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Dear Readers,
Hope that the new year has been great for you so far! Initial coin offerings have appeared on the legal landscape as a new way to fund projects, and businesses are curious about what the fuss is all about. Enjoy our latest piece, an explanatory article on ICOs!
- Koh C-u Pinn, Arielle Law Corporation
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Should Your Company Launch an Initial Coin Offering (ICO)?
What is an ICO?
With the recent increase in the number of Initial Coin Offering (ICO) launches, there has been growing interest in ICOs as an investment and fundraising avenue.
Essentially, the issuer offers virtual currency that it has created, otherwise known as “tokens” or “coins”, in exchange for cash or established virtual currencies (such as Bitcoin or Ether) from investors.
In return for investing in the issuer, investors may then have access to certain of the issuer’s physical and/or virtual assets, in the case of asset-backed tokens, and/or goods and services in the case of utility tokens. As you can see, what the token represents varies heavily according to the specific project.
Are ICOs regulated by the Monetary Authority of Singapore (MAS)?
On paper, ICOs seem like a good way to raise money from many different sources at one go without going through cumbersome compliance requirements. However, ICOs have increasingly drawn the attention of regulators such as MAS.
Because of the varied nature of the function of tokens in the different systems, MAS does not provide blanket guidelines that apply to all ICOs. Rather, it takes the position in a November 2017 Guide that offers or issues of digital tokens may be regulated by MAS if the digital tokens are capital markets products, such as securities or futures contracts, under the Securities and Futures Act.
For example, a token that represents a share in a company would likely be considered a security, and subject to the same regulations. However, a token whose sole function is to access a platform and rent computing power from other users in the ecosystem is probably not subject to MAS regulation.
Can the digital tokens be integrated into your business model?
While it is tempting to raise money when the market is hot, the digital tokens should form a integral part of your business model for them to have any long-term value.
Virtual currencies have been around for a long time. What makes things different this time is the use of cryptocurrencies based on blockchain technology. The cryptocurrencies can be used for transactions over a decentralised network without the need for a third party, as opposed to say Starbucks reward points which can only be used at Starbucks outlets and must be verified by Starbucks. Crytocurrencies potentially allow for more frictionless transactions among parties in an ecosystem, among other uses. An example is a token used for file storage services offered by other users in the ecosystem. If your business model involves multiple parties in different roles transacting with each other, you may wish to start exploring the possibility of creating your own token for use in your "economy".
It is still early days, as established user-friendly systems based on cryptocurrencies have yet to materialise, largely due to nascent technology. That said, given the popularity of ICOs, you may want to think about whether the business is suitable for such an eventuality.
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Koh C-u Pinn is a director at Arielle Law Corporation, a boutique law firm that provides individualized services tailored specifically to your needs.
Simply email us at ask@ariellelaw.com, or give us a call at (+65) 6268-8963 to chat with us about your needs. We are always happy to discuss what works best for you, whether over email, the phone, or a freshly brewed cup of coffee.
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