New Zealand needs to pull off a balancing act to protect investors without stifling an innovative new investment technology, one of the country’s top firms said.
MinterEllisonRuddWatts partner Jeremy Muir's recent comments are even more important now that the Financial Markets Authority’s (FMA) long-awaited official comments on initial coin offerings and cryptocurrency services have just been released.
“Whether a token offered via an ICO is a particular type of financial product depends on its specific characteristics and economic substance,” the FMA
said.
An ICO is regulated depending on whether a “financial product” is being offered to retail investors in New Zealand, it said. The
Financial Markets Conduct Act 2013 (FMCA) defines four “financial products” namely debt securities, equity securities, managed investment products, and derivatives.
This is the first time the authority has bared its views on ICOs, making it clear that it is open to regulating tokens under the guidelines set by the FMCA.
Other governments, including Australia, Canada, Malaysia, Singapore, and the UK, have said that some tokens are securities. China has banned ICOs and ordered issuers to repay investors.
The FMA has also made its view on cryptocurrency services
known. It said that businesses and individuals based in New Zealand and are offering “financial services” related to cryptocurrencies need to comply with the
Financial Service Providers (Registration and Dispute Resolution) Act 2008.
This means that these individuals and businesses need to be a member of a dispute resolution scheme, be registered on the Financial Service Providers Register for each category of financial service they provide, pay the applicable fees and levies for the relevant categories of financial services they provide, comply with fair dealing provisions of the FMCA, and comply with anti-money-laundering obligations.
Balancing act
MinterEllisonRuddWatts predicts that the situation will only get more complicated as ICOs gain popularity in the country.
“Over time, the lines between traditional capital-raising methods and ICOs are like to become blurred as we start to see a convergence of the old paper-based financial markets and the new digital economy for money,” said Jeremy Muir, MinterEllisonRuddWatts partner.
More and more individual investors and organisations are participating in ICOs. Some estimates peg the value of ICO raisings completed so far in the year to have topped US$2bn, the firm said.
“The main appeal of ICOs is their speed, ease and flexibility,” said Andrew Suggate, senior associate. “A company, group or individual can create a token which serves as a mechanism to participate in a project or enterprise. Issuing these token can then, subject to compliance with any applicable securities laws, allow for both the raising of funds for and a means of payment within a the project or enterprise.”
The popularity of ICOs has caught the attention of authorities. For example, when the Decentralises Autonomous Organisation (DAO) offered tokens for their ICO to raise US$150m in 2016, the US Securities and Exchange Commission started to investigate. The US agency ruled in July that the DAO tokens, which offered investors “rewards” that were compared by the organisation to dividend payouts, are securities.
MinterEllisonRuddWatts said that the Financial Markets Conduct Act 2013 (FMCA) offers a broad enough definition of “security” that it can cover ICOs, essentially agreeing with the FMA’s view.
“If a token offered through an ICO is a financial product, that ICO would need to meet the requirements of the FMCA. If it is offered to retail investors, these requirements would include disclosure, governance, licensing, and financial reporting obligations,” Muir said.
Not all tokens are financial products, the firm said. Muir and Suggate acted in New Zealand’s first ICO, the recent offer of the UC Coin by VerifyUnion.
New Zealand is yet to have its first retail ICO.
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