Initial Coin Offerings – Decrypting Digital Tokens

By Stefanie Yuen Thio
and Nadia Ahmad Samdin

Behold, Blockchain

What do DarkCoin, virtual islands and an unhackable digital ledger have in common, other than sounding like the plot of the next Marvel movie? They are the subject matter of the latest investment craze threatening to storm traditional capital markets. Welcome to the disruptive world of blockchain, where Bitcoin (brainchild of unknown creator(s) under the pseudonym Satoshi Nakamoto) is the new currency and Geek-speak the new lingua franca.

Bitcoin and Blockchain Broken Down

Bitcoin is a virtual currency created on the internet. Like paper money, it has no intrinsic value. You can buy (cyberworld) Bitcoin using (real world) cash, and deposit it in a virtual wallet.

Bitcoin was first used principally for online payments. The anonymity associated with the cryptocurrency made it a natural choice for sensitive payments (donations to Wikileaks) and criminal transactions (buying illegal drugs on the Darknet).

Today Bitcoin is increasingly used in the world of bricks and mortar. Overstock, the international retailer, accepts Bitcoin. According to the Luno wallet application, Bitcoin is accepted in at least 30 merchants in Singapore.

Blockchain is the technology that Bitcoin is based on. Blockchain technology has revolutionised online payments and transactions because it is seen as a decentralised and more secure form of maintaining a digital ledger of electronic transactions.

From Cyberspace To Capital Market – Crossing The Rubicoin

Digital currency and blockchain are no longer confined to the online domain. Businesses have recently launched offerings of bitcoin-based digital tokens called Initial Coin Offerings (ICO) to the investing public. With a reported US$1.3 billion raised in the first 7 months of 2017 alone, and some offerings successfully funded in record time (Brave’s ICO raised US$35 million in less than a minute), there has been growing investor interest.

This has prompted regulatory scrutiny from the Securities and Exchange Commission in the US and the Monetary Authority of Singapore (MAS).

The issue is this: What is the exact nature of digital tokens? If they are cryptocurrency or donations-based crowdfunding, they are not currently regulated. However, if they are debt instruments or give returns based on underlying investments, then they may fall within the ambit of regulated securities.

Are digital tokens cryptocurrency?

Just because digital tokens, like Bitcoin and Ether (another virtual currency), are based on blockchain technology, does not make them a cryptocurrency.

Are ICOs a form of crowdfunding?

ICOs have been characterised as “crowdfunding” which, in its purest form, is not regulated. Kickstarter is the best known example of a crowdfunding platform, where creators raise financial support for their projects. Backers were rewarded in products or services – from an autographed copy of the graphic novel they financed, to dinner with the author. Backers’ contributions are more akin to donations or (product) purchases because they do not get returns from the project. This is not regulated. However, the MAS has also clarified that crowdfunding that is securities-based is subject to regulation.

Are ICOs securities offerings?

Some of the ICOs currently in the news have elements of securities offerings.

In Singapore, any offering of shares, debt instruments like bonds, business trusts and collective investment schemes (CIS) such as REITs, would attract prospectus requirements. CIS are defined broadly to include investments where investors’ funds are pooled and managed, with investors getting a return based on fund performance.[1] Accordingly, if the digital token confers similar rights, then it is in essence a security.

Adding to the confusion is the fact that ICOs are deceptively like IPOs (down to the rhyming abbreviation). The offering is accompanied by a White Paper containing information about the ICO, but these vary drastically in detail and clarity, and are often more manifesto than offering memorandum, giving investors scant information. The lack of (capital) market standard offering documents makes it hard to fathom the nature and risks of such investments. Take some examples:

Some ICOs appear to offer in-platform rewards:

  • Opus

    Founded in Poland and China, this is a music sharing platform, like Spotify. In July 2017, Opus launched an ICO, offering tokens called OPTs which can be used to purchase songs and other music content from the platform.

  • Decentraland

    This is a virtual reality platform in development phase. Holders can use the digital tokens to buy virtual real estate. This appears to be essentially a pre-paid in-game purchase to be used within the platform when it is launched. However, this is extrapolation only, as the White Paper was inscrutable. As an illustration, consider this paragraph, intended as a Summary (and presumably to help investors understand the ICO): “Decentraland is a distributed platform for a shared virtual world that enables developers to build and monetize applications on top of it. The scarcity of land, on top of which applications can be built, creates hubs that capture user attention, which drives revenue to content creators. MANA tokens will be used to purchase land, goods, and services in-world. MANA tokens will also be used to incentivize content creation and user adoption, therefore bootstrapping the first decentralized virtual world.”

Some ICOs appear to offer rewards linked to investments (but whether these are securities would depend on the rights attached to tokens):

  • Cross Coin

    The proceeds from the sale of the Starta digital token will be used to invest in the Starta Accelerator, a basket of startups “with Eastern European R&D roots”. The White Paper states that “Tokens will be issued as a type of debt”, and “Cross Coin will receive a profit share from the Starta Accelerator and undertakes to utilise it to buy back the tokens”.

  • FundPlaces Pte Ltd

    This Singapore-based company is a “proptech” company: an “online platform where users can discover, research and invest in global real estate opportunities, starting from as low as S$1,000”. It claims to provide “execution-only Services”, without advising “on the merits of any particular transactions”. Users register with the platform to view potential real estate deals that would be paid for in TILES (its digital token) which, as its website proclaims, entitles holders “to all the economic benefits (after fees and expenses) of the underlying asset that each unique TILE references.”

  • TenX

    TenX is a Singapore-based cryptocurrency payment platform provider whose tagline is “Making Cryptocurrencies Spendable Anytime Anywhere”. On 24 June 2017, it launched an ICO and raised US$80m in under 10 minutes, with the proceeds being used to develop the business of TenX. Based on its White Paper, holders of the “PAY tokens will receive 0.5% of the aggregate payment volume that is spent by all users with the TenX Card on a monthly basis”.

Investing in FOMO

No, FOMO is not another ICO. It is Millenial-speak for “Fear of Missing Out”.

Investors may feel that they have missed the Bitcoin rush and see ICOs as a chance to jump on the blockchain bandwagon. Bitcoin has increased in value by more than 1,600% in the past 2 years. But notwithstanding the new nomenclature, investors should ask the same fundamental questions: How strong is the underlying business and the management team? What are the risks? What returns do I get? In the case of many ICOs, the lack of a prospectus makes an effective evaluation by potential investors challenging.

Until investors are able to read offering documents without saying “It’s all Geek to me”, we suggest an investment philosophy based not on FOMO but rather, one we have coined DUMBAS: Don’t Understand Much? Better Ask Somebody.

[1] The Securities and Futures Act is expected to be amended to broaden the ambit of CIS to capture investors’ monies which are either pooled or managed (not necessarily both).


TSMP law corporation