: Certain Tokens May Be Securities

On September 5, 2017, Hong Kong made clear that certain tokens may be securities.9   In its release, Hong Kong's Securities and Futures Commission (SFC) stated that it "has noticed an increase in the use of initial coin offerings (ICOs) to raise funds in Hong Kong and elsewhere. This statement serves to explain that, depending on the facts and circumstances of an ICO, digital tokens that are offered or sold may be "securities" as defined in the Securities and Futures Ordinance (SFO), and subject to the securities laws of Hong Kong."10

Explaining that, when a given digital token constitutes a "security" (a category that the SFC mentions includes debentures, interests in a collective investment scheme and shares) under Hong Kong law, dealing in or advising in connection with such token, or managing or marketing a fund that invests in such token, "may constitute a 'regulated activity'.[....] Parties engaging in a 'regulated activity' are required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public."11

In addition, the SFC sent a warning to token issuers, secondary traders of tokens and cryptocurrency exchanges that securities laws and other legal requirements may apply to them, including requirements for certain registrations and authorizations (unless an exemption applies). Among other things, the SFC stated:  "Parties engaging in the secondary trading of such tokens (eg, on cryptocurrency exchanges) may also be subject to the SFC's licensing and conduct requirements. Certain requirements relating to automated trading services and recognised exchange companies may be applicable to the business activities of cryptocurrency exchanges."12

The SFC ended its release by cautioning potential investors regarding the possibility of fraud, significant investment risks and potential lack of liquidity, but not before reminding issuers of anti-money laundering and similar matters.  Noting that tokens issued in token sales may be transacted or held on an anonymous basis, the SFC stated that "inherent and significant money laundering and terrorist financing risks" exist and referenced its January 16, 2014 circular reminding licensed corporations and associated entities "to take all reasonable measures to ensure that proper safeguards exist to mitigate these risks."13

Key Takeaways

While it is unclear which jurisdiction will be the next one to speak out about token sales, many issuers are beginning to realize that no token sale is an island, so to speak.  If an issuer is marketing, offering or selling digital tokens into a jurisdiction, ignorance of that jurisdiction's laws does not mean that laws do not apply.  A new token sale era arguably is beginning.

Footnotes

1 https://www.linkedin.com/pulse/sec-issues-investor-alert-warn-investors-ico-related-klayman-kuzar, https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-public-companies-making-ico-related https://www.mofo.com/resources/publications/170726-howey-got-here-sec-token-offerings.html , https://www.sec.gov/litigation/investreport/34-81207.pdf https://www.mofo.com/resources/publications/170802-singapore-token-offerings.htmlhttp://www.mas.gov.sg/news-and-publications/media-releases/2014/mas-to-regulate-virtual-currency-intermediaries-for-money-laundering-and-terrorist-financing-risks.aspxhttp://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20170824_cryptocurrency-offerings.htmhttp://bloombergtv.ca/shows/bloomberg-markets-canada/bloomberg-markets-canada-episode/?epid=828&sgid=6, https://www.linkedin.com/pulse/bull-china-shop-reportedly-halts-token-sales-prior-klayman-kuzar 

2 https://www.blockchaintechnews.com/articles/attorneys-offer-perspective-on-sec-ruling/

3 https://www.cnbc.com/2017/08/31/new-cryptocurrencies-and-icos-create-financial-risk-says-chinas-national-internet-finance-association.html

4 http://www.atimes.com/article/60-ico-token-distribution-platforms-face-investigation/, https://siliconangle.com/blog/2017/09/03/china-bans-initial-coin-offerings-pending-reviewhttp://fortune.com/2017/09/04/ico-china-central-bank-ban/

5 https://siliconangle.com/blog/2017/08/31/chinese-regulators-consider-massive-crackdown-initial-coin-offerings/

6 https://siliconangle.com/blog/2017/08/31/chinese-regulators-consider-massive-crackdown-initial-coin-offerings/

7 http://www.iii.co.uk/articles/441171/cryptocurrencies-plunge-china-bans-initial-coin-offerings

8 https://siliconangle.com/blog/2017/09/03/china-bans-initial-coin-offerings-pending-review

9 http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117

10 http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117

11 http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117

12 http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117

13 http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions