After unveiling major announcements, towards the end of 2019, about the future of blockchain technology in China, the Bank of China is set to introduce a tough security token protocol soon. The bank is also seeking to create its cryptocurrency that will be centralized and pegged on the Chinese RenMinBi (RMB).

This has brought hope to blockchain startups in China where Security Token Offering (STO) campaigns were banned almost immediately after the Initial Coin Offering was banned in 2017.

China’s hard stand on Cryptocurrencies

Despite being the country with the most blockchain startups and cryptocurrency adopters worldwide, China has had a hard stand on cryptocurrencies. In 2017, just as cryptocurrencies were making their debut, China banned exchanges, ICOs and STOs making it practically impossible for blockchain startups to raise capital for their projects through fundraising campaigns.

Interestingly, China has also been very hard on the cryptocurrency miners even though the government controls some of the largest cryptocurrency mining rigs/facilities.

The turnaround

It appears Chinese officials, especially at the Bank of China, have finally realized that blockchain technology is here to stay.

China outlined its new strategy on cryptocurrencies and blockchain technology through Weimin Guo, the Chief Scientist at the Bank of China, in a Finance Technology Summit held towards the end of 2019.

Among those new strategies is the intention of China to release its cryptocurrency that shall be called China’s Digital Currency Electronic Payment (DCEP). The DCEP shall be a stablecoin pegged on the Chinese RenMinBi (RMB).

According to the DCEP developers, the introduction of the digital coin will streamline the obsolete traditional financial practices currently in use. They also anticipate that the digital coin will rival Bitcoin, one of the most adopted cryptocurrencies in the world.

According to Weimin Guo, Bitcoin failed in its purpose to provide a better financial market compared to avoid the manipulations of the traditional markets.

Proposed strict regulations on STOs

As China loosens its stand on cryptocurrencies and blockchain technology, it still wants to ensure that the technology is kept in check.

Among some of the strict regulations that China seeks to introduce is the tough security token protocol that will see all Security Token Offerings (STOs) operate within an austere “regulatory sandbox mechanism”. By giving STOs a leeway, the country seeks to promote blockchain technology innovations as it maintains complete control of the sector.

However, as China inches back into the game, it is interesting to see how the Chinese regulators continue to embrace blockchain technology. The country seems to be realizing that times are changing and changing fast. Regulators seem to have realized that the country has to embrace blockchain technology or get left behind as the completion across the world hits up. Other countries are doing all they can to ensure that they conform to the technology by introducing laws and regulations to govern it.

Security Token Offering (STO) has become one of the most appreciated methods of raising funds for blockchain projects and startups. However, it is strictly regulated since it falls under financial securities. Therefore, any person, company or organization thinking of conducting an STO in any part of the world must first be aware of the regulations they need to adhere to.

The regulatory requirements set for STOs are primarily set to educate and protect investors.

Due to the seriousness and complexities involved in most regulations, individuals, firms or companies looking to tokenize their assets or equity for sale to investors through STOs are advised to hire an STO advisor like Gravitas international to develop successful strategies and identify the various regulatory requirements for the specific region they want to operate in.

It is worth noting that different countries have different rules for STOs.

In this article, we shall look at STOs rules and regulations in some of the counties around the world where STOs have gathered momentum over the past few years.

1. STOs regulation in the USA

In the United States of America, digital currencies are regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)

The CFTC in 2015 classified cryptocurrencies as commodities, which meant they were to be included under the Commodity Exchange Act.

SEC, on the other hand, has set in place several rules meant to deal with anti-fraud, and registration issues of digital currencies. Through the Howey Test, the SEC can tell if the token used to raise funds falls under securities.

There are three types of regulations that any STO issuer eyeing the USA market should be conversant with. These are Regulation D, Regulation A+, and Regulation S.

  • Regulation D

This specifies how some certain token offerings can avoid the SEC registration after filling a form known as “Form D” once the securities are sold.

The issuers, however, must stick to Rule 504, Rule 506 (b), and Rule 506 (c).

Rule 504 does not set any limitations to investors while Rule 506 (b) and Rule 506 (c) allow accredited investors in the US to take part but does not put any limit on the fundraising.

This regulation, however, has limitations on resale.

This regulation also allows the STO issuers to advertise their projects.

  • Regulation A+

STO issuers who want permission to issue SEC approved securities to non- accredited investors should work under this regulation. However, the regulation states that the maximum amount of investment by investors cannot exceed $50 million.

This regulation does not have any resale limitations.

However, it is more expensive and takes more time to register with this regulation.

  • Regulation S

This regulation shed light on how the securities act registration for security offering that shall take place outside the US should be carried out.

Whenever a security offering is being carried out outside the US, the issuer must follow the security regulations of the respective countries where the offering is being carried out.

This regulation comprises of Rule 901, Rule 902, Rule 903, Rule 904, and Rule 905 of the 1993 Act.

2. STOs Regulation in Europe

In Europe, STO issuers must create a prospect and also meet the security regulation of their respective local regulatory authorities. However, there are some exemptions for the European Union, which include:

  • The qualified investors’ exemption – STO issuers can freely request accredited investors to invest.
  • The limited network exemption – STO issuers can sell their securities to 150 people in any European member state freely.
  • The large investment exemption.
  • The nominal value exemption- if the value of each of the securities is worth 100,000 euros, then issuers can sell the securities without any need for registration.
  • The limited amount exemption – issuers can sell securities of up to 5 million euros without the need for a prospectus.

Regulation of STOs in France

In France, any activities involving financial instruments must be regulated.

The French Treasury came up with a new legislative framework for token issuance after the Financial Markets Authority identified that lack of ICO regulations was a risk.

This was added to the Title V of the French Monetary and Financial Code (CMF) as a new chapter titled “Intermediaries in Miscellaneous Property and Token Issuers.”

The second chapter of the Title V gives the specifications of the tokens that can be registered, or transferred. As a token issuer in France, you must conform to the requirements and conditions under article L. 550-8.

Regulation of STOs in Switzerland

In Switzerland, token issuers must ensure that their tokens comply with Swiss laws. The Financial Market Supervisory Authority ensures that it examines every token sale.

But, in a nutshell, Switzerland is considered to be one of the friendliest states when it comes to token issuance.

STOs regulation in Malta

STO issuers in Malta should ensure that they comply with the Malta Digital Innovation Authority Act, Innovative Technological Arrangement and Services Act and the Virtual Financial Asset Act.

Authorities in Malta are required to first look into the technology behind any project to deduce if it is feasible or not.

3. STOs Regulation in Asia

Asia has grown to become one of the best places for blockchain and cryptocurrency startups.

STOs regulation in Singapore

In Singapore, any STO issuer must first submit a prospectus and register with the Monetary Authority of Singapore (MAS) unless they qualify for the exemptions in the “A Guide to Digital Token Offerings”.

The MAS is mandated to regulate digital token issuance that falls under the capital market products under the Securities and Futures Act (SFA). To determine if the token issuance falls under the capital markets, MAS examines the structure and characteristics of the digital token.

STOs regulation in South Korea

In 2017, the Financial Services Commission in South Korea announced that token sales are illegal in South Korea.

STOs regulation in China

China was the first to ban the sale of tokens in its country in 2017 before South Korea followed suit.

Nevertheless, we could see an ease on the STO stand by the Chinese authorities in future when they come up with STO regulations.

4. STOs Regulation in the Middle East

In the Middle East, the two most countries of interest are Israel and the United Arab Emirates.

STOs regulation in Israel

After forming a committee in 2017 to examine if the Israeli securities laws were applicable in tokens sales, the Israel Securities Authority (ISA) planned to be evaluating token sales on a case by case basis.

According to the ISA, security tokens are cryptocurrencies thus giving the holder of the token entity to the cash flows and ownership rights in the future.

STOs regulation in the United Arab Emirates

UAE Securities and Commodities Regulator plans to recognize tokens as securities, which are governed by the Dubai International Financial Services Authority (DFSA) in Dubai and Abu Dhabi Global Market’s Financial Services Regulatory Authority (FSRA) in Abu Dhabi.

Security Token Offering (STO) is slowly becoming a darling among technocrats, especially those involved in raising funds for blockchain projects. STOs are usually strictly regulated by federal regulations making them one of the best and most secure forms for raising funds. However, due to the strict regulations that the STO tokens must comply with, special standards are required to make them comply with the regulations.

The common ERC-20 standard is not sufficient for creating STO tokens. Therefore, companies and organizations had to come up with more advanced standards with an additional layer for regulations compliance. In addition to complying with the set regulations, the additional layer also helps in identifying who interact, purchase or even trade the STO token.

Available token standards for creating STO tokens

  1. ST-20

This security token standard was developed by a company known as Polymath. It is a smart contract that defines a set of rules, including who can interact with the security token and how they should interact.

Polymath, the company behind this standard, provides a set of pre-programmed regulatory modules that developers can use when creating a security token using the standard.

  1. R-Token

This standard uses a combination of three smart contracts, namely A, B, and C. The three smart contracts are interlinked in a way that they can associate. Smart contract A contains ERC-20 standards. Smart contract B contains the rules on who can interact with the STO token and how they should interact. Smart contract C dictates who can communicate with the token and how they should communicate.

  1. ERC-1404

This is a special standard, developed by Tokensoft. The standard enables tokens that are built using different standards, including R-Token and ST-20, to be interoperable with different cryptocurrency wallets and exchanges.

  1. ERC-1400

This standard was developed by ERC-20 and ST-20 developers. The standard is designed to incorporate gatekeeper access control, redemption semantics or issuance, error signaling, and differentiated ownership.

For non-fungible tokens, this standard is backward compatible with the ERC-777 standard.

Due to the additional layer of standards required for the security tokens so that they can comply with security regulations, STO requires more advanced standards when it comes to their creation. STO security tokens are not created using the ERC-20 standards as most ICO and IEO are.

To cater for the additional regulatory layer, there are a number of companies and organizations that have come up with platforms where STO issuers can create their security tokens with ease.

Below are some of the best platforms for creating your STO’s security tokens:

  1. Polymath

Polymath allows security token issuers to create tokens using the ST-20 standards which were designed by Polymath.  It works similar to the Ethereum network and it has its own crypto token referred to as POLY.

It connects the smart contract developers, advisory experts, legal experts, KYC/AML providers, and token investors.

The process of creating security tokens is quite simple as one does not have to do any programming. You just have to follow through the steps and end up getting a fully functional security token and a configured STO.

  1. Swarm

Swarm uses the SRC20 protocol to create security tokens for real-world assets. In short, the platform allows users to create asset-backed security tokens. Therefore, users can create tokens backed by assets like real estate and so forth.

The Swarm platform also has its own crypto token that can be used for operations within the platform. The Swarm token has a symbol of ‘SWM’.

  1. Harbor

Harbor platform is a special security token creation platform since it allows traditional assets to transform into security tokens. It allows the creation of security tokens backed by real-world assets like real estate, fine arts, etc.

The platform uses a regulated system token referred to as the R-token. The R-token is a token on the Ethereum blockchain that allows the transfer of tokens once an On-chain Regulator Service is approved. The token basically gives permission for transfers.

  1. Securrency

This platform allows the creation of security tokens through a drag and drop process.

Furthermore, the platform allows users to perform Know-Your-Customer (KYC) and Anti-Money- Laundering (AML) verifications over 155 countries on both crypto and fiat transactions.

Users can use the InfinXChange™ APIs to select blockchains of their choice and also get an abstraction layer.

  1. Securitize

This platform manages the entire process of security token creation and issuance throughout the token’s lifetime. It manages the processing of the investors to the received capital.

Coinbase, a US-based cryptocurrency exchange, is set to join the league of cryptocurrency exchanges with IEO Launchpads soon. Kayvon Pirestani, the head of Coinbase institutional sales in Asia, revealed that the exchange was currently exploring a number of capital-formation tools including an IEO Launchpad.

According to the head of sales, an Initial Exchange Offering (IEO) Platform is a great opportunity and Coinbase is carefully exploring it. Though also hinted at developing a Security Token Offering (STO) platform, the IEO platform seems to have stolen the show and it could be the first to be launched.

However, Pirestani careful to say that he could make a formal announcement on the development yet. Nevertheless, the revelation is already an indicator that the IEO platform could be coming within the next few months.

If successful, Coinbase shall join its peers, the likes of Binance, KuCoin Bitfinex, Probit and OKEx. This would greatly enhance Coibase’s revenue and reputation, which is already high at the moment following years of great cryptocurrency exchange services.

A strategic choice for the US Market

Coinbase’s move to launch an IEO Launchpad could be viewed as a strategic move considering the trouble that US investors are going through trying to invest in ICOs. In the US, ICOs are either classified as stocks or securities depending on whether the tokens meet the Howey Test or not. And being a US-based exchange, it stands to benefit the most from US clients who wish to use IEOs instead of ICOs to solicit funds for their blockchain projects.

Compared to ICOs, IEOs offer a better investment opportunity for investors since they are not very much sought after by the regulatory authorities, especially the SEC. The only hectic part is getting an exchange to allow to host the IEO. Once the token sale is allowed to be offered on the exchange platform, authorities do not come looking for the IEO. The exchange is the one responsible for scrutinizing the IEO token sale.

Exchanges scrutinize the IEO token sale issuers to ensure that they are not scams. They also evaluate the project to see whether it will be of any economic value to the exchange.

Source of revenue

In addition to creating an opportunity for investors, IEOs also come in handy in attracting users to register with crypto exchanges. For investors to cash in on any IEO, they have to first register with the exchange running the IEO.

Therefore, if a promising project chooses a certain crypto exchange to run its IEO, the exchange can be sure that new users will sign up with it for them to be able to invest in the IEO.

The new users who sign up with the exchange start trading the IEO tokens once they become tradable and in the process pay commissions as they trade, which adds up to the exchange’s source of revenue.

On the other hand, IEO issuers also pay a certain amount of fee to the exchange running their IEO so as to be allowed to issue their tokens through the exchange’s IEO Launchpad.

As a blockchain or fin-tech investor, you have to keep up with the pace of the ever-changing market and investment opportunities. Two years ago, ICOs had dominated the fin-tech industry, especially the blockchain/cryptocurrency space. Blockchain startups easily raise funds through ICOs as long as the whitepaper is convincing enough to prove that the underlying project is viable. For the startups, they benefit by raising the required capital while investors benefit by making profits from the sale of the tokens at a later stage or using the tokens in paying for services connected to the project.

However, since mid-2018, ICOs have gradually become less attractive to investors, especially due to scammers taking advantage of the lack of proper regulations on the ICOs. Instead, investors are now going for IEOs and STOs since they have some degree of safety compared to the ICOs.

However, IEOs seems to be stealing the show. Though IEOs are newer than the STOs, STOs are yet to pick in the industry probably due to their strict requirements.

But how do you go about investing in IEOs to ensure that you make the most profits? How can you be sure that the IEO is profitable or not?

Below are the number of things that you should consider as an investor before commit yourself in an IEO:

  1. Carry out thorough research about the IEO

You may wonder why the research and the project have already been Okayed by the exchange platform that has better experts than you. But remember, the Exchange does not look too much at the end result of the project. The exchange is only concerned with whether the project is genuine and whether its users will be attracted to the IEO token sale. The exchange is in business and it has to find something that will be well received by its customers. Therefore, it is paramount that you do in-depth research about the project itself to find out if it is a viable investment opportunity.

As you do the research, you could try to find answers to the following questions:

  • Does the project seem to attract the interest of the general public?
  • Is the project a new concept or just a copy-paste?
  • Who are the people behind the project offering the IEO?
  • How experienced are the members of the development team?
  • Is the exchange listing the IEO reputable?
  • Is the exchange secure?
  • Has the exchange been involved in any malpractices?
  • What is the history of the exchange in line with IEOs?

Always remember that the exchange is also looking for profits from the IEO token sale. Therefore, don’t just rush to buy the tokens, do a background check on the project first.

  1. Find out about the work that the development team has done so far

You have to look at what the team behind the project has done so far. You can’t just invest your money into a project that is not yet started; it might end up not starting at all. The software should be completed. You should be able to look at the program to verify if it will indeed be applicable.

You should invest in a project that has already started and the team can show some commitment to the project. This shows that the team behind the project is serious about the entire project.

Things like a whitepaper, well-designed websites, and the development team must be there.

  1. Research about the exchange that offers the IEO

Once you are convinced that the project behind the IEO is viable and looks to be profitable, you have to consider the platform where the IEO is launched. For security reasons, you have to look at the reputation of the exchange platform.

In addition, you have to consider the onboarding processing that the platform requires for you to participate in the IEO. Remember, different exchanges have different requirements for you to become an investor in an IEO. But most importantly, you have to be a registered member with the exchange for you to participate. You have to go through the entire registration process, including the KYC/AML process.

Since it may take some time depending on the exchange that you choose, it is important to do this some days before the actual IEO.

The common exchanges with IEO Launchpads are Binance, Huobi Global and Gate.io.

  1. Find out how the payments for the IEO are to be made

This is a very important factor. You cannot participate or invest in an IEO unless it allows you to buy tokens through a means that is accessible to you. Again, you have to consider the asset that the development team together with the exchange sets as the accepted currencies to buy the project tokens. Some of the most used currencies include Bitcoin (BTC), US Dollar (USD), Great British Pound (GBP) Euro and Ethereum (ETH).

You should also look at the processing time. How long does the processing take after making a purchase?

  1. Look at the tokenomics of the IEO

You have to closely examine how the tokens are distributed. You have to clearly understand the number of tokens available. You also have to see what percentage is assigned to what.

One of the things that you should carefully look at is the percentage of tokens given to the development team. If the development team is given the majority share of the tokens, then that is a red flag. Most of the tokens should go to the investors so as raise sufficient funds for the project.

You should also closely look at the distribution of the funds that are raised through the IEO. How does the development team intend to distribute the funds? The development team should not be the one taking the lion’s share of the funds. A good IEO distributes the majority of the funds to the project development.

Initial Exchange Offerings (IEOs) may be headed for a more complicated scenario than the ICOs. ICOs got banned in a number of countries, including China and South Korea for poor regulations. When IEOs were invented, they proved to be the tie-breaker, especially in these countries.

However, the fact that the exchanges offering the IEOs act like brokers by bringing the development team and investors together, these exchanges could be headed for a legal confrontation with the US Securities and Exchange Commission (SEC).

Lately, a senior official indicated that the crypto exchanges that are offering IEOs could be violating the U.S. securities laws. The official argues that if an exchange has a set fee for listing an IEO and either the issuer of the token or any of the investors is from the US, the exchange can best be classified as Security Dealer (better referred to as a broker-dealer) under the US securities laws.

And according to the Law, security dealers engaging in broker-dealer activities should be registered and licensed as broker-dealers, national securities exchanges or alternative trading systems (ATS). But unfortunately, none of the exchanges that have listed IEOs in the past have met with these requirements despite the fact that a significant amount of IEO investors come from the United States.

At the look of things, this could be signaling the wake of a SEC crypto-crackdown targeted towards IEOs. However, we are yet to see if the exchanges interested in offei8rng the IEO and targeting US citizens shall choose to comply with the SEC regulations or choose to leave the US market.

By the look of things, one may argue that this is true. Initial Coin Offering (ICOs) were doing very well in 2017 and early 2018 and many startups were able to collect billions of funds as capital to get their projects started. However, to date, no proper regulations have been put in place to monitor how the ICOs are carried out.

ICOs lack a third-party overseer. Therefore, scammers have found it to be a great opportunity to reap from the uninformed investors. As it stands, basically anyone can launch and run an ICO provided they are able to convince people that they have something they want to do and money is the hindrance.

Some governments like those of China and South Korea have banned ICO completely making it very hard for the genuine startups to fundraise through the ICOs.

The introduction of Initial Exchange Offering (IEO) was a game-changer. Startups even in those countries that had banned ICOs can now easily raise funds through crowdfunding since they shall not be breaking any laws.

In addition, though both ICOs and IEOs share some degree of rationales, in IEO, there is an overseer who is normally the exchange platform through which the IEO is being run.

For a development team to run any IEO, they have to meet and comply with the requirements set by the exchange. Therefore, the exchange acts as a cushion for investors. Investors are guaranteed that whatever the exchange is offering is well cross-examined and that it is not a scam. As a matter of fact, if the IEO was to be a scam, it would ruin the reputation of the exchange which still needs to continue with its activities after the IEO.

It is always important to factor in the cost before undertaking any project. Otherwise, you may get stuck along the way due to a lack of funds. A clear picture of the cost will enable you to financially plan in advance to ensure that you have enough funds to run all the necessary activities for the success of any project.

For a STO, the cost depends on a number of things throughout the various phases of the STO, which include:

  1. The concept phase: this includes the development and drafting of the project concept and it entails the selection of the token standard and the whitepaper.
  • Choosing the token standards

For the token standard selection, you will need to choose the best standard to build your token on. The most commonly used standards are the ECR20 though there is a large list of standards ranging from the ERC20 to ERC1450.

The selection of the right token standard can be easy with the right standard consultant. Ideally, it is better to engage a consultancy that provides the full suite of STO services including legal instead of looking for a consultant for every task.

  • Whitepaper

As the founder or owner of the STO, you could have the best description of the project, but you require a professional to draft the whitepaper nicely and professionally.

  1. The development phase: This is the bulk of the entire project. It includes the creation of the smart contract, deploying the smart contract, and creation of an investor panel.

You will need to hire a development team depending on qualifications. Most importantly, you will need UI and UX experts, blockchain engineer (s) and product experts. All these professionals come at different costs depending on their level of expertise.

At this phase, it is wise to go for the highest experienced individuals to ensure that you get the best. You can always negotiate your way out with the professionals to charge you fairly instead of going for novices who may compromise your entire project.

  1. Security and legal audit: You will have to test your blockchain project for bugs before launching the STO. The testing requires an internal auditor and a third-party auditor who can also be a community auditor.

Above the security, you should also ensure that the tokens are checked for compatibility with the available crypto exchange platforms.

Most people ignore this phase due to the added cost, but it is an important phase which would prevent future problems with your STO.

  1. Legal and marketing: Contrary to ICOs, STOs have rules that they must adhere to. Therefore, you will require a good legal team to follow up on the issue of KYC, AML in addition to the other rules and regulations touching on STOs.

You also need to market the STO so as to attract as many investors as possible. However, you will need to involve the legal team to ensure that marketing is GDPR compliant. Most importantly, you will require website developers to create an attractive landing page.

You will also have to explore all the marketing avenues, especially through digital platforms. However, you have to strike a balance to avoid overspending on marketing.

 

Localcoin, a crypto exchange, has been receiving a backlash from the online community as well as investors for possible whitepaper plagiarism.

It is so embarrassing for a company or startup to be caught up in a plagiarism scandal! It throws the entire ICO project into jeopardy. It becomes extremely difficult to convince investors that it was just a mistake since a whitepaper should be a very original document explaining a project that should be original. Otherwise, any similarity in whitepapers shows that the project could also be a “Copy Paste” or a scam. It becomes extremely hard for investors to believe that the project is real.

This is what is happening to Localcoin exchange. People, especially on Bitcointalk, have concluded that the whole project is a scam.

Localcoin blames the whitepaper author, whom they say they had outsourced, for the misfortunes but it will be hard to persuade investors into buying into this narrative. The back still stopped with them even if they outsourced the author. An author can only write depending on the information he/she gets from the project developers. And further still, the development team out to have gone through the whitepaper before publishing it.

But what could have made the author make such grave mistakes? Was it deliberate?

From a closer look at things, the author could have made deliberate plagiarism possibly from a misunderstanding with the development team. There are allegations that Localcoin owes marketers over $15,000 and this could be the reason behind the plagiarism.

However, all in all, it shows that the team behind the whole project isn’t serious.