Being the 22nd richest country in the world and with the 7th largest economy in Asia, international investors including blockchain companies have lots of interest in Taiwan. With security tokens proving to be a go-to option for most blockchain companies, Taiwan’s Financial Supervisory Commission in July 2019 recognized the need to officially incorporate security token offering (STO) into the Securities and Exchange Act, which entails the regulatory framework for trading securities, by defining security tokens as securities.

According to the FSC, a security token is a cryptocurrency that is transferable and hold the following features:

  • The owners make capital contributions to the issuer
  • The owners invest in a common enterprise/project
  • The owners expect to receive profit depending on the efforts of the issuer or a third party.

The new Security Token Offering regulations

In January 2020, the FSC proposed deregulating STOs with an equivalent of up to NT$30 million. These STOs are characterized as “Exempt STO” in Paragraph 1 of Article 22 of the SEA. According to the article, these STOs are exempted from the obligation of reporting to the FSC.

Although the deregulation of STOs seemed to be a step in the right direction, the exemption comes with a tight set of restrictions. Additionally, the NT$30 million limit is relatively low, meaning that most of the STOs will not be exempted since most of them have targets above NT$30million.

However, the main objective behind the new regulations is to ensure that STOs in Taiwan are issued by regulated issuers and issued to professional Taiwan investors.

Issuer’s Qualifications

For a company or startup to issue security tokens in Taiwan, it has to be a company listed by shares, meaning it is incorporated per Taiwan’s Company Law.

For an STO to qualify for the exemption, the STOs must be conducted to on the same trading platform with the cumulative placements not exceeding the NT$30 million. The issuer must also ensure that the raised funds are denominated in the New Taiwan Dollar (NT$).

Additionally, the issuer should show the relevant issuance documents in an application to a security firm like the prospectus and security token application.

The prospectus, in particular, should include:

  • The Company Profile and Risks.
  • The Operation Overview.
  • The Operating Plan and Execution.
  • The Financial Overview.
  • An Expert’s Opinion on the Information Technology used in the issuance of the security token
  • Financial (non-certifying CPAs or securities underwriter) Expert’s Opinion about how reasonable the issuance price is.
  • Attorney’s opinion on whether the issuance of the security token complies with the set regulations and if the fundraising project adheres to the set legal rules.
  • Any other documents that should be disclosed and supplemented as per the securities firm notification.

The security firm that the issuers choose to use should have a securities dealer license.

Investors’ regulations

STO investors should be professional investors that qualify as per the criteria under paragraph 3 of Article 3 of the Offshore Structured Products regulations.

For the Exempt STO, the amount that a professional investor can subscribe should not exceed the limit of NT$300000.

Key Takeaways

For an STO to qualify for the “Exempt STO” it should target raising NT$30 million, which is equivalent to $1003764 USD. This is relatively low and means that most of the security token offerings will most likely not fall under the Exempt STO category. The Exempt STO category is however good for the small startups looking to raise a small capital.

Secondly, only professional investors as per the Offshore Structured Products regulations can participate in an STO. Also, the maximum amount that an investor can cash in cannot exceed NT$300,000 on a single STO.

Thirdly, STO funding is limited to the New Taiwan Dollar (NT$). This makes it increasingly difficult for foreign investors. Also, issuers cannot raise funds in other cryptocurrencies or USD as is the norm with most STOs.

Fourthly, an STO can only raise funds through one platform. Therefore, one STO cannot use different platforms to issue security tokens. Also, there is a limit to the number of STOs that can be accepted by each trading platform. This reduces market participation of STO issuers and operators of the trading platform.

Fifthly and lastly, there are many business restrictions and strict qualifications for security token trading platform operators.

Singapore is recognized as a pacesetter in blockchain and cryptocurrency due to its unfailingly supportive regulatory environment. Over the last few years, Singapore has seen a tremendous rise in the number of blockchain projects that have been registered within its borders.

To keep up with the evolving world of digital tokens, the Inland Revenue Authority of Singapore (IRAS) published a guide on the e-Tax that details how digital token transactions including ICOs, IEOS and STOs shall be taxed. These came a few months after Singapore released its new regulations for enterprises offering payment services.

The guide focuses on the taxation of three types of digital tokens. These include security tokens, utility tokens and payment tokens (tokens used as payment options). The guide also elaborates on the taxation of other tokens that are distributed through unconventional means like hard forks and airdrops.

Payment tokens

According to the e-Tax guide, all transactions done using payment tokens shall be considered to be in the form of barter trade. Therefore, the recipients of the tokens shall be taxed depending on the value of the underlying goods or services.

Nonetheless, purchasing a payment token is not taxable. However, the returns from the disposal of the token are taxable if the process involved is a trading activity.

Payment tokens miners shall also be taxed if the mining intends to make profits.

Payment tokens distributed via hard forks and airdrops are not taxable if they are freely given out.

Utility tokens

According to the e-Tax guide, utility token transactions are not taxable since they are mainly acquired to enable the users to acquire future services within a specific blockchain network.

Security tokens

According to the e-Tax guide, security tokens are regarded as a form of equity or debt since they give owners an implied degree of control or equity to a certain asset or project. As such, the taxation of the returns gotten from security tokens depends on the type of the return. The types in consideration here are interests and dividends.

ICOs and STOs taxation

According to the IRAS, the proceeds of Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) shall be taxed depending on the functions and rights of the used token.

If the issued token is a utility token, the sale shall be considered to be in the form of revenue and is therefore taxable. This is because the utility token is an obligation for the issuer to provide a service or good in the future that shall be bought or paid for using this token.

On the other hand, the issuance of security tokens shall not be taxed since the proceeds parallel the proceeds obtained from issuance of equities or debts, which is normally capital in nature. However, as mentioned above, withholding tax obligation and the general income tax shall apply to the interest and dividends paid to the owners of the token.

Tokens set aside for founders in ICOs and STOs

In most cases, startups set aside some tokens for the founders. In this case, if the tokens are used to pay or compensate the founders, they are regarded as revenue and the founder that receives them shall be taxed. However, if the tokens are not issued as a form of payment, they are regarded as a capital asset of the founder.

What a taxpayer dealing with digital tokens in Singapore should do

IRAS instructs taxpayers in Singapore that deal with digital tokens to keep proper records of the digital token transactions so that it can be simple to file the returns.

The records should have the following:

  • Transaction date.
  • The number of tokens sold or received.
  • Value of the digital token at the time of transaction.
  • The used exchange rate.
  • Purpose of the transaction.
  • Details of the customers/suppliers in case it was a buy or sell transaction.
  • Details of the ICO or STO.
  • Invoices or Receipts of the expenses incurred within the business.

As the novel coronavirus ravages the world, killing thousands, almost everything tangible including paper cash has been classified as a medium of conducting the COVI-19. Physical money isn’t safe anymore. You cannot know who touched it; did they have the virus!

And as a result, governments have resulted in the use of electronic payment methods with countries like Kenya upping its use of mobile money transfers. Other countries like South Korea had temporarily removed cash from circulating while China had recalled its paper cash for sanitization using ultraviolet rays.

However, mobile money and some of the other electronic payment methods that are currently in use are dimmed to be slow and could not possibly be efficiently used to deliver government stimulus to households or businesses.

Besides, most of the traditional electronic money transfer methods like mobile money, PayPal, Neteller, and the like are still centralized and depend on traditional banking systems.

As the majority of the world’s population currently works from home, the world could be preparing for the next phase of a technological boom, and blockchain technology could be it.

Central Bank digital currencies

At the beginning of April this year, the Bank of International Settlements (BIS) researchers suggested that the current pandemic would accelerate the adoption of digital currencies and fuel the debate of central banks issuing digital currencies.

And as a matter of fact, several central banks have started looking at the possibility of issuing digital currencies to reduce the use of paper cash which they are being forced to recall back for cleaning or destroying.

China became the first country to announce that it is going to launch a central bank digital currency, with the four largest commercial banks there starting a test of the digital currency this month. The city of Suzhou even suggested it is going to give some of the digital Yuans to government employees in the coming month for use for transport.

In the US, the House democrats suggested a digital dollar in a draft bill for the recently signed stimuli package. According to the members of the congress, the digital dollar would be rolled out by the central bank and distribute money directly to businesses and households. In this way, the process of distributing the stimuli package would be faster and more efficient.

In Europe, the German government is proposing the use of Euro-tokens that could be used in providing consumption vouchers that are based on blockchain. France also launched the atrial phase for testing the integration of the digital euro in settlement procedures.

Cashless economy

Currently, the cashless economy does not necessarily mean a blockchain or cryptocurrency-based economy. Companies like Visa and Mastercard have long been in the market and they have helped promote the cashless economy for a while. Nevertheless, these companies are centralized, and cross border transactions are still expensive and time-consuming thus the need for better infrastructure and blockchain is the best shot at filling the gap.

Though governments have viewed cryptocurrencies as rivals to their centralized financial systems, it is just a matter of time before we witness a complete adoption of digital currencies in government institutions starting with the central banks.

The adoption of digital currencies will mean that government institutions like central banks will have to use blockchain technology to launch digital currencies.

According to WeeTracker media firm, African startups raised about $1.3 billion from venture capital funding in 2019, which is an improvement from the past years. Nevertheless, startups in Africa still face enormous challenges when it comes to funding projects due to a lack of liquidity.

Blockchain technology could step into the gap and help startups especially in the emerging tech hubs like Kenya, Nigeria, and South Africa to raise funds for their projects through blockchain-powered equity crowdfunding. Equity crowdfunding has helped revolutionize the way businesses raise funds from investors.

By adopting blockchain technology, startups do not have to go through the tedious process of getting their companies listed on the stock markets to sell their shares.

Why investors hesitate

In Africa, the ecosystem for doing business is still not that favourable for startups to achieve reasonable growth in a short time span. Most startups struggle to make ends meet due to factors like high taxes, which are common in many African countries. In some worst-case scenarios, some startups end up closing shops. This makes investors shy off from investing since they are not sure if they will live to get the returns.

Also, in Africa, secondary markets are scarce resulting in low market liquidity for investors to exit from investments. Venture capitals, for example, look for entrepreneurs that build sustainable businesses with promising exit opportunities. For a startup to win a venture capital investment, it has to have at least an IPO, merger, or some acquisitions, which are only possible if a startup achieves a certain level of growth.

To create the necessary liquidity, startups in Africa could adopt blockchain technology to enable them to tokenize their assets.

 How token-based financing increases market liquidity

By using blockchain, startups can create tokens (either utility or security tokens). They can then go ahead and sell the tokens through Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), or Security Token Offering (STOs) for the case of security tokens.

Investors will find it safer to invest in startups by buying tokens since the tokens are easily traded in exchanges where the liquidity is high. If an investor purchases some tokens from a startup, and the startup succeeds to get the tokens listed on a cryptocurrency exchange, then the investor can trade the tokens and make some profits. In most cases, the price at which the tokens are listed on the crypto exchanges is usually higher than the price of the tokens during the initial offerings.

Therefore, an investor could decide to exit the market immediately the tokens of the startup get listed on an exchange.

Besides, since a good amount of investment in Africa comes from outside Africa, token financing offers the best opportunity to tap into the external sources. Blockchains are usually decentralized and they allow cheap and fast cross broader transfer of funds. Therefore, investors from any corner of the world can easily purchase the tokens of a startup in Africa without necessarily having to travel to a specific country or sign huge volumes of paper agreements.

Examples of African startups that have reaped big from token financing

Below are some startups that have raised funds through token financing by conducting ICOs, IEOs, and STOs.

  1. Golix

Golix, a Zimbabwean crypto exchange that was started in 2014. In 2018 Golix conducted an ICO that raised $23 million by offering their GLX token.

  1. BlockBank

The UK’s BlockBank that acquired some stake in Kenyan Spire Bank. BlockBank was able to raise about 12.8 million in its pre-ICO conducted in 2018.

  1. Wala

Wala, the “zero-fee money app” South African startup that was able to raise $1.2 million through an ICO conducted in 2019.

  1. Mazzuma

Mazzuma, a Ghanaian startup that was raised over $45,000 in its third token sale phase after successfully conducting a pre-phase, first phase, and a second phase.

Blockchain technology is revolutionizing every aspect of our lives. Besides the impact of blockchain technology on Governments, financial institutions, and conglomerates, blockchain technology has also proved to be a game changer when it comes to the way small Fintech startups raise capital. Startups can now conduct Initial coin Offerings (ICOs) among other methods to raise funds for their projects.

However, for an ICO to be successful, the development team has to diligently choose the blockchain protocol upon which their project’s token will be built on. This is mainly because the functionality of the token will greatly be influenced by the chosen blockchain protocol.

Besides, there are other blockchain technology use cases that the startups can benefit from the blockchain protocol they choose to use. Some of the most profound use cases include asset management through asset digitization, decentralized finance, global trade & commerce, and payments.

Advantages of using blockchain technology

  1. Ability to streamline and automate executions. The use of smart contracts, for example, has made it possible for businesses to eliminate intermediaries and thus streamlining business processes and allowing real-time clearing and settlements.
  2. Increased security during transactions. The fact that the data stored on blockchain networks is immutable transactions tamper-proof and thus authentic.
  3. Ability to develop and deploy permissioned blockchain networks that have a shared business logic and customizable governance.
  4. Ability to digitize assets. This is what has made it possible for startups to conduct online crowd funding through methods such as ICOs.

Most used blockchain protocols for creating ICO tokens

1.    Ethereum

Ethereum is an open-source, public Blockchain distributed computing platform that features smart contract functionality. It was the first such blockchain platform to be developed and it has paved the way for the development of many other blockchain networks that are based on its blockchain architecture.

Ethereum was the first blockchain protocol to prove that blockchain was not only meant for the creation of cryptocurrencies for payments as its predecessor, Bitcoin.

Ethereum provides a platform for blockchain developers to develop decentralized applications. The decentralized applications developed on Ethereum are usually accessible from anywhere in the world. Also its ERC-20 token standard has earned itself a reputation when it comes to the development of cryptocurrency tokens. Actually, most of the altcoins use Ethereum’s ERC-20 token standard.

The token used for conducting transactions within the Ethereum network is called Ether (ETH) and it is normally generated by the platform as a reward for mining nodes the performed computations.

Some of the notable features of Ethereum apart from the smart contracts include the Ethereum Virtual Machine (EVM) that executes scripts through a network of public nodes throughout the world and Gas, which is its internal transaction pricing mechanism.

Ethereum use cases largely revolve around smart contracts and dApps.

Pros of Ethereum enterprise use cases
  • Ethereum supports the development of decentralized applications (dApps). Therefore business enterprises can use the platform to write customized blockchain codes that whose performance is oriented towards the specific business enterprise.
  • Ethereum has a very promising use case in decentralized finance (DeFi). Enterprises can use Ethereum’s smart contracts to issue or go for smart contract powered loans. Developers can also use the smart contracts to mint stable coins as in the case with the MakerDAO project. Smart contracts can also be used in creating decentralized exchanges.
  • Ethereum has proved to be of great use when it comes to tokenizing real-world assets. One of Ethereum’s use cases in line with this is the PolyMath, which has embarked on the creation of a revolutionizing platform for creating security tokens.
  • The decentralized nature of Ethereum and the decentralized applications developed on it make it impossible for hacking attacks.
  • Ethereum’s smart contracts have completely revolutionized the way transactions are made. Instead of writing paper agreements, the transaction agreements can now be recorded in a computer code. In so doing, it has eliminated the need for intermediaries, and parties can now transact directly.
Cons of Ethereum enterprise use cases
  • Though Ethereum’s smart contracts can be easily used in generating digital identities. It has proven to be extremely difficult for governments or regulatory authorities to check the authenticity of digital identities.
  • Ethereum was designed to work through the proof-of-work (PoW) consensus mechanism, which makes it less scalable compared to other blockchain networks. And although there are plans to switch the consensus mechanism from PoW to PoS, the process is not that easy.

2.      Stellar

Stellar is a decentralized open-source blockchain network that allows cross border transactions by converting the currencies to digital representations. The network uses a cryptocurrency token known as Stellar Lumen to facilitate transactions within the network.

Some of Stellar’s uses cases involve its integration into Vumi, an open-source messaging platform, enabling Vumi to use cellphone talk time as airtime. Stellar also was integrated into Oradian’s banking platform to enable the bank top to add microfinance institutions in Nigeria.

Stellar has also partnered with several banks including Deloitte, IBM, KlickEX to facilitate cross border transactions.

Pros of Stellar enterprise use cases
  • The stellar network makes cross border transactions cheaper since it eliminates the need for intermediaries. It only costs an average of 1/100,000 of a penny per transaction.
  • Stellar also makes the cross border transactions to be faster compared to the use of traditional means. Stellar can easily achieve 10,000 transactions per second with an average on-chain settlement time of 5 Seconds.
  • Digital currencies developed using Stellar can be traded on StellarX, which is Stellar’s decentralized exchange platform.
  • Stellar has smart contract functionality and users can be developed and executed smart contracts.
  • With Stellar, there are no limits. Businesses can transact any amount at any time to whatever location.
  • Stellar has the necessary documentation, tooling, and support to help enterprises get their project quickly.
Cons of Stellar enterprise use cases
  • All Stellar accounts are required to have a certain minimum balance of lumens.
  • Stellar’s smart contract is not as developed as those of Ethereum blockchain.

3.      Binance Smart Chain (BSC)

Binance smart chain (BSC) is a blockchain-based platform launched by Binance that shall enable developers to issue new cryptocurrencies as well as ICO coins. The platform supports smart contracts and decentralized applications (dApps).

The Binance smart chain shall run parallel to the current Binance Chain blockchain.

Binance smart chain gives Binance Company its blockchain rather than depending on Ethereum.

Pros of Binance smart chain enterprise use cases
  • Enterprises can easily create customized blockchain networks for use in their businesses.
  • Just like Ethereum, Binance smart chain has smart contract functionality which can be of great help in business transactions.
  • Binance smart chain enables developers to come up with their cryptocurrency tokens that can also be used for Initial Coin Offerings.
  • Binance smart chains also make it easier for the cryptocurrency coins developed to be listed on Binance exchange.
Cons of Binance smart chain enterprise use cases
  • The binance smart chain features a delegated proof-of-stake (DPoS) system of governance, which is prone to centralization. Centralization would stifle creativity among dApp developers.

4.      Tron

Tron protocol is a blockchain network that provides a decentralized virtual machine that can execute a program through the network of public nodes within the network. TRON TRX is the cryptocurrency token used within the Tron network.

There are several use cases for Tron, key among them being the ability to use TRX as a payment system. Websites like travala.com have incorporated TRX as a mode of payment already.

Another use case for Tron was the partnership with BitTorrent, enabling it to use a token called BTT, which is a Tron based digital coin.

TRX has also found lots of use in the world of online gaming.

Pros of Tron enterprise use cases
  • Transactions within the Tron network are free.
  • The transaction speed is relatively high since the system can conduct 2000 transactions per second.
  • It allows dApps developers to easily develop applications (dApps) that are custom made according to the requirements of the enterprise and deploy them.
  • The TPS is much more improved in Tron thus giving Tron a high throughput.
  • Tron also has high scalability and it gives developers a wider variety of ways to deploy their applications.
Cons of Tron enterprise use cases
  • Tron’s whitepaper suggests quite a lengthy development timeline that suggests that we may not be seeing the real application of TRON come to life soon. That leaves Tron users with only one choice of buying TRX and trading it on exchanges or using it as a payment option.

5.      Cardano

Cardano is an open-source decentralized public blockchain network that features smart contract functionality. It was built to improve the financial system.

Some of the renown Cardano use cases include the GRNET, released in 2018 for checking student diplomas, the New York Ledger Accelerator (SOSV) and Traxia, released in 2018 for converting invoices into smart contracts so that they can be sold as short-term assets,

Pros of Cardano enterprise use cases
  • It allows the use of smart contracts and provides blockchain developers with a network to develop and deploy dApps.
  • Cardano has proved to be flexible, secure, and scalable for enterprises. This is mainly due to the use of the Proof-of-Stake consensus mechanism.
  • Cardano integrates a wide range of digital coins without the use of an intermediary.
  • It also combines regulation and privacy.
  • It is one of the few blockchain networks that go through a third party audit, thus making it highly transparent.
  • Cardano blockchain network is made up of two layers, the Cardano settlement and ledger processing transactions layer and the Cardano computation layer that supports smart contracts and provides users with a platform for building DApps. This makes it less prone to the disruptions brought about by soft and hard forks.
  • There is a middle layer made up of side chains that connects the two main layers. This makes Cardano more scalable.
Cons of Cardano enterprise use cases
  • Cardano introduces its programming language called Plutus and developers could have a hard time trying to learn the new programming language to be able to develop dApps on the platform.

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.

A few months ago, Polymath one of the most reputable security token offering platforms decided to move its Polymesh Blockchain platform from Ethereum to Parity Substrate, a platform that was developed by Parity Applied Sciences that is owned by Gavin Wooden, who was Ethereum’s co-founder.

This came just a few months after introducing Polymesh, which is a security token specific blockchain. Polymesh was initially built on Ethereum and Polymath had also gone ahead and built an SDK (a suite of developer tools for security token issuers and white-labellers) that want to issue security tokens on Ethereum.

Reason for migrating

The main reason for the fallout is the fact that Ethereum uses proof-of-work (PoW) consensus mechanism, which does not go well with security tokens, though it plans to upgrade to proof-of-stake (PoS).

Adam Dossa, the head of Polymath’s blockchain, had earlier stated in a telephone interview that though Ethereum has some great attributes, the world of regulated security tokens is quite different from that of Ethereum. Dossa was quick to identify that PoW posses a serious problem known as block reorgs where blocks of data containing transaction information can be rolled again to annul a disputed transaction.

Dossa also touched on the way Ethereum settles transactions, saying that since it uses mining to settle its transactions and miners can operate from any location in the world, establishments dealing with securities could be scrutinized by authorities if the charges paid to the miners are traced to a nation that is already sanctioned.

What did the migration mean?

By changing the platform on which its products are built on, Polymath decided to embark on a journey to migrate its ST20 security token development standard, which was initially constructed through Ethereum’s ERC-1400 token standard, to Parity Substrate. Besides, Polymath also had to migrate its token, the POLY (which is an ERC-20 token) from Ethereum to Parity Substrate.

Adam Dossa, however, stated via an email that they shall maintain a bridge for the POLY token for at least one year.

On their part, Parity agreed to develop a sure business-logic option on the base layer of Ploymesh. It shall also construct decent runtime and contract communication modules.

Why Substrate?

The head of Polymath’s blockchain stated that other candidates had been considered before settling on Substrate. One of the Candidates was Hyperledger Cloth among others.

However, Dossa described Parity Substrate as a “modular, versatile framework”. He also pointed out that it is simple to construct good contracts from the bottom up on Substrate, which is a great thing for Polymesh.

Parity Substrate has offered solutions to a number of consensus mechanisms in the past, some of which are even customized. Also, transactions performed via Substrate are final and cannot be undone.

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).

Though ICOs and STOs are great fundraising methods that startups can use in raising funds for their projects, it is paramount to asses the risks involved.

Launching ICOs/STO requires quite an amount of investment and therefore requires due diligence to ensure that that money is used for the right cause.

Besides, the sole purpose of the ICO or STO is to raise funds for your project. So, one should assess whether the ICO/STO shall be able to meet its target.

What to consider when doing ICO/STO risk assessment

In assessing your ICO/STO, you should consider the following:

  1. Market assessment

It is good to keep in mind that the market shall play a very great role in the success of your ICO/STO and your project.

Before launching your ICO/STO, it is good to assess the market to find out if your project shall be accepted and even adopted by a significant number of people. If a lot of people like your project, they shall be ready to invest in it. However, if people don’t find the project to be worth it, they will not be interested in investing in it and your ICO/STO could end up being a total failure.

To ensure that your project fits in the market, you should ensure that it tackles a solution to something crucial in society. Your solution must also be viable and unique. Remember, you also have other competitors and you have to prove to the people that your project is better than the rest.

Besides, you must be able to identify your target group. You must clearly distinguish the people that you want your project to help. This ensures that your marketing strategies are trained towards this group. And the wider the target group, the higher the likelihood of finding more investors. To identify a target group, you should ask yourself what services your project intends to offer; and who is best suited for those services.

  1. Regulatory risk assessment

This is very critical in launching an ICO/STO.

You have to understand what is required of you depending on the regulations that are set within the region or country where you want to run your fundraising. Failure to adhere to those regulations could cost you a lot and could even result in your ICO/STO or project being put on hold by the regulatory authorities.

Since at times those laws and regulations are quite intricate, like when launching an STO, it is good to involve an ICO or STO advisory firm to help you maneuver those regulatory issues.

Legal liabilities can be very costly to your company or startup especially if you are involved in court cases. Also, once it goes public that your project is on trial at the courts, people/investors will tend to become extra cautious and it may hamper the rate at which people find it worthy to invest in the project even if you manage to handle the cases.

Why do an ICO/STO risk assessment?

  • Preparing yourself for eventualities in future

Countries and regions are still struggling with regulation cryptocurrencies and blockchain technology. As a result, most of the countries are still formulating laws and regulations to govern anything related to blockchain technology.

Therefore, your antennas should be up all the time to ensure that your blockchain project adheres to all the laws; even those that were just released. The best way to do this is by looking for a competent advisory firm like Gravitas International that will be concerned with the regulatory issues.

A good advisory firm will help you maneuver the current legal matters and also prepare you for legal issues that may come up in the future.

  • Ensuring that you ICO/STO does not violate any laws/regulation

There is nothing that can be bad like finding yourself on the wrong side of the law.

Risk assessment ensures that you are on the right side of the law.

  • Estimating the success of your ICO/STO

Carrying out a risk assessment, enables you to find out your weak points and helps you to come up with ways of improving to ensure maximum success of your ICO/STO.

It also enables your team to identify risks and develop plans and contingencies to mitigate risks for your investors. This instills confidence in the investors.