Fending off token opposition
ICOs are navigating a regulatory maze as they seek legitimacy, write Nuntawun Polkuamdee and Darana Chudasri
Traditional investment assets such as bullion and equity have been superseded by initial coin offerings (ICO), a muchtouted digital crowdfunding option making a big bang across the globe. “Same same, but different” could be used to describe the striking similarities and prominent differences between an ICO and an IPO.
ICOs see a company, usually a tech startup, issue digital tokens, typically in exchange for a cryptocurrency such as bitcoin or ethereum. Tokens can be used to buy future services from the issuer or can be sold to ostensibly reap a handsome return.
ICO transactions are similar to crowdfunding, whereby the issuer presents a business model to investors, but the difference is in the raised funds, which are in the form of digital currencies using blockchain technology, and the deals are enforced using smart contracts.
Apart from the use of digital currencies, regulation is a key difference between ICOs and IPOs. There is no regulation in place to supervise ICOs, and global financial regulators have struck a cautious tone with regard to the fund-raising method.
The growing presence and unregulated nature of ICOs has made global financial regulators jittery, with China and South Korea outright banning ICO fund-raising, citing fraud and the potential for bubbles as the rationale behind the prohibition.
“Fund-raising in the near future will be done through ICOs, with a decentralised business model adopted by companies,” said Jirayut Srupsrisopa, a Thai bitcoin guru and founder of coins. co.th, a bitcoin trading platform. “This type of business will no longer need mediums such as chief executives, accountants and marketing staff.”
REGULATION IN PROGRESS
ICOs have grown exponentially over the past few months and have surpassed the early stages of venture capital funding. As a result, financial regulators, including Thailand’s Securities and Exchange Commission (SEC), are concerned that in some cases ICOs may be deliberately used as a tool for fraud and other types of exploitation.
Companies opting to raise funds through ICOs are mostly tech startups, which largely view this type of crowdfunding as a convenient and timely way to access funding.
Since digital tokens offered by ICO issuers can diverge widely in design and representation, some may resemble financial returns, rights and obligations, in a manner similar to securities under the Securities and Exchange Act, prompting the SEC to make a move to establish a regulatory framework to regulate ICOs that constitute securities offerings.
About five companies have expressed interest in becoming ICO portals to screen ICO offerings for legitimacy.
An ICO portal acts as a checkpoint and screens the “white paper” presented by ICO issuers. The white paper is similar to the prospectus of an IPO, offering stocks to investors and bringing shares to list on the stock exchange. An ICO portal’s aim will be to discern legitimate ICOs from scams.
SEC deputy secretary-general Tipsuda Thavaramara said the market regulator will regulate ICO offerings that fall under the “investment participation” category for a new type of securities, following the SEC Act provision that lets the SEC supervise securities’ fund-raising.
The SEC cannot, however, supervise other ICO offerings apart from those classified as securities offerings, Mrs Tipsuda said.
The definition of “investment participation” refers to instruments representing rights, divided into units, each with highly standardised terms and conditions, where such instruments are issued for raising funds from the public and represent rights for holders to participate in pooled benefits from pooled contributions, which are collectively managed. Investors have no control over day-to-day operations.
Such classification, however, does not include the existing types of securities under the SEC Act 1992 and instruments representing rights pursuant to an agreement of contract where the right is primarily for consumption or usage of assets or services.
Holistically, an ICO can be viewed as a combination of three rising trends: crowdfunding, blockchain technology and cryptocurrencies. While the essence of fund-raising and the technology involved have changed, the effectiveness of the trust mechanism remains relevant, more so than ever.
“A clear regulatory approach can provide guidelines for financial service providers as to how they can remain relevant and continue to create value through new technologies,” Mrs Tipsuda said. “For example, financial advisers involved with an ICO will need to understand blockchain technology.”
But most cryptocurency exchanges around the world still face no regulations, so investors must gauge their own risks when investing in ICO offerings.
The SEC completed a public hearing on the ICO regulatory framework on Jan 22, 2017 with market participants. The next step, focusing on details of regulations and conditions for ICOs, will begin on March 15 and continue into April.
An effective date for adopting full-fledged ICO regulations is expected to fall in this year’s second quarter, Mrs Tipsuda said.
“The SEC understands the unique environment that tech startups operate within and realises that ICOs may not yet fit neatly within the existing regulatory framework,” she said. “Therefore, to strike a balance between supporting digital innovation and protecting investors from potential ICO scams, the SEC is considering appropriate approaches to ICOs and welcomes comments and suggestions from the private sector.”
ICO PLATFORM NEEDED
With the digital revolution transforming business landscapes and unsettling traditional business models, ICOs could be an inevitable disruption to the existing fund-raising regime. Even the market regulator acknowledges this emergent possibility.
ICOs could replace IPOs in the long run, disrupting the traditional operations of asset management firms, investment banks, investment advisories, stock exchanges and brokers, said SEC assistant secretary-general Praoporn Senanarong.
Apart from regulatory frameworks and the possibility of funds raised through ICOs surpassing IPOs, there is a need to establish an ICO trading platform in Thailand in order to encourage funds to stay within the domestic market and prevent repatriation overseas, said Thakorn Piyapan, head of Krungsri Consumer Group.
For the overseas markets, the most active ICO trading platform is situated in the US, while global ICO fund-raising was worth US$3 billion (94.2 trillion baht) in 2017, Mr Thakorn said.
Funds raised through venture capital are mostly derived from institutional investors, but it is different for ICOs, whereby retail investors are the source of funding, he said.
“ICOs are a [fund-raising] platform for retail investors to invest in small-scale tech startups,” Mr Thakorn said. “ICOs are a technology-based approach, and the core business also uses blockchain technology as a fundamental.”
In Mr Thakorn’s view, it’s rather impossible to forbid ICO fund-raising in overseas markets — despite the unwavering ban imposed by Chinese and South Korean regulators.
The same logic applies to Thailand: startups that want to raise funds from an ICO might embark on such fund-raising activities overseas because there is no existing supportive platform in Thailand, he said, noting that Russia, Israel, China and Britain have active ICO platforms as well.
On the other hand, investors should question the purpose of ICOs and consider whether the offerings are pure speculation of returns generated from cryptocurrencies or are aimed at developing startups by using digital tokens as a discount for ICO-related businesses, Mr Thakorn said.
GROWING INTEREST
As ICO offerings are essentially tied to cryptocurrencies, investors are flocking to the alluring cryptocurrency market on the back of skyrocketing bitcoin value.
Poramin Insom, a developer of the Thai cryptocurrency called Zcoin under Satang Corporation, said Thai investors are intrigued by ICOs and cryptocurrencies at the moment because of how bitcoin and ethereum have generated hundredfold returns so far.
Developed a couple of years ago, Zcoin ranks in the top 100 cryptocurrencies worldwide by most-active trading.
Satang Corporation is a fintech startup with a website providing cryptocurrency trading, bitcoin wallet and trading of other cryptocurrencies. The startup is a member of the Thai
Fund-raising in the near future will be done through ICOs. JIRAYUT SRUPSRISOPA Founder, coins.co.th
Fintech Association.
Satang Corporation is also one of the five companies expecting to apply for an ICO portal licence with the SEC.
Mr Poramin has set up the Thai Digital Asset Exchange (TDAX), a second cryptocurrency trading website developed by tech-savvy Thais, launched in September 2017.
TDAX has 20,000 user trading accounts, with average trade volume of $1 million.
Mr Poramin is an adviser at JFintech, the subsidiary of SET-listed Jaymart Plc that plans to launch an ICO next month in the Thai market, whereby funds will be raised through its own digital currency, JFin.
“We have already screened the JFin coin project and view it as of interest, with possible high income growth in the future,” Mr Poramin said. “JFin will be offered on TDAX and other cryptocurrency exchanges in the future. TDAX abides by digital money regulations in the region and [protects] the rights of traders.”
Another Jaymart subsidiary, J Ventures, is poised to become the country’s first SETlisted company to sell its own digital currency once JFin is released through an ICO in March.
The company hopes to acquire 660 million baht in the first phase of the 100-million-coin ICO, with a price of $0.20 (6.40 baht) per JFin coin.
J Ventures plans to use the raised funds to develop a decentralised digital lending platform integrated with blockchain technology.
J Ventures has created 300 million digital tokens, with 100 million to be offered in the first phase.
The presale period will run Feb 14-28, and the ICO will commence on March 1 and end on March 31.
J Ventures is in the process of completing all the relevant information and documents for the ICO. The white paper will be released globally via the www.jfincoin.io website on Feb 14.
SECURITY AS PRIORITY
With the marvel of blockchain technology integrated systematically, ICO is the future of crowdfunding, spreading the impact of decentralised business models to all business segments.
Despite the absence of an ICO platform in Thailand, there are sufficient digital coins to generate a desirable amount of financial liquidity. Funds raised through ICOs will inevitably permeate the country, similar to how bitcoin has disrupted in the global financial realm, Mr Jirayut said.
A company raising funds from an ICO does not have to be listed on the Thai stock market, he said, therefore having a mobile phone and internet connection are sufficient to conduct an ICO.
“Personally, I think that the SEC’s intention to regulate ICOs to separate ICO scams [from legitimate ICOs] is a positive development, but the market regulator is not expected to undertake stringent regulations that will diminish innovation in this industry,” Mr Jirayut said.
While ICOs are a useful way to raise funds for small and medium-sized enterprises and startups, and offer greater access to a variety of funds compared with venture capital and IPOs, security is at the forefront of financial regulators’ priorities.
By investing in digital coins, investors need to study the ICO white papers for details of investment products and the intentions of the business direction, said Bhume Bhumiratana, an adviser to the SEC and the Thai Fintech Association.
Digital coins themselves cannot be hacked or altered in terms of value, since they’re based on blockchain technology, but if a computer has been infiltrated with a computer virus or malware, this opens a path to vulnerability, Mr Bhume said.
Investors can keep digital coins with e-wallet service providers under secured systems, but they still need to ensure that service providers are trustworthy, he said.