Hong Kong's securities regulator, the Securities and Futures Commission, has put companies planning Initial Coin Offerings (ICO) on notice that any such digital fundraising activity may fall under Hong Kong's securities code, requiring them to be registered with the regulator.

The comment, in a statement issued on Tuesday, came one day after China's central bank banned ICOs out of concerns over financial risks and stability

"We are concerned about an increase in the use of ICOs to raise funds in Hong Kong and elsewhere," said Julia Leung, the SFC's executive director of intermediaries, in the statement.

"Those involved in an ICO need to be aware that some ICO structures may be subject to Hong Kong securities laws." In such cases, she said, this would require those carrying out an ICO to be regulated by the SFC.

ICOs are normally used as a way of raising funds for the development of digital platforms. Platform operators issue tokens to investors, who hope that the platform becomes successful enough to push up the value of the tokens. ICOs have become increasingly common in recent years, obliging global regulators to formulate a response.

Cryptocurrencies have hitherto operated in an unregulated environment, and while some have been wildly successful, others have been scams which did not use the investment for the purpose it was intended.

However, as a new form of currency, and one not backed by any official organisation, it has not been clear which regulatory bodies should take responsibility for cryptocurrencies and ICOs. The tendency now is for securities regulators to take up the burden.

"The SFC's statement on initial coin offerings does not constitute a change in law or interpretation by the SFC, but a notification that it intends to regulate ICOs, where possible, within Hong Kong's existing financial services regime," said James Parker, a partner at law firm Norton Rose Fulbright.

"It remains to be seen whether the constraints of Hong Kong's existing financial services regime provide sufficient flexibility for the regulation of relevant ICOs."

Explainer: What is an ICO, and why is China's central bank banning it?

The SFC said that in certain situations, the tokens could be seen as being a share, a debenture or an interest in a collective investment scheme, rather than their more usual characterisation up to now as virtual commodities.

"Whilst digital tokens offered in typical ICOs are usually characterised as a 'virtual commodity', the SFC has observed more recently that certain ICOs have terms and features that may mean that they are 'securities'," the statement said.

If tokens were classed as commodities, then they would not be governed by securities law. But if they were seen more as shares, then dealing in or advising on them or managing a fund investing in them "may constitute a regulated activity", the SFC said. Those involved in a regulated activity would then have to be licensed and registered with the SFC.

The SFC's position is not too far removed from that the US Securities and Exchange Commission.

In July the SEC issued a report on its investigation last year of DAO, a virtual organisation and form of cryptocurrency investment fund, and its use of an ICO to raise capital.

The SEC determined that DAO tokens issued in the ICO were securities, and said that those who offered and sold securities in the US were required to comply with federal securities laws, regardless of whether those securities were bought with virtual currencies or distributed with blockchain technology.

However, the SEC decided not to bring charges in the case, but instead cautioned the industry and participants.

Read the original article on South China Morning Post. For the latest news from the South China Morning Post download our mobile app. Copyright 2017.

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