What is an ICO?
An ICO is a low-cost and time-efficient type of crowdfunding which is facilitated through the use of distributed ledger technology.
In an initial public offering (IPO) which involves the issue of securities to investors in exchange for fiat currency, whilst an ICO involves the issue of transferable tokens to investors typically in exchange for cryptocurrency such as Bitcoin or Ether.
Some tokens may resemble traditional securities such as shares or debt securities, while others may represent a right to access or receive future services, typically on preferential terms.
Launching an ICO
To launch an ICO, an issuer will generally produce a white paper, which is analogous to the prospectus that a company is required to produce in connection with the admission of securities to trading on Singapore Stock Exchange.
A subscriber will subscribe for tokens by transferring consideration to a specified account, and in doing so it is deemed to have accepted the terms and conditions applicable to that ICO.
The tokens themselves are typically created, allocated and distributed through a pre-existing blockchain platform, such as Ethereum, in each case without requiring an intermediary.
The white paper will set out the nature of the service or product, what resources are required and the amount of funds that are required to raise to develop the service or product.
It will also typically set out the minimum and maximum number of tokens the issuer intends to issue and what rights each token gives to the tokenholder.
However, unlike a prospectus or admission document, there are no content requirements or minimum standards for white papers and this can contribute to the common misconception that all ICOs are completely unregulated.
At the time of writing (April 2018), a lack of regulatory barriers is seen by some participants as one of the primary attractions of carrying out ICOs.
However, while there is no regulatory framework in Singapore which is specific to ICOs, or which refers to the specific technology or terminology used in ICOs, it is a common misconception to say that all ICOs are unregulated.
In November 2017, Singapore’s MAS issued “A Guide to Digital Token Offerings“, which provide non-legal guidance on digital tokens.
It clarified that if a digital token constitutes a product regulated under the securities laws administered by MAS, the offer or issue of digital tokens must comply with the applicable securities laws, namely Securities and Futures Act (Cap. 289) (“SFA”) and the Financial Advisers Act (Cap. 110) (“FAA”).
Offers or issues of digital tokens may be regulated by MAS if the digital tokensare capital markets products1 under the SFA. Capital markets products include any securities, futures contracts and contracts or arrangements for purposes of leveraged foreign exchange trading.
MAS will examine the structure and characteristics of, including the rights attached to, a digital token in determining if the digital token is a type of capital markets products under the SFA.
MAS emphasises that the relevant MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism may apply (“AML/CFT Requirements”).
Digital tokens that perform functions which may not be within MAS’ regulatory purview may nonetheless be subject to other legislation for combating money laundering and terrorism financing.
Distributed Ledger Technology
The concept of a distributed ledger is that there is a shared database which is replicated and synchronised across all of its users over an online peer-to-peer network.
There is no central administrator or centralised data storage centre or node.
The most famous use of distributed ledger technology is Bitcoin. Bitcoin transactions are recorded on a distributed ledger called the blockchain. As with all distributed ledgers, no one person owns or controls the blockchain. Thousands of computers around the world work together to process Bitcoin transactions.
Growth in ICOs
The growth in initial coin offerings (ICOs) has been particularly facilitated by the development of blockchain platforms such as Ethereum, an open-source programmable platform which lets anyone create secondary digital tokens, in exchange for the primary platform currency Ether. The platform has a built-in crowd sale function enabling issuers to carry out ICOs.
Blockchain is a type of distributed ledger. However, the use of distributed ledger technology for the Bitcoin payment ledger is only one particular use of distributed ledger technology.
Historically, programmes and applications have been centralised. In this context, centralised means that the relevant programme or application is stored on, and controlled by, a central server.
Conceptually, a decentralised application cannot be changed without the consensus of the majority of its users.
[CAUTION: This article does not provide legal advice or guidance, and is strictly for informational purposes and subject to errors and inaccuracies. If you wish to offer digital tokens in Singapore or operate a platform involving digital tokens in Singapore, you are encouraged to seek professional advice from qualified legal practitioners to ensure that your proposed activities are in compliance with all applicable laws, rules and regulations in Singapore or elsewhere]