Cryptocurrency: To-be securities in Singapore

Investing on stocks and bonds seem to be an old folktale since the recent emergence of cryptocurrency. Within 2017 only, the price of Bitcoin has surge from $900 to over $20,000 at its peak, alluring a growing number of investors to instant wealth! While cryptocurrency shares some similar features, bonds and stocks are legal security, but cryptocurrency remains sketchy.
The barriers preventing cryptocurrency from becoming a security is regulation. Firstly, cryptocurrency hasn’t been widely legalized worldwide for numerous reasons resulted by decentralization like money laundering risks. Currently, only Argentina, Bulgaria, US, Croatia and Japan have legalized the use of Bitcoin. The number of countries that have the most favorable legal frameworks for cryptocurrency is limited, which are Singapore, Hong Kong, Taiwan, Ireland, Portugal, South Korea, UK and Denmark. Another reason why most cryptocurrencies are not being regulated is because they do not meet the requirement of “securities” defined by the authorities such as Securities and Exchange Commission (SEC).
Pursuant to Section 2 of Securities Act of 1933, “Securities means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”
However cryptocurrency has not been mentioned in the given definition of securities, it is not impossible to be securities, should it be proven to function as such. Early of mid-July 2017, SEC issued the results of an investigative report of an initial coin offering (ICO) of a fully decentralised cryptocurrency venture capital fund called the “DAO” in the first half of 2016. The report is based on “Howey Test”, which was conducted by the Supreme Court as a means of determining whether certain transactions qualify as “investment contracts” 1. In the report of SEC,
1. Investors compose transactions of purchasing DAO tokens by Ethereum – a medium of exchange or so called “money”
2. Investors expect profits earned by the increase of value of DAO tokens as DAO was a for-profit entity that sought to fund projects, targeting a return on its investment.
3. The DAO founders, developers & marketing teams form the entity to offer services of DAO tokens.
All these features match the definition of SEC about “investment contract” as
“Any contract, transaction or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party”, which is one kind of Securities
In accordance to Chapter 11 The Law of Credit and Security of Singapore Commercial Law, “Security is any form of asset obtained by a credit provider from the debtor or a third party to ensure repayment of usually the full sum of the debt.”- a much broader definition of “Security” than the US Law.
Moreover, as the rules developed in the Singapore courts do bear a very close resemblance to those developed under English Common law1, law cases – the power of Common Law can be taken from US (also belongs to Common Law system). Considering all above factors, cryptocurrency stand a great chance to be legal securities in Singapore, especially when Commonwealth nations, adopting UK Common Law, are heading to regulations to control cryptocurrency. Indeed, Singapore has already applied the Securities Act on the issuance of digital token to control Money laundering and terrorist finance under the Monetary Authoritiy of Singapore (MAS).Cryptocurrency issued under this document will be considered securities in Singapore:
“This paper provides general guidance on the application of the securities laws administered by MAS in relation to offers or issues of digital tokens in Singapore.” (MAS – Article 1.2)
Based on “Howey Test criteria”, MAS has done a good job of turning “Singapore legalized” cryptocurrency into securities:
1. Pursuant to Article 2, MAS control the tokens by examining the structure and characteristics of, including the rights attached to a digital token, which may constitute a share, a debenture or a unit in Collective Investment Scheme (CIS). (medium of exchange)
2. Pursuant to Article 2.2 – 2.12, MAS strictly control the Token Offer or the founder of cryptocurrency in many angles namely the amount of token issuance and platform launch, as digital token offerers “must hold a capital markets services liscense for that regulated activity under the SFA”. This is the key point in turning uncontrollable virtual coins into legal entities
3. Of course, MAT does not prevent investors from reasonably expecting profits earned by increasing of the value of tokens, where investors are also customers.
It seems that cryptocurrencies have been accepted in Singapore but not all cases. Specifically, any digital tokens registered to be securities must comply with the applicable securities law, which refers to the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA). The allowance of any risky products must always come along with regulations to minimize the unwanted risks. Therefore, the procedure for registration would be a big challenge for digital token desiring to step into a promising and safe market like Singapore.