Hong Kong: Unlicensed STO Trading is a Criminal Offence


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Hong Kong’s Securities and Futures Commission (SFC) wants stakeholders to know that it regards security token offerings (STOs) as securities. The SFC issued a press release on March 28, 2019, intimating investors of the regulatory status and associated risks of STOs.

STOs Remain Regulated as Securities

In the press release, the SFC maintained that STOs are most likely to be deemed as securities, and as such, these tokens would fall under the regulatory ambit of Hong Kong’s Securities and Futures Ordinance (SFO).

Security tokens are usually mainstream assets like shares, or commodities like gold, whose ownership is issued via a blockchain. These tokenized securities are arguably a growing market within the emerging digital asset landscape.

The Hong Kong financial regulator also declared that unlicensed trading of STOs constituted a criminal offense. An excerpt from the press release reads:

“Where Security Tokens are “securities”, unless an applicable exemption applies, any person who markets and distributes Security Tokens (whether in Hong Kong or targeting Hong Kong investors) is required to be licensed or registered for Type 1 regulated activity (dealing in securities) under the SFO.”

The SFC also called on STO brokers to adhere to the Commission’s strict compliance guidelines. Furthermore, the Commission reminded STO brokers of their duty to provide investors with the necessary information pertaining to these virtual assets.

Beware the Risks

The Hong Kong SFC also reminded investors of the associated risks involved in trading tokenized securities, as well as digital assets in general. The Commission listed issues concerning liquidity, volatility, and cases of fraud to mention a few.

Presently, the cryptocurrency landscape is dealing with the revelation from multiple sources that as much as 90 percent of bitcoin (BTC) trading volume is fake. Given the nascent nature of STOs within the still cryptocurrency markets, the SFC says investors should adhere to proper due diligence checks to avoid exposure to huge losses.

STO Regulation in Asia

As previously reported by BTCManager in February 2018, the SFC  instructed exchanges to delist security tokens from their platforms. At the time, the Commission sent warning letters to seven exchanges to remove certain ICO tokens deemed by the SFC to be securities from their trading catalog.

The issue of whether ICO tokens are securities remains a major debate within the industry. While many ICO projects maintain that their tokens are utilities, regulators like the United States Securities and Exchange Commission (SEC) continue to assert the opposite.

Elsewhere in Asia, Thailand’s Securities and Exchange Commission says it is putting modalities in place to develop a regulatory framework for STOs. The plan is part of the country’s sweeping cryptocurrency laws that cover initial coin offerings (ICOs), virtual currency brokers and exchange platforms.

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