ICO warning

BANK Negara and the Securities Commission (SC) have joined the ranks of regulators the world over to pour cold water over the red hot trend of initial coin offerings or ICOs.

A joint statement issued yesterday by both bodies stated what has already been made clear in many other jurisdictions - that ICOs could transgress local securities laws. ICOs take place by parties producing white papers detailing their business plans for raising funds via the issuance of new tokens or cryptocurrencies, all purportedly to be built on the blockchain technology.

A handful have taken place in Malaysia, but that is likely to be halted. Last week, the SC shut down one Singaporean firm’s bid to launch and promote its ICO in Malaysia.

The regulator’s stance is that it will stop firms seeking to bypass securities laws, especially when other novel fund-raising avenues have been made available for start-up companies such as equity crowdfunding and peer-to-peer lending.

However, things could be more complex. One key question is what defines a security. In the traditional sense, it is clear to us when we buy listed equities that we have certain rights in the company, are able to vote at shareholder meetings and have other legal entitlements.

However, what if an ICO said it was running a blockchain company that needed tokens to power that network, but did not ascribe any rights to those tokens which it decides to sell? Will that firm be hauled up for breaching existing securities laws, or can it argue its way out of that?