SFC Issues Warning Against Investing in STOs

The Hong Kong Securities and Futures Commission (SFC) has issued fresh warnings against the risks associated with digital asset investments with a focus on the securities token offerings (STOs).

Unlike initial coin offerings (ICOs), which usually sell Utility Tokens Utility Tokens Utility tokens are defined as digital assets that are used to fund a network by providing its buyers with a guarantee of being able to consume some of the network’s products. Of note, utility tokens differ with crypto coins such as Bitcoin as they are not mineable and are instead based on third-party blockchain. However, similarly to these cryptos, utility tokens are valued only for its inherent functions and properties. Utility tokens do not fluctuate in value, and are therefore not considered Utility tokens are defined as digital assets that are used to fund a network by providing its buyers with a guarantee of being able to consume some of the network’s products. Of note, utility tokens differ with crypto coins such as Bitcoin as they are not mineable and are instead based on third-party blockchain. However, similarly to these cryptos, utility tokens are valued only for its inherent functions and properties. Utility tokens do not fluctuate in value, and are therefore not considered Read this Term of a platform to the potential customers to raise funds, STOs are offering ownership to the company, much like an initial public offering (IPO) but on the Blockchain Blockchain Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tampe Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tampe Read this Term.

Though regulators around the world could not do much to curb ICOs, their stance on STOs is very strict.

STOs are Securities

The Hong Kong financial market watchdog clarified that STOs falls under the category of “securities” and thus the region’s securities laws are applicable to them.

The agency also detailed that a distributor of such tokens needs to have a proper license or registered for Type 1 regulated activity under the Securities and Futures Ordinance (SFO).

“It is a criminal offense for any person to engage in regulated activities without a license unless an exemption applies,” the SFC warned.

“Intermediaries which market and distribute security tokens are required to ensure compliance with all existing legal and regulatory requirements,” the market regulator stated. “Further, intermediaries are expected to observe requirements which are similar to those set out in the Circular to intermediaries on the distribution of virtual asset funds dated 1 November 2018.”

The regulator has also advised token distributors to follow three steps - imposing selling restrictions, proper due diligence, and provide information to clients - to ensure the safe distribution of the virtual assets.

“Intermediaries are reminded to implement adequate systems and controls to ensure compliance with the requirements before they engage in the distribution of STOs, the SFC noted. “Failure to do so may affect their fitness and properness to remain licensed or registered and may result in disciplinary action by the SFC.”

The regulatory agency, last September, issued a similar warning against ICOs and urged potential investors to keep a distance from the unregulated market.

The United States’ counterpart of the SFC is also cracking down on many blockchain tokens falling under the category of STOs.