Join thousands of others who receive this daily analysis of crypto markets & news in their inbox every morning - subscribe now.
China is beginning to target Security Token Offerings.
It shouldn’t surprise anyone that as the ICO markets have cooled, specifically due to regulatory crackdowns and/or uncertainties, entrepreneurs have continued to look for ways to finance their projects. Security Token Offerings (STOs) have become popular in recent months because they are seen as a regulatory compliant path for issuing a digital token (usually representing equity, debt, or a claim on cash flow) in exchange for capital from investors.
STOs require an issuer to conduct proper KYC and AML practices, while also adhering to additional requirements depending on which regulation or regulatory exemption is used (Reg D, Reg S, Reg A+, or Reg CF). The idea here is that entrepreneurs have access to similar capital markets as ICO issuers, but regulators are able to ensure a fair, safe, and compliant marketplace.
US-based regulators have encouraged the use of these regulatory compliant financings, but it appears that China is taking the first steps to crackdown on them. The South China Morning Post is reporting that a deputy governor of The People’s Bank of China (China’s central bank) stated “the STO business that has surfaced recently is still essentially an illegal financial activity in China.”
This is interesting because the gentleman who made these remarks, Pan Gongsheng, made sure to separate ICOs from STOs, before saying that both are still rampant and illegal in the country. His comments followed last week’s comments by Huo Xuewen, the chief of the Bureau of Financial Work, who said, “I want to warn those who are promoting STO fundraising in Beijing. Don’t do it in Beijing. You will be kicked out if you do it.”
Not exactly soft language.
It is unlikely that STOs actually violate any regulations in China today, but this is more of a scare tactic to deter founders from pursuing the new financing path. As we know, China isn’t too keen on losing control of capital markets or having citizens gain greater access to investment opportunities outside of mainland China.
If security token offerings were illegal, the penalty presented wouldn’t be “you will be kicked out,” but rather a fine or jail time. This doesn’t mean that regulators won’t change the rules quickly in an effort to ban STOs, but at least they haven’t done so yet.
China is obviously a unique case but this new development presents a broader question — what would happen if regulators started to target security token offerings in the same way that they have targeted ICOs?
In developed countries, with uncorrupted legal systems and true checks & balances, it would be difficult to see selective enforcement used (ex: you can use Regulation D to fundraise, but if you have a token involved, it is illegal even if you follow the Regulation D rules). The problem arises in less developed countries that have corrupt or overreaching governments and legal systems.
It isn’t a stretch to imagine Venezuela, Russia, China, and others outlawing any financings that involve a digital token. They have enough controls in place to actually enforce these types of bans, while also having the political clout to have the decisions upheld in court. In this scenario, founders would most likely seek friendlier jurisdictions.
This leads us back to the idea of regulation arbitrage. Governments are entering a new world — one where they are forced to create attractive regulatory environments or risk losing their top talent to other nations. Banning all access to token-based capital markets would be one way to accelerate talent flight.
History will be unkind to the governments who bet against this technology. As Victor Hugo said best, “Nothing is more powerful than an idea whose time has come.”
The “Off The Chain” podcast has been downloaded 275,000+ times in 120 countries. You can listen to the latest episode with Josh Stein, CEO of Harbor now: Click here for Off The Chain podcast
Bitmain Closes Israeli Blockchain Development Center: Chinese crypto mining giant Bitmain is closing its development center in Israel and firing local employees. Bitmaintech Israel — founded in 2016 to explore the use of blockchain technology, work on the Connect BTC mining pool and develop the infrastructure behind Bitmain’s artificial intelligence project Sophon — will close this week. All 23 employees will be fired. Read more.
IBM Partners with Abu Dhabi National Oil Company for Blockchain Supply Chain System: The Abu Dhabi National Oil Company has successfully collaborated with IBM to pilot a blockchain supply chain system. The release notes that ADNOC — a state-owned oil company in the United Arab Emirates — is reportedly among the world’s leading energy and petrochemical groups, with a daily output of about 3 million barrels of oil and 10.5 cubic feet of natural gas. The pilot project has “provided a single platform that tracks the quantities and financial values of each bilateral transaction” between the involved companies automating the accounting. Read more.
South Korea’s Second Largest Bank Begins Blockchain Record-Keeping: South Korea’s second-largest commercial bank, Shinhan Bank, has embarked on a project to implement blockchain in internal processes to decrease human error. Shinhan, which has sought integration with both the blockchain and cryptocurrency spheres over the past 18 months, also completed a staff training program to increase knowledge of blockchain for various applications. Read more.
Crypto Exchange Gemini to List Bitcoin Cash With NYDFS Approval: announced Friday. Specifically, the New York-based startup is only supporting the fork of bitcoin cash based on the Bitcoin ABC roadmap, and not the alternative version, “Satoshi’s Vision” (SV). The difference arises after a controversial hard fork last month when the bitcoin cash network split into two different and competing blockchains with their own tokens. The exchange has added replay protection to ensure that transactions are only valid on the one network, wrote engineering VP Eric Winer. Read more.
Crypto Market Crash Leaving Bankrupt Startups in its Wake: ETCDEV, the startup that led development on Ethereum Classic, which is among the top 20 coins with a market capitalization of about $400 million is shuttering operations due to a funding crunch. Joseph Lubin’s ConsenSys said Thursday that its workforce will be reduced by 13% as part of a reorganization. Many of the companies are suffering because they kept a portion of their funds in digital assets, whether in tokens they sold through initial coin offerings or in Bitcoin and Ether, which served as the preferred means of exchange in the crypto world. Read more.
If you enjoy reading “Off The Chain,” click here to tweet to tell others about it.
Nothing in this email is intended to serve as financial advice. Do your own research.