ICOs, Tokens Sale, & Virtual Currencies — Where do the Securities Regulators stand?

ICOs, Tokens Sale, and Crypto Investment Funds

On 22 September, Evolve Funds Group Inc. (“Evolve Funds”), a company based out of Toronto, announced that it has filed a preliminary prospectus with the Canadian Securities Regulators for Canada’s first cryptocurrency ETF, Evolve Bitcoin ETF (“BITS”). This new Evolve ETF is designed to provide Canadian investors with indirect exposure to the world’s first decentralized currency.….

As per Raj Lala, President & CEO of Evolve ETFs, BITS seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of exposure to bitcoin obtained through investments in CFE Bitcoin (USD) Futures. The Evolve ETF invests directly or indirectly in exchange-traded futures contracts and other financial instruments and derivatives that provide similar return characteristics. BITS will offer investors with both hedged and unhedged units.

The announcement of Evolve Bitcoin ETF is on the heels of two other crypto investments initiatives in Canada — the registration of First Block Capital as an investment fund manager in British Columbia and the launch of the ICO of Impak Coin in Quebec.

Let us take a closer look at how the Canadian Securities Regulators are embracing the alternative investment products based on cryptocurrencies such as ICOs, Tokens, ETFs.

On 6 September, British Columbia Securities Commission announced the first registration of an investment fund manager, First Block Capital, solely dedicated to cryptocurrency investments — a landmark in the global crypto capital markets. This trust will enable the consumers and/or institutions to invest in bitcoins without buying them through digital exchanges and/or digital wallets, and in turn, storing them thus minimizing the security risks associated with digital breaches and/or digital thefts from hackers and digital criminals such as what happened with Mt. Gox in Japan in 2014. Since most of the digital exchanges are unregulated except a few like Gemni.com, First Block Capital has a value proposition of regulatory oversight by a Canadian Securities Regulator thus enabling the large institutional investors to execute their alternative investment strategy for the digital assets.

In terms of the revenue model, the Canadian Bitcoin Trust will buy bitcoin and securely store the coins on behalf of its investors, and First Block Capital will charge a 1.5% management fee. First Block Capital’s partnership with FrontFundr, an online market for equity and debt financing, allows the investors to reserve and buy units of the Canadian Bitcoin Trust starting at $500. The key stakeholders associated with First Block Capital are Trustee: Computershare Trust Company of Canada, Custodian: Xapo Limited, Administrator: SGGG Fund Services Inc., Auditor: KPMG LLP, and Legal Counsel: Borden Ladner Gervais LLP. For details on the operating model of First Block Capital, watch the interview of Sean Clark, Founder & General Partner with Peter Armstrong, Host of CBC’s Show, On the Money

On 24 August 2017, Canadian Securities Administrator also issued CSA Staff Notice 46–307 Cryptocurrency Offerings which stated that Cryptocurrency offerings can provide new opportunities for businesses to raise capital and for investors to access a broader range of investments… Many of these cryptocurrency offerings involve sales of securities and as such, securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or if there are Canadian investors.’

On 17 August, the Autorité des marchés financiers in Quebec, also approved the public sale of a new digital currency, # MKP (aka Impak Coin), issued by Impak Finance. This is the 1st of its kind decision in the Canadian Securities Markets as it has set a precedent for other startups and international regulators on how to embrace the alternative investment products such as ICOs and ITOs. For a legal briefing on it, please read McMillan Advises on First Initial Coin Offering Granted Exemptive Relief by Canadian Securities Regulators

While Canada is leading the global financial regulators in embracing the alternative investments products such as Initial Coin Offerings (ICO), Initial Token Offerings (ITO) and Cryptocurrency Investment Funds, it is not quite the same in other capital markets. On 4 September, the People’s Bank of China issued the statement On the prevention of the risk of tokens issued financing highlighting that The tokens or “virtual currency” used in the custody financing are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to currency, and can not and should not be circulated as money in the market use.

Here’s how the regulators and central banks around the world stand on ICOs, Tokens Sales etc.:

6 February 2017, Bangko Sentral ng Pilipinas (BSP) Guidelines for Virtual Currency (VC) Exchanges

25 July 2017, U.S. Securities and Exchange Commission Investor Bulletin: Initial Coin Offerings

10 August 2017, Monetary Authority of Singapore on Consumer Advisory on Investment Schemes Involving Digital Tokens (Including Virtual Currencies)

24 August 2017, Canadian Securities Administrators (CSA) Staff Notice 46–307 Cryptocurrency Offerings

4 September 2017, People’s Bank of China Statement on the prevention of the risk of tokens

4 September 2017, Financial Supervisory Commission (FSC) of South Korea as covered in Korea’s financial regulators will strengthen regulations on the trade of digital currencies to protect consumers

4 September 2017, Central Bank of the Russian Federation (Bank of Russia) on Use of private virtual currencies (cryptocurrencies)

5 September 2017, Securities & Futures Commission (SFC) of Hong Kong on Statement on initial coin offerings

5 September 2017, Securities Commission Malaysia Media Statement on Initial Coin Offerings

12 September 2017, Financial Conduct Authority (FCA) U.K. Statement on Initial Coin Offerings

13 September 2017, Dubai Financial Services Authority (DFSA) General Investor Statement on Cryptocurrencies

14 September 2017, Securities and Exchange Commission, Thailand Viewpoint on ICO

20 September 2017, Bank Negara Malaysia | Central Bank of Malaysia as covered in Bank Negara to issue guidelines on cryptocurrencies

22 September 2017, Gibraltar Financial Services Commission Statement on Initial Coin Offerings

Another interesting development in Russia is the first of its kind partnership of between State Corporation “Bank for Development and Foreign Economic Affairs (Vnesheconombank)” and Vitalik Buterin.

In line with the global securities regulators, Crypto Valley Association based out of Zug, Switzerland also issued a Statement on Token Launches which has mobilized CVA and its members to draft a code for ICOs with the help of a multi-disciplinary team from the fields of law, tax, accounting, cybersecurity, communications, and more.

What’s Next

As per U.S. Securities and Exchange, Crowdfunding (like ICOs & ITOs) offers investors an opportunity to participate in an early-stage venture. However, you should be aware that early-stage investments may involve very high risks and you should research thoroughly any offering before making an investment decision. You should read and fully understand the information about the company and the risks that are disclosed to you before making any investment.

I hope that the securities regulators in Canada, China, Hong Kong, Malaysia, Singapore, Russia, Switzerland, United Kingdom, and United States will form a global coalition and collaborate among themselves as well as the industry organizations such as Global Blockchain Business Council, Digital Chamber of Commerce, Crypto Valley Association, Blockchain Association of Canada, Blockchain Players such as The Bitcoin Foundation, Ethereum Foundation, Blockchain Miners, Digital Exchanges, and other market forces to tame the beast of ICOs, ITOs, and Crypto Investment Funds, and regulate it as soon as possible to provide a structured and legal approach to the launch of ICOs, ITOs, and Crypto Investment Funds followed by audits of the capital raised to ensure that the issuers deliver on the products and services claimed in the white papers (aka prospectus in an IPO).

Now, I have a few questions for you:

1) Is there a need to create a Decentralized Crypto Investments Market Regulator on a Blockchain? (The proposed regulator can use the power of smart contracts to enforce its mandate versus dealing with multiple securities regulators across the continents)

2) As a retail and/or institutional investor, how would you like the regulators to embrace the alternative investments such as ICOs, ITOs, and Crypto Investment Funds?

3) Would you invest in regulated alternative investments such as Crypto Investment Funds under RRSP, LIRA, and TFSA in Canada, and/or 401 (k) / IRA in United States or other such similar financial products in EU and other countries, if they were regulated like other asset classes?

Here are the results of my Twitter Polls:

About the Author

Fasih Sandhu, @FasihSandhu, is a high-octane technology leader, trusted advisor, Certified Management Consultant, Prosci Certified Change Practitioner, and Project Management Professional who has delivered professional services to Fortune 500 global organizations such as Sun Life Financial (NYSE, TSX: SLF), Voya Financial (NYSE: VOYA), Prudential Financial (NYSE: PRU), Bank of Montreal Financial Group (NYSE, TSX: BMO) and Loblaw (TSX: L). He delivers on outcomes that matter and have a tangible and sustainable impact to the current and future performance of the business. He does this through driving transformation initiatives with a roadmap for success and pathway to the future by marshaling key elements toward a united vision and objective.

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Originally published on LinkedIn on 12 September 2017 and updated with Evolve Funds news and round up of regulators on 24 September 2017 on Medium.