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 to be investments.These are a method of transacting within a particular platform or to buy goods or services from their issuing company.How are Utility Tokens Used?Utility tokens are used primarily for Initial Coin Offerings (ICO), which became an extremely popular form of investment during 2017-8.The structure of utility tokens proved highly useful for ICOs, which required a construct for issuance. This is where utility tokens entered the equation.During a utility token ICO, a given company issues a specific number of tokens that are sold to the community. This is done across multiple rounds for different prices. The owners of the token are then granted a specific right in the usage of the company’s products such as being first to access it or getting other privileges. his approach enables a company to gain funding without jeopardizing its overall independence.Beyond ICOs, if a blockchain-based company’s team decides to gather funding in some other way, security tokens can instead be used only for powering up the network.Ultimately, most utility tokens are based on the Ethereum blockchain. It is however possible to build unique utility token using other blockchain platforms. 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 to be investments.These are a method of transacting within a particular platform or to buy goods or services from their issuing company.How are Utility Tokens Used?Utility tokens are used primarily for Initial Coin Offerings (ICO), which became an extremely popular form of investment during 2017-8.The structure of utility tokens proved highly useful for ICOs, which required a construct for issuance. This is where utility tokens entered the equation.During a utility token ICO, a given company issues a specific number of tokens that are sold to the community. This is done across multiple rounds for different prices. The owners of the token are then granted a specific right in the usage of the company’s products such as being first to access it or getting other privileges. his approach enables a company to gain funding without jeopardizing its overall independence.Beyond ICOs, if a blockchain-based company’s team decides to gather funding in some other way, security tokens can instead be used only for powering up the network.Ultimately, most utility tokens are based on the Ethereum blockchain. It is however possible to build unique utility token using other blockchain platforms. 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 tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others. 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 tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others. 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.