Germany’s ‘reversible ICO’ breathes life into the ICOs

After going through trying times, ICOs are poised to regain their glory after German regulators approved incorporating investor protections to the ICOs in a project they are terming as reversible Initial coin offerings (rICOs). This will certainly be a game-changer in the Fintech crowdfunding landscape since ICOs hold the record of being the cheapest among the currently available funding mechanisms.

ICOs’ dwindling popularity among blockchain and fintech developers and investors was due to the lack of an elaborate regulatory framework for the ICOs across the world. And the new ‘reversible ICO’ seeks to bring order to the way ICOs are regulated especially by protecting investors.

According to the German regulators, the approved reversible ICO’ shall allow investors to buy tokens gradually and be in a position to remove their support and funding at any time if they feel like doing so.

Reversible ICO developers

The rICO was developed by Fabian Vogelsteller, who was actively involved in the development of the ERC-20 Ethereum standard.

Fabian first floated rCIO idea in 2018 at Devcon. It has since taken about one year to bring the idea into reality.

How the reversible ICO will function

The main objective of rICO is to add a layer of investor protection to the largely unregulated ICOs. In so doing, it will give investors an upper hand and also shield them from scammers.

Reversible ICOs shall be carried out in two phases rather than the way they were ICOs were formally issued in one go. In the first phase, investors will first reserve the tokens they desire to purchase. Then in the second phase, they can buy the reserved tokens gradually over time. By doing this, investors will have time to watch over the project issuing the ICO.

Additionally, if the investor sees any reason not to continue supporting the project by buying the reserved tokens, they can release the reserved tokens and also have their ETH refunded. That way scammers will have no chance of getting away with investors’ money.

The two phases make it possible for investors to understand the project as they invest to avoid losing the opportunity as they try to figure out if a project is legit or not.

The reversible ICO holds close resemblance to Vitalik Buterin’s proposal to have ICOs that resemble the DAO. According to Buterin, the DAO like ICOs would permit DAO participants to vote on milestones while still funding the project behind the ICO.

It is needless to point out the other numerous proposals on ICOs that were floated in trying to combat the issue of ICO regulation.

The rICO has some advantages over Buterin’s proposal in that rICO is simple and it is fast compared to the DAO like ICOs that would experience stumpy voting participation by the DAOs.

The future of ‘reversible ICOs’

Germany is one of the largest economies in Europe and its regulatory authority Bafin has made great strides in the field of tokenized assets compared to countries like the USA.

Germany was actually among the first countries to approve the use of Security Token Offerings back in 2019.

Although it is not yet clear if investors in the other parts of Europe or the world would be eager to approve the rICO fundraising mechanism, rICOs represent a great step towards regulating ICOs.

The first use case for reversible ICO (rICO)

The first blockchain project that shall use rICO to raise funds shall be LUKSO, which is a sister to Ethereum when it comes to making mainstream decentralized applications

The LUKSO rICO is scheduled for some time next month if all things go as planned.

Every business has a business model, which is the overall architecture of how the business orchestrates its day to day operations to create, deliver and capture value. For a business to become a success, the business model they are using must address certain elements, which include:

  • Value proposition – refers to the services and products that the company/business produces.
  • Value capture – describes how the business makes money by showing cost and revenue structures
  • Value creation – describes how processes and activities are carried out, and how resources are used in the business
  • Value delivery – refers to the process of identifying the target customers

Business models, however, differ depending on the industry, which can either be traditional based or internet-based. Traditional based businesses are primarily concerned with producing tangible products and improving their supply chains. On the other hand, internet-based businesses focus on operating digital services/products and do all they can to find value for the digital services/products

However, both traditional based and internet-based models thrive well when business transactions are fast and secure and fully transparent. And the only technology that can offer these features is the blockchain technology.

Blockchain technology

Blockchain is a decentralized digital ledger that supports fast, secure and fully transparent transactions. Though it has mainly been recognized through cryptocurrencies, which are the digital currencies used in transacting within the blockchain networks, it also has other real-life applications.

Blockchain technology applications span from Agriculture, healthcare, cloud storage, logistics, real estate, education, public transport, and food and beverages among many others. Different blockchain startups have come up with different blockchain-based solutions and business models for almost every sector around the globe.

As a result, blockchain technology has become appealing to economies around the world since it offers immutability, security and also eliminates the need for third-party intermediaries/middlemen. This is prompting governments across the globe to work against the clock to ensure that there are proper regulations set in place to govern the blockchain industry to allow it to flourish in this digital age.

Basic blockchain working principle

Blockchain networks are purely decentralized. Therefore, they work on a Person-to-person (P2P) governance model. As such, the effect of external pressures is greatly reduced.

Furthermore, blockchain networks use Distributed Ledger Technology (DLT) to facilitate and record transactions and thus ensuring that the transactions are secure.

Lastly, blockchain networks require the creation of a token for use as a mode of payment during transactions within the network. These tokens are then assigned real-life value by linking them to fiat currencies.

For instance, a company could create a blockchain network called ‘Busses’ and create a token called ‘BUSS’ that will be used for transactions within the blockchain system. One ‘BUSS’ token could be equal to $0.5 at the start (when it is first introduced to users). As the adoption of this token rises and the ‘Busses blockchain’ network continues becoming popular, the value of ‘BUSS’ could increase.

Blockchain governance framework

Blockchain technology is rapidly revamping the traditional regulation models to make them more cost-effective, relevant and accessible to businesses. Most importantly blockchain has fostered the creation of consensus algorithms which makes decision making in DTL more efficient.

Blockchain governance promotes the use of a decentralized governance framework across different business sectors. As a result, this makes it easy for businesses to access the Interconnected Trusted Network of Loyal Customers.

Nevertheless, the decentralized blockchain applications must look for ways in which they can complement the roles that the central authorities were playing in governing the different industry sectors.

Application of blockchain technology in businesses

Blockchain technology has greatly transformed the way businesses carry on with their day to day activities. There are four predominant domains/fields where blockchain has found lots of applications.

Financial sector

The first is the financial services sector, especially touching on bank transfers, accounting, and auditing. Traditionally, these sectors involved the use of so many intermediaries. However, several blockchain solutions that eliminate the need for intermediaries and thus reduced transaction costs have been invented.  Furthermore, there are blockchain solutions that allow for cross-border transactions without having to account for currency exchange fees as would be the norm with using the traditional models that depend on the fiat currencies.

Supply chain sector

Second is the supply chain sector. This has thrived to become the most successful non-financial blockchain application across the globe. The architecture of blockchain networks allows users/members to identify and track the possession of a certain item throughout the supply chain. Since the data fed into the blockchain network is immutable, cases of fraud are eliminated. It also reduces redundancy where every stakeholder would be required to update their database. The integration of IoT and blockchain has also allowed industries to be able to track various aspects of products on transit to ensure that the standards are not compromised. For example, a company dealing with the distribution of meat can install thermometers into the refrigerators being used to ferry the meat and integrate the feedback from those thermometers into a blockchain network for real-time tracking of the temperatures to ensure that the meat remains well refrigerated.

Market sector

Companies or businesses depend on trusted third parties such as Google, Amazon, Uber, Alibaba, among others to provide the platforms where transactions can be done. Blockchain networks eliminate the need of these third parties by introducing nodes throughout their systems that make it possible for individual members to transact directly without the need for an intermediary.

Social welfare

Through the use of smart contracts, blockchain users/members can manage the outcomes and also automate the process of concluding contracts. If a blockchain user enters into a smart contract, the funds can be held in an escrow account and released once the contract is marked as complete. This ensures that the customer feels safe and it also eliminates scams.

If the contract is not carried out according to the laid out specifications, the customer has all the rights of terminating the contract and he/she is guaranteed of getting his/her money back.

Impact of blockchain technology on business models

Business models have a lot to benefit from the blockchain technology. The most significant advantages of employing blockchain-based business models include:

  1. Reduced costs, which is attained by eliminating intermediaries.
  2. Increased transaction rates.
  3. Reduced redundancy and need for record-keeping since blockchain automatically stores immutable data.
  4. Enhanced traceability and verification of information.
  5. Blockchain also offers alternative approaches to how assets are authenticated.
  6. The transactions performed through a blockchain network are secure since they are protected by a layer of cryptographic encryption.
  7. Blockchain supports distributed autonomous organizations (DAOs), which makes it possible to eliminate the need for intermediaries since DAOs don’t rely on not central governments and they are operated by members through the use of smart contracts.
  8. Blockchain-based models make it possible to use cryptography and asset tokenization, which is the current trend. This further makes it easy to conduct fundraising. Contrary to using the traditional shares markets to raise capital, a business can easily raise funds through methods such as Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs) and Security Token Offerings (STOs).

Singapore has positioned itself as a financial hub not only in South East Asia but also in the whole world. Besides, it has also become a global crypto hub.

Most blockchain companies prefer registering their projects in Singapore due to the favorable cryptocurrency ecosystem there. As a result, Singapore has become home to some of the most innovative projects; the likes of CitiOS, and GeTS, among many other blockchain projects being implemented in almost every sector in Singapore.

The main reason why blockchain technology has thrived so much in Singapore is because the country has been able to maintain a reliably supportive regulatory environment for emerging technologies such as blockchain. The World Bank has ranked Singapore in the top three countries with Ease of Doing Business Index for over a decade. The government gives grants to companies to encourage them to adopt new emerging businesses and it also launched the Smart Nation Initiative in 2014 that aims at creating solutions that will transform the country using big data, networks and Infocomm technologies.

The Monetary Authority of Singapore (MAS) also created a regulatory sandbox for financial Institutions to experiment with Fintech solutions. The sandbox relaxes some regulations for the industry.

Also, as some countries like China and South Korea limit the use of blockchain-based fundraising methods like Initial Coins (ICOs), Initial Exchange Offerings (IEOs) and Security Token Offerings STOs), Singapore has literary encouraged the industry to grow. This has made it possible for startups to easily fund their blockchain projects, which in turn offer solutions to some of the needs that Singapore and the world at whole may have.

IEOs in Singapore

In 2019, Singapore played host to over 28 IEOs out of the about 100 IEOs that were conducted globally. This positioned Singapore as a global leader in IEOs. The second country, the United States of America, only played host to about 11 IEOs. China hosted 9 IEOs, the United Kingdom hosted 7, South Korea Hosted 4, the Cayman Islands hosted 3, Estonia hosted 3, Estonia hosted 3, Switzerland hosted 3, Germany hosted 2 and Malta hosted 2.

The 28 IEOs that were conducted within Singapore’s boundaries raised over $188 million, which is quite a large amount for a single country. This success is greatly attributed to the fact that several cryptocurrency exchanges like Binance are finding their way into Singapore. Besides, Singapore has its cryptocurrency exchange the Huobi Global that has an IEO Launchpad by the name Huobi Prime.

And out of the total amount that was raised through IEOs, over 50% of that amount was raised through the top five cryptocurrency exchanges that include Huobi and Binance among the likes of Gate.io, Okex, and Bittrex.

2020 Projection

The IEO industry in 2020 kicked off with a boom with Biki.com crypto exchange, a Singapore-based exchange joined the league of IEO issuers by announcing its first IEO in February.

With the emergence of new IEO exchange launchpads based in Singapore, and the rush by some of the most renowned exchanges to gain access to the Singaporean market, we could see an even higher number of IEOs being raised in Singapore in 2020 compared to 2019.

Launching a successful Initial Exchange Offering (IEO) is simple if done correctly.

Initial Exchange Offering mode of fundraising was invented after Initial Coin Offerings (ICOs) proved to be hectic to regulate, and thus becoming a playfield for scammers. The IEOs, however, retained the basic framework of the ICOs but placing the process of the token issuance/sale on the hands of cryptocurrency exchange platforms. That is why IEOs are sometimes referred to as ICOs that are issued on cryptocurrency exchanges.

Although IEOs were intended to solve the issue of safety with the ICOs, IEOs ended up introducing lots of other advantages for the token issuers. Some of these advantages include:

  • Trust

An IEO instills trust into your potential investors. The token crowdsale is conducted through a cryptocurrency exchange and investors/ users believe that the exchange properly vets any token issuer before agreeing to sell the tokens to its users. Besides, exchanges are in business and if they allow a scam project to conduct an IEO thought their platform, it could greatly harm their reputation; therefore they have to be vigilant in cross-checking the projects behind the IEO.

A good example of how careful exchanges are when listing IEOs is the recent case where Bittrex, one of the most famous crypto exchanges in the world, canceled the RAID IEO after suspicion of fraudulent activities following the termination of a partnership between OP.GG. (a data analytics company) and RAID.

Therefore, if your IEO gets listed on an exchange, investors will have some trust that your project is not a scam and it could become a success in the future.

  • Security

When issuing an IEO, you do not have to worry about managing the AML/KYC since the crypto exchange handles all that.

  • Easy

Once you have accomplished the hard part of creating a token, doing the tokenomics, and writing the white paper, the rest is left to the exchanges.

Also, you do not require to conduct a lot of marketing and roadshows compared to the ICOs, since the exchange where the IEO is listed already has some users who will get interested in your IEO.

  • Token Listing

There is nothing more precious than to see your project’s token listed on a crypto exchange for trading. It is a painful reality that quite a number of projects that have conducted token crowdsale struggle to have their tokens listed on exchanges.

However, for an IEO the token is easily listed on the same exchange where the IEO was issued since the exchange had already vetted the project before.

Examples of successful IEOs that have been conducted

The first projects that conducted taken crowdsale through IEOs were Bread and GIFTO, which conducted their IEOs in 2017 just after IEO was invented.

IEOs then embarked on a journey to fame that culminated in 2019, during which a number of projects carried out very successful IEOs within record-breaking timeframes.

Some of these projects include:

Steps to launching your successive IEO

Hitting the anticipated target with your IEO is the dream of every blockchain startup or company that launches an IEO. However, to do that, you have to follow through all the necessary steps.

We shall go through the entire process of launching an IEO step by step.

1.      Work on your blockchain project

Remember you are raising funds for your project. Therefore, you have to have a concrete blockchain project that at least seeks to solve a particular problem.

Also, your project should be viable with the prospects of being implemented in the foreseeable near future. A good project idea should include a progressive business model, the use of breakthrough technologies and also have a strong team of experts.

2.      Token Economics (Tokenomics)

This is a very critical step and you should hire experts to do this for you.

Most exchanges prefer issuing utility tokens to get off the hook of being required to apply for the strict regulations that go with issuing security tokens. As a matter of fact, most of the exchanges will require a legal opinion that concludes that the token is a utility token. Therefore, you should ensure that the token that you create for your project is a utility token.

However, if you prefer to create a security token, you should be ready to look for a securities exchange that is registered and authorized to conduct the sale of security tokens. You should also be ready to adhere to the strict rules that go with issuing securities.

3.      Whitepaper

The whitepaper explains your blockchain project, the tokenomics of your project and how you intend to distribute the funds collected through the IEO within the project. Therefore, you should hire a professional to draft and write the whitepaper for you.

Some of the most important parts of a whitepaper are:

  • Legal disclaimer
  • An executive summary of your project
  • The problem statement
  • Overview of the project
  • Description, use cases, advantages and usefulness of the created product/technology
  • Financial model of the project
  • Market analysis
  • Token economics (Tokenomics)
  • Roadmap
  • Team members
  • Partners

The whitepaper should demonstrate to the potential investors why they should invest in the project by purchasing the tokens being issued through the IEO.

The team members should also be well listed alongside their qualifications and contact information.

4.      Marketing

To reach as many prospective investors as possible, you should embark on good marketing strategies. Also, the stronger your project is the high the chances that you will get a strong exchange to launch your IEO.

Some of the marketing strategies that you could employ include:

  • Social media marketing – LinkedIn, Facebook page, Twitter, Telegram chats, and Medium.
  • Community management – You should work at generating as much hype as possible around the project on different forums. Some of the best platforms to use include Reddit threads, Bitcointalk threads, Medium, and Telegram chats, so on.
  • Press Releases – these should work at explaining the advantages of your project and also creating awareness of the coming IEO.

5.      Finding the right cryptocurrency exchange for the IEO Launch

Once the project, tokenomics, and whitepaper are done, you will have to diligently choose the cryptocurrency exchange platform to use for your IEO.

When choosing an exchange, you should consider whether the exchange is registered to operate in your country or region. Regulated exchanges always hold the front seat in the hearts of cryptocurrency investors. Therefore, launching your IEO on a registered exchange is an added advantage. You also avoid the risk of getting your IEO interrupted by legal case battles.

You should also do a background check to find out about its reputation; whether it has been involved in irregularities in the past and if any, how it resolved them.

Some of the cryptocurrency exchanges that are known to conduct IEOs are:

  • Binance
  • Huobi Prime
  • Bittrex
  • BitMax
  • KuCoin
  • Liquid
  • IDAX
  • CoinBene
  • Latoken
  • OKEx
  • Exmarkets
  • ProBit

Once you identify the cryptocurrency exchange where you want your IEO launched, you should approach the exchange’s listing team. The listing teams of most of the exchanges are can be approached through their agencies or partners.

The conditions set by the listing teams vary from one exchange to the other and you should be keen to identify what is required for the exchange you have chosen. For instance, different exchanges ask for different fees; to some, it could be a percentage of the amount received from the token sale while in others it is a standard listing fee while others ask for both.

The listing team will also require enough information about your project. Therefore, they are going to review the entire project to understand the current stage of the project development, the readiness of the token for the sale, the team and the potential of the project to succeed.

Most importantly, exchanges require a legal opinion on your token.

Legal opinion

The legal opinion is a legally abiding document that concludes that the token of your project is a utility token. Different exchanges have different requirements for the legal opinions and you should enquire about what your specific exchange requires from you.

To get a legal opinion, you should contact a legal company that is recommended or trusted by the exchange that you chose. The legal company will then take you through the necessary legal procedure.

Once you are cleared by the legal company, the IEO goes ahead and launches your IEO.

However, it is important to note that the exchange can still cancel the IEO before the set start date in case they realize some anomalies.

Post IEO launching

IEOs generally take a short duration of time to hit the target amounts. Some IEOs have less than 1 minute in the past to sell out.

So, after holding a successful IEO, you should concentrate on ensuring that your project achieves the objectives you have highlighted in the whitepaper following the developed roadmap. Hitting the milestones on the Roadmap gives investors hope that your project is headed for success.

You should also embark on ensuring that the collected funds are distributed as stated in the whitepaper so that they can go into the proper use in the project.

Access to capital is essential for Fintech companies looking to embark on rapid growth. However, the available traditional fundraising methods have lots of drawbacks that hinder Fintech companies from realizing their full potential.

Most of the traditional fundraising methods rely on middlemen, who end up making the process too expensive. Also, the process involves a lot of paperwork, which ends up slowing down the whole process.

The rapid evolution being witnessed in the cryptocurrency and blockchain arena has stepped up the efforts of removing intermediaries from most business transactions. The invention of blockchain-based fundraising methods like Security Token Offerings (STOs) has completely revolutionized the way fintech startups and companies engage their customers in raising funds.

Security Token Offerings have stood out among the blockchain-based fundraising methods and offered great competition to methods such as the Initial public offerings which are quite expensive due to reliance on middlemen.

Security Token Offerings within the Fintech industry

Security Token Offerings (STOs) issue security tokens, which are digital financial products that experts and analysts believe could replace the way everything is conducted in the future. Despite being secure and highly liquid (making them easier to buy and sell), they have also provided a better opportunity for transparency and oversight among investors, businesses and regulators.

Security tokens have provided an avenue for digitizing almost anything in the world. A host of industries, among them the real estate industry, and the capital markets, among many others, have seized the opportunity by tokenizing their assets and offering them as security tokens.

Security tokens can easily be offered through smart contracts or STOs.

While STOs allow the Fintech startups and companies to net serious investors, the investors also benefit since the STOs makes it easier for them to monitor the performance of their portfolios. STOs are also easily regulated since the security tokens have an added layer that makes them able to comply with regulations.

Investors who purchase security tokens through STOs are entitled to a given stake, voting entitlements or dividends in the company.

Some of the STOs that have stolen the show recently include that of AssetBlock, a real estate investment firm that has embarked on tokenizing about $60 million worth of exclusive hotels in partnership with a luxury hotel asset manager, for investors to cash in.

There is also another case in Manchester, UK, where a luxury residential development it tokenizing about $25 million worth of assets on Tezos blockchain, with a plan to tokenize over $600 million real estate within the United Kingdom.

Comparing STOs to other blockchain-based fundraising methods

STOs are among several other models for fundraising blockchain projects, among them Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs). Among the three, STOs have stood out after gaining prominence following the regulatory issues facing ICOs.

Initially, ICOs were the go-to fundraising option since they were very simple to orchestrate and required no regulations at all. However, scammers noticed the loophole and started issuing fake ICOs to milk vulnerable investors, thus making investors keep off from them or at least be very careful when participating in one.

The fall away of ICOs saw the invention of the IEOs, which are safer compared to the ICOs. However, most IEOs do not offer security tokens due to the strict restriction that goes with offering security tokens. In the US for example, if an IEO offers security tokens, the IEO should be issued through a registered/regulated securities exchange and the company behind the IEO should disclose adequate information about its business, the token sale as well as the terms of the token sale.

Therefore, though IEOs solved the issue of safety with ICOs, it hasn’t been able to attend to the need of the evolving trend among most Fintech companies to use security tokens instead of using utility tokens. Security tokens are best issued through STOs.

As a result, Fintech companies and startups are opting to run STOs even though they are more involving compared to the ICOs and IEOs. And since the STO landscape is persistently evolving, companies are forced to constantly conduct in-depth market research to thoroughly understand the anticipations of their target audience.

 

Initial Exchange Offerings (IEOs), which were introduced following the decline of Initial Coin Offerings (ICOs) popularity among blockchain startups and investors, have gone on to become a force to reckon with within the blockchain crowdfunding industry. IEOs are said to be more trustworthy compared to the ICOs.

IEOs are much safer compared to the ICOs and at the same time much easier to run compared to the STOs, which are the safest.

Some of the things that make IEOs a darling among blockchain token issuers and investors are:

  1. Trust

The fact that IEOs are issued on exchanges brings a sense of centralization in IEOs. This in return has brought trust among investors since they see exchanges as secure platforms due to the regulations that they have to adhere to offer their services.

  1. Efficient token listing after the token sale

Contrary to the ICOs where the issuers (the team behind the blockchain project) would be responsible for approaching exchanges to have their tokens listed, Tokens issued through IEOS are easily listed by the same exchange that issued them.

Therefore, investors are guaranteed that it shall not take long before they start selling the purchased tokens on the exchange.

  1. Ease of raising funds

Since IEOs are issued through exchanges that already have registered users, the IEO issuers are guaranteed that they shall get a vast customer base without much advertising as is the case with ICOs.

Also, the IEO issuers do not have to worry about things like AML/KYC. The exchange platform issuing the tokens takes care of that.

  1. Speed of sale

We cannot forget to mention that due to the large influx of ready investors in exchanges, IEOs take a very short time to hit their targets. There have been cases where it has only taken a few seconds for the target to be hit.

  1. Protection from regulatory consequences

Contrary to ICOs where the startups or companies behind the ICOs are the ones responsible for the legal obligations of the token issuing, Exchange platforms have well organized legal frameworks that deal with the legal consequences of the IEO.

However, there are some legal compliances that the startup or company behind the IEO should adhere to and it at times requires the help of an IEO consultancy or advisory firm to maneuver these regulations. Some exchanges go the extra mile of providing legal advice to startups.

Initial Exchange Offerings (IEOs) regulations

Having evolved from ICOs, which have no provision for legal compliance, IEOs still face the challenge of fitting in the various legal provisions within the various state regulatory authorities.

Of essence, the Team behind an IEO must work diligently to ensure that they developed the right kind of a token. In most cases, IEOs are not after security tokens unless the development team ants the token to be a security token. Therefore, the development team must work within the given regulations to ensure that the token that they develop does not fall under securities. To do so, it is advisable to consult with a reputable IEO advisory firm like Gravitas International so that they can guide you through the legal handles within your country and region. Besides passing the legal handles within your locality, it will also be paramount to adhere to the legal obligations within the countries or regions within which your target audience is.

In some countries like the USA, if the token being issued falls under securities, then the startup or team behind the IEO must look for a securities exchange to list the IEO. Besides, the startup or company behind the IEO shall be subjected to the registration requirements of offerings that fall under the securities laws. If the tokens are securities, the company or startup shall be required to make some important disclosures about its business, the terms of token offering, itself and also about the digital asset it is offering.

If the token does not fall under securities, the startup or company offering the IEO only has to look for a registered exchange where the IEO can be issued. In countries like the USA, such exchanges are normally registered as brokers and must be registered with the SEC and be members of FINRA.

With blockchain security tokens garnering interest throughout the world, Autorité des Marchés Financiers (AMF), the French regulator has seen an opportunity that the rest of the European nations should not miss. The AMF recommends that the European nations should create a European digital lab or sandbox that should enable the nations to ease the legal regulations governing security tokens.

Security tokens are known to be the most regulated digital products in the cryptocurrency and blockchain industry. The reason being that the security tokens fall under securities, although they are digital tokens. Therefore, they are subject to the regulations that govern both the cryptocurrencies or digital assets and those that govern securities.

Other countries like China have also suggested allowing security token offerings under a sandbox mechanism.

AMF’s legal review on security tokens

The French regulator recognizes that security tokens have gained a lot of interest across the world. Both incumbents and blockchain ecosystems seem to gracefully embrace security tokens. The IMF looks at tokenization as an accepted step towards the automation of most financial/trade processes.

The French regulator explored two legal facets in its report on security tokens. The first facet deals with the issue and sale of the security tokens. The second deals with the inclusion of security tokens in investment funds.

Normally, there are no regulatory impediments when it comes to including security tokens as investment funds, either in France or any other European nation. The only thing that asset managers that deal with security tokens should do is to apply for a license with the AMF.

The main issue lies with the issue and sale of the security tokens, especially through Security Token Offerings (STOs). For the case of centralized Distributed Ledger Technology (DLT) platforms there are no challenges since the involved parties can comply with the already set licensing requirements.

However, when it comes to decentralized blockchain projects it is quite challenging for the token issuers and sellers since it is difficult to identify a manager. Concerning this, the AMF suggested an outlined a proposal where parties can list buy and sell orders without requiring the endorsement under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID 2 Directive), which has been in effect since November 2007 among European Union nations.

AMF’s suggestion on the issue and sale of security tokens

Currently, the legislation of a security token issue and sale requires a central securities depository.

AMF suggests that the creation of a sandbox or digital lab would allow regulators in the various counties in the European Union to wave certain regulatory requirements. However, it suggests that this should be done as a trade-off.

According to the AMF’s suggestion, the applicant can only be given a waiver or exemption if they are compliant with key regulatory ethics giving the regulators a higher oversight role.

Earlier on, the AMF had released a working document that sought to inspire the European Commission to create a European digital lab that can deal with the financial services around security tokens.

The French regulator is set to release several other papers in support of its security token research in the coming days or months. Most importantly, the regulator recommends that the use of intermediaries in an age where blockchain technology is available is outdated. The AMF would, therefore, like to see the use of more technologically oriented approaches which gives public adoption of blockchain technology a green light.

Regulation authorities in different countries, including the SEC in the US, are doing all they can to ensure that they keep up with the rapidly evolving digital asset industry. One of the recent developments, the Initial Exchange Offering (IEO), has been gathering a lot of momentum since its invention.

IEOs are similar to the Initial Coin Offering (ICO). They are initial offerings of tokens by startups or companies that seek to raise capital.

IEOs evolved from the ICOs. The only thing that the IEOs have done is taking the coin offering process to cryptocurrency exchanges where the exchanges offer the coins/tokens on behalf of the startups or companies. In exchange, the companies or startups behind the IEO pay a small fee to the exchange platform.

IEO issuers have taunted IEOs to be highly secure by arguing that the IEOs are thoroughly vetted by the exchanges before being allowed to run on their platforms. However, the US Security Exchange Commission (SEC) issued a warning in January 2020 saying that some of the exchanges issuing IEOs are not registered with it and yet they are enticing investors with the propaganda that the IEOs they are offering are secure.

Though IEOs are known to be among the most secure coin offerings that investors can invest in, unregulated exchanges are taking that advantage to give investors false promises of high returns. Investors should be wary that IEOs can be conducted in violation of the federal securities laws making them lack most of the investor protections that are associated with the registered exchanges.

As such, there are certain issues that both IEO issuers and investors should take into account when issuing and investing in IEOs in the USA. These include:

Is the IEO offering security tokens?

Since IEOs are built on top of the ICO framework, they mostly do not deal with securities. However, the startup or company issuing the IEO should be well advised by its legal advisors to ensure the tokens they are issuing do not fall under securities (that is if they do not want to issue securities).

However, there is still a probability that an IEO could involve the sale/offering of security tokens. In so doing, the IEO becomes subject to the registration requirements that apply to offerings that fall under the federal securities laws.

If the IEO is a securities offering, the company or startup offering the IEO should among other things provide important disclosures about its project/business, the digital asset being offered and the terms of the offering.

On this issue, IEO issuers could approach IEO advisory firms for directions on how to best formulate the IEO.

Is the platform issuing the IEO a securities exchange?

If the IEO issues security tokens, the exchange platform on which the IEO is being run should be registered with the SEC as a securities exchange. Or alternatively, the exchange should have applied to operate under exemptions; for instance, it could apply to operate as an alternative trading system (ATS).

The regulations that govern the registered national securities exchanges and ATS are aimed at protecting investors from fraudulent or manipulative trading practices that exchanges may indulge in.

If the exchange offering the IEO is a broker, is it registered with the SEC?

Most trading platforms opt to operate as brokers rather than securities exchanges.

The exchanges operating as brokers in the US are required to register with the SEC as members of the Financial Industry Regulatory Authority (FINRA), an independent, non-governmental organization that comes up with and imposes the rules governing registered brokers and broker-dealer firms in the US. Additionally, they should only run IEOs that issue utility tokens but not security tokens.

FINRA members are subject to regulatory requirements that aim at safeguarding investors by ensuring that the brokers and broker-dealer firms act in a manner consistent with SEC’s customer protection standards.

On 28th January 2020, Singapore enacted the Singapore Payment Service Act (PSA), creating a legal framework to govern payment systems and Payment service providers. Payment Service providers, including exchanges and platforms dealing with cryptocurrencies or digital payment token providers, must obtain licenses from the Monetary Authority of Singapore (MAS) to operate in Singapore.

The PSA will ensure that the FinTech industry, which is already well established in Singapore due to the favorable conditions, is streamlined.

Businesses categorized as payment services according to the PSA

According to the PSA, the following services are categorized as payment services:

  1. Account issuance services – These include businesses that offer services like issuance of payment accounts, or related to operations that required operating a payment account. This could include an e-wallet or a non-bank issued credit card.
  2. Domestic money transfer services – These include businesses that offer services that provide fund transfer services in Singapore. This could include payment kiosk or payment gateway services.
  3. Cross‑border money transfer services – These include businesses that offer services that provide for inbound and outbound fund transfer remittance services in Singapore.
  4. Merchant acquisition services – This applies where a service provider accepts and processes payment transactions for a merchant. This could include the operation of online payment gateways or the provision of point-of-sale terminals.
  5. E-money issuance services – These include businesses that offer services that allow for the issuance of e-money in Singapore so that users can pay merchants or transfer e-money to other individuals. Examples of e-money include money stored in e-wallets.
  6. Digital payment token services – These include businesses that offer services that provide for the buying or selling of digital payment tokens (e.g. cryptocurrencies), or provide a platform which facilitates the exchange of such digital payment tokens in Singapore.
  7. Money‑changing service – This applies to businesses that deal with the buying or selling of foreign currency notes in Singapore. This would include money changers that profit from the exchange of physical currency notes.

Licenses to apply for

To start a business that offers any of the above seven services, one must apply for one of the following licenses with the Monetary Authority of Singapore (MAS) depending on the scope of the business:

  1. Money-changing license – if the business intends to carry out money changing services only.
  2. Standard payment institution (SPI) license – if the business intends to offer payment services specified in the following thresholds (as stipulated under section 6 (5) of the Act):
      • Average monthly transactions of S$6m for two or more activity types
      • Average monthly transactions of S$3m for any activity type
      • Daily outstanding E-money float of S$5m
  1. Major payment institution license – if the business intends to offer payment services without being subject to the above-specified thresholds.

It is worth noting that even the already running businesses had to apply for new licenses or else be considered as operating illegally without any license and they can be charged with an offense.

Requirements for applying for a license

To apply for a PSI license, one must:

  1. Have a company registered in Singapore or overseas and have a permanent business place or registered office in Singapore.
  2. Have at least one executive director who is a permanent resident of Singapore or at least a Singapore citizen.
  3. Have at least one executive director who holds a Singapore Employment Pass.
  4. Have at least one non-executive director who is a permanent resident of Singapore or at least a Singapore citizen.
  5. Fulfill the prescribed operational and financial criteria.
  6. Have a minimum base capital of at least S$100,000.

In addition to the above-mentioned requirements, the MAS also takes into account other factors like the track record of the applicant, experience, qualifications, the ability to comply with the regulations under the PAS and also the financial condition of the applicant.

License application fee

All license applicants are required to pay a nonrefundable license application fee corresponding to the type of license they are applying for.

  1. Applying for a Money-Changing License costs S$500
  2. Applying for a Standard Payment Institution License costs S$1000 to S$5500 depending on the threshold.
  3. Applying for a Major Payment Institution License costs S$1500 to S$8000.

In addition to the application fee, the applicant must also be ready to pay an annual license fee plus other applicable fees depending on the chosen license.

Issues that can result in the cancelation of the license

License holders can lose their license if:

  • They do not start the stated business within 6 months upon receipt of the license.
  • They stop offering payment services for 6 months.
  • They do not make any payments within 6 months.
  • If the business no longer offers services related to the categories stated in the PSA.

PSA regulations governing controllers and directors of payment service providers

In addition to setting a new presence in Licensing of Payment services, the Payment Service Act (PSA) also sets some restrictions for the directors and controllers who intend to control at least 20% of the service provider businesses.

According to the PSA, a 20% controller in a service provider business is a single person or a person together with other associates that:

  • Owns at least 20% in shares of the company/businesses.
  • Can control at least 20% of the votes of the company/business.

However, to become a 20% controller of the company, the said individual must first apply with the MAS. Then, according to the guidelines of MAS, the authority can approve or reject the applications. Upon approval to become a 20% controller, the MAS may also impose other restrictions on the individual.

Reasons why MAS could refuse an application to become a 20% controller

  1. If the person has been earlier convicted of dishonesty and fraudulent offense in Singapore or elsewhere.
  2. If the person is declared bankrupt in Singapore or elsewhere.
  3. If there are complaints about the individual about unsettled debts.
  4. If the person has been a previous director of a financial institution that has been accused in court in Singapore or elsewhere and its license revoked.

Penalties for contravening the rules and restrictions on control over companies

PSA has set harsh penalties for individuals found contravening the rules set aside for the 20% controllers.

The penalties could include fines of between S$250 000 and S$25 000 per day or imprisonment for a term of up to 3 years for unlawful control of a payment service provider.

Need help with registering for a PSA license?

Gravitas International sister company, MT Chambers LLC, which is a leading Singaporean law firm with an international reach can assist you in the following:

  • Preparing and submitting a PSA license application to MAS to obtain the appropriate license to be allowed to operate in Singapore.
  • Drafting and/or updating current compliance policies and procedures, including AML/KYC procedures to meet new regulatory requirements.
  • Conducting ongoing compliance support that includes assisting with regulatory filings, conducting periodic monitoring and reviewing and amending internal controls.
  • Conducting an internal audit to review the Company’s preparedness to adhere to new PSA regulations.

The MT Chambers LLC is one of the 65 law firms that have been handpicked for a pilot phase program for the new Payment Services Act (PSA) known as the Singapore Academy of Law’s of Payment Regulatory Evaluation Program (PREP).

Fractional ownership through blockchain technology is the new haven for companies and startups looking to raise capital from investors in exchange for a stake in the companies/projects. Traditionally, companies and startups could only do so through the traditional shares market.

In the traditional shares market, shareholders have to undergo rigorous selling and buying procedures, which also involved lots of paperwork. Investors also have to invest the full minimum required amount to own at least one share of a company or startup.

But thanks to blockchain technology. Companies and startups can now digitize or tokenize assets and offer them as digitized securities also referred to as tokens, rather than as traditional shares. By doing so, people looking to own a stake in the companies/projects can now do so by purchasing the digitized securities, which are normally transferred through blockchain networks rather than through the traditional stock market platforms.

Fractional ownership

Fractional ownership refers to the ability of an investor to own a fraction of a company or startup asset. For this to happen, the asset must first be converted into a form that can be divided into fractions, which is normally possible through asset tokenization.

Traditional shares are normally offered as whole numbers without the possibility of breaking them into fractions. Therefore, investors can only purchase whole shares. For instance, an investor can purchase 1, 2, 3, 4, 5, etc. shares from a certain company, but cannot purchase 0.5, 0.3, 1.3, 1.5, etc. shares.

On the other hand, digitized assets are easily offered as fractions/decimals thus enabling fractional ownership.Investors can purchase 0.1, 0.5, 1.4, etc. digitized assets.

Contrary to the traditional shares market where investors are required to invest a minimum amount to purchase shares, security tokens can be offered as fractions or decimals, therefore, allowing fractional ownership.

Asset tokenization changes how asset ownership is managed and also automates the activities that come after investment.

Blockchain technology makes it possible to have instant, traceable and cryptographically secure distribution and transfer of the digitized assets (tokens) without the need for intermediary parties.

Besides, contrary to the traditional securities, tokens of the digitized assets are issued and settled on a blockchain network. Therefore, the transactions are instant and without the need of signing stock certificates. And this process is not time-bound; it can take place 24/7.

Advantages of using digitized assets (digital securities)

The digital assets can be offered through smart contracts or security token offerings (STOs), where the holders acquire fractional ownership of the company/project behind the tokens.

These digital securities can also be exchanged in secondary markets just like other cryptocurrencies. When an asset is digitized, shareholders can use smart contracts to promptly sell their securities on registered exchanges where there is high liquidity compared to the traditional shares market. This in return help in avoiding the long lockup period of capital that is witnessed in the traditional shares markets

The beauty of it is that companies and projects can basically tokenize any assets whenever the need arises.

Comparing traditional securities to digital securities

Traditional securities (shares) normally call for larger investments while digital securities (digitized assets) allow fractional ownership, which reduces the amount of the required investment.

Additionally, since traditional securities require large investments, access to significant funding can only be done by institutional investors while in digital securities, since there is fractional ownership, there is a large pool of investors which makes it easy to quickly access significant funding.

Secondly, in traditional securities, the capital is usually tied up, especially with private placements like the venture capitals. However, with the digital securities investors can sell the tokens at secondary markets where there is high liquidity.

Traditional securities are also too costly due to the high fee structures. But the digital securities have a low fee structure due to automation using blockchain technology.