ICOs in Singapore: regulatory and consumer protection concerns

In Singapore, initial coin offerings (ICO) of digital cryptographic tokens are not directly regulated. The Singapore government has not issued legislation which is specifically targeted at ICOs. In February 2018, the Minister for Finance confirmed that, at present, there is "no strong case to ban cryptocurrency trading" in Singapore.

Nonetheless, the Monetary Authority of Singapore (MAS), the central bank and financial services regulator, is primarily concerned with, and regulates, two aspects of ICOs:

• The nature of the token; and
• the possibility of the tokens being used for money laundering and/or terrorism financing.

Apart from the financial regulatory issues surrounding a token issuance, there are also consumer protection considerations.

Those considering raising money through an ICO, as well as intermediaries and purchasers of tokens, should be aware of the regulatory framework that applies to ICOs in Singapore.

Nature of the token

Offer of token

The MAS regulates financial products by way of the Securities and Futures Act (Cap. 289) (SFA). Products that are considered to be "capital markets products" will fall within the purview of the SFA, and consequently, will be regulated by the MAS.

"Capital markets products" means:

• securities;
• futures contracts;
• contracts or arrangements for the purposes of foreign exchange trading;
• contracts or arrangements for the purposes of leveraged foreign exchange trading; and
• products as the MAS may prescribe as capital markets products.

Thus, tokens which fall within any of these categories will be regulated under the SFA.

For example, tokens that are structured as shares which represent an ownership interest in the token issuer, or as a unit in a collective investment scheme (such as an investment fund), will be considered to be "securities" within the meaning of the SFA (such tokens are sometimes referred to as "security tokens").

An ICO for security tokens must satisfy the requirements under the SFA for the offer of securities. These requirements include the need for a prospectus that has been prepared in accordance with the SFA and registered with the MAS. Offers of tokens which are structured as units in collective investment schemes must also comply with investment restrictions and business conduct requirements.

However, tokens which do not fall within the SFA's definition of "capital markets products" will not be regulated under the SFA. Therefore, tokens which only have a limited right of use of the issuer's platform, typically called "utility tokens", will not be regulated under the SFA.

Other intermediaries

Other intermediaries who facilitate the ICO may also be regulated, depending on the nature of the tokens.

The SFA regulates a broad range of activities, such as dealing in securities and fund management. If the tokens in question constitute "capital markets products" (e.g. securities), such that the SFA applies, the SFA may regulate certain activities in respect of these tokens.

Possible intermediaries in the ICO process include:

• platforms that facilitate the ICO and/or a secondary market for the trading of the tokens post-ICO; and
• persons who provide financial advice in respect of the tokens.

Platforms facilitating trading of tokens which are capital markets products (whether pursuant to the ICO or for secondary trading) may be regulated under the SFA. Such platforms may be regarded as establishing or operating a "securities market" or a "futures market", and these platforms must be approved by the MAS as an approved exchange, or their operators must be a recognised market operator.

Persons who provide financial advisory services in respect of tokens that are capital markets products may be regarded as rendering financial advice within the meaning of the Financial Advisers Act (Cap. 110) (FAA). This may include activities such as advising others on the tokens, marketing a collective investment scheme in relation to these tokens, and issuing research reports concerning these tokens.

Other forms of dealing with tokens which are capital markets products may also be regulated. For example, entering into agreements for the acquisition, disposal, subscription or underwriting of tokens which are securities may be regarded as "dealing in securities".

As with the offer of utility tokens, intermediaries who are strictly concerned with utility tokens will fall outside of the purview of the SFA and the FAA, given that these are not capital markets products (within the meaning of the SFA) or investment products (within the meaning of the FAA).

Money laundering and/or terrorism financing concerns

As transactions involving tokens are typically anonymous, and only require the seller's cryptographic wallet address for the transfer, there is a risk that tokens can be used for money laundering and/or terrorism financing.

There is no single anti-money laundering / countering the financing of terrorism (AML/CFT) legislation in Singapore. The AML/CFT requirements can be found in various pieces of legislation, regulation and guidelines, including:

• the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A) of Singapore (CDSA);
• the Terrorism (Suppression of Financing) Act (Cap. 325) of Singapore (TSFA);
• the United Nations Act (Cap. 339) of Singapore (UN Act); and
• sector-specific regulations and guidelines, such as guidelines issued by the MAS.

In general, all parties have an obligation to report suspicious transactions (under the CDSA), and are also prohibited from dealing with or providing financial services to designated individuals and entities.

To fulfil these general AML/CFT obligations, it would be prudent for token issuers and intermediaries to conduct know-your-client checks on token purchasers, to verify the person's source of wealth and the source of funds for the purchase of tokens, and to ensure that the persons are not designated and/or sanctioned individuals and entities.

Consumer protection considerations

Although utility tokens do not fall within the scope of the SFA or the FAA, other legislation may still be potentially applicable.

Consumers who purchase tokens may have recourse against the token issuers under consumer protection legislation.

In Singapore, the primary consumer protection legislation relevant to ICOs is the Consumer Protection (Fair Trading) Act (Cap. 52A) (CPFTA). Generally, the CPFTA prohibits unfair practices, which is defined as:

• doing or saying anything (or omitting to do or say anything) if as a result the consumer might reasonably be deceived or misled;
• making a false claim; or
• taking advantage of a consumer, if the service provider knows (or ought reasonably to know) that the consumer is not in a position to protect their own interests, or is not reasonably able to understand the character, nature, language or effect of the transaction.

Some non-exhaustive examples of unfair practices (which are therefore prohibited) include:

• making a representation that services are available or are available for a particular reason, for a particular price, in particular quantities or at a particular time, if the service provider knows or can reasonably be expected to know it is not so – unless the representation clearly states any limitation;
• accepting payment or other consideration for the supply of services when the service provider knows or ought to know that the supplier will not be able to supply the services within the period specified by the supplier;
• including in an agreement terms or conditions that are harsh, oppressive or excessively one-sided so as to be unconscionable; and
• omitting to provide a material fact to a consumer, using small print to conceal a material fact from the consumer or misleading a consumer as to a material fact, in connection with the supply of goods or services.

The CPFTA allows consumers to commence an action against the service provider for unfair practices, and also gives consumers the right to cancel certain regulated contracts within a cooling off period. The regulatory authority responsible for the enforcement of the CPFTA may apply for a declaration and/or injunction against the service provider.

The Unfair Contract Terms Act (Cap. 396) will also apply to consumer contracts. Except insofar as is reasonable, the service provider cannot restrict or exclude contractual liability in respect of contractual breach, or claim to be entitled to render a contractual performance that is substantially different from that reasonably expected of it.

In the context of an ICO, consumer protection concerns may arise where a consumer purchases tokens in anticipation of certain features, only to find out that these features do not exist or will not be developed, in spite of what was promised.

For example, token issuer may have promised that the tokens may be used within a game, to purchase in-game upgrades; however, because the game is not developed subsequently, the tokens become valueless. Consumers may then have a potential claim against the token issuer under the CPFTA, the UCTA and/or in misrepresentation.

While these may be somewhat mitigated by including appropriate qualifiers in the token terms of sale and/or the whitepaper, it remains to be seen how effective these qualifiers will be to exclude the token issuer's liability.