Is Singapore now the most favored jurisdiction for ICOs?
If you’re in the crypto space, you are probably well aware that Singapore features heavily among the top jurisdictions where initial coin offerings originate from. Based on a research conducted by Ernst & Young in December 2017, Singapore ranked third behind Russia and United States in number of ICO projects originated by jurisdiction. In an article by Professor Wulf Kaal, it was reported that slightly more than 5% of the world’s ICOs was launched from Singapore, ranking fifth behind Switzerland.
(Figure extracted from Professor Wulk Kaal article)
Although the United States leads the amount of funds raised from ICO projects by a large margin, recent regulatory developments, such as the Munchee case and recent SEC subpoenas in the United States, have created a chilling effect on ICO fund-raising in the United States. If you’re wondering why most ICOs exclude US citizens and residents, now you know why.
Conversely, Singapore and Switzerland have long been considered as friendly jurisdictions for cryptocurrencies and initial token offerings - this is well-reflected in the data. On 16 February 2018, the Swiss Financial Market Supervisory Authority FINMA released guidelines (FINMA Guidelines) regarding the regulatory framework for initial coin offerings, where it distinguished between various types of digital tokens. While it provided much welcomed clarity in the regulatory treatment of digital tokens, it might have also made Switzerland a less attractive jurisdiction for initial coin offerings than Singapore.
Let me explain, particularly in the context of utility tokens.
The FINMA Guidelines distinguishes between payment tokens/cryptocurrencies, utility tokens and asset tokens. Utility tokens will not be treated as securities if their sole purpose is to confer digital access rights to an application or service. In addition, the utility token must be usable for its purpose at the point of issue – if this is absent, the utility token will be considered a security because it has an investment purposes at the point of issue.
This approach towards utility tokens is similar to the SAFT, which structures delivery of digital tokens to take place only when the utility token can be used for its purpose.
On 1 August 2017, the Monetary Authority of Singapore released a guide to digital token offerings (MAS Guide). The guide sets out the structure and characteristics that would cause a digital token to be considered as a security or units in a collective investment scheme under the Securities and Futures Act (SFA). Interestingly, the guide also sets out illustrations of how the securities law applies to various types of digital tokens. In an illustration that alludes to utility tokens, it states that the digital token will not constitute securities under the SFA if the holder of the token only has (a) rights to access and use the issuer’s platform and (b) rights to use the token to pay for rental of computing power provided by other users.
Little things that make a big difference
The key difference between the two approaches is this: under the MAS Guide, a utility token that is not fully-functional when distributed is not precluded from falling outside the Singapore securities regulations. All things being equal, a utility token launched from Singapore can be distributed much earlier than one launched from Switzerland. While this appears to be a small difference, it is an extremely impactful one. Singapore-launched utility tokens can be traded much earlier (even if solely due to speculation) and any upside can be realised quicker. While I do not condone speculative trading of digital tokens, many investors active in the ICO space crave it for the potentially huge profits.
In the ever-evolving regulatory landscape of ICOs, Singapore could well lead Switzerland as the most favored ICO jurisdiction for now. Welcome to the Little Red Dot!