Singapore has emerged as the third largest initial coin offer (ICO) market globally after the US and Switzerland and the leading hub for ICO activity in Asia, as part of a larger disruption to the venture capital sector. The only other Asian markets that saw significant ICO activity are Russia and Hong Kong.
According to information compiled by CB Insights, Funderbeam and Crunchbase, ICOs in the US account for 57 per cent of funding raised across five countries: Switzerland, Singapore, Canada and the UK. Meanwhile, data provider Coinschedule indicates that from November 2016 to November 2017, ICOs have seen more than $3.3 billion raised across more than 200 ICOs, compared to about $70 million from November 2015 to November 2016.
A study by Funderbeam indicates that ICO funding started gaining traction in 2016 and exploded in 2017, where the funding increased from $228 million to $2.6 billion. In 2017, North America and Asia, when compared to Europe, have rounds almost twice as large, with average ICO rounds in North America valued at $31.5 million, Asia averaging $30.7 million and Europe averaging $16.7 million.
The growth in ICOs has also accounted for the surge in the cryptocurrencies Ethereum and Bitcoin, which have surged in value amid the growing number of completed ICO transactions.
Over 250 blockchain teams have completed ICOs since January 2016, with more than 55 per cent of them raising during or after July 2017. Cumulatively (since January 2016), the number of ICOs should surpass the number of blockchain equity deals in October 2017. One of the most notable deals this year was the ICO of Singapore-based TenX, which raised an estimated $80 million through the issue of its PAY tokens.
More recently, cryptocurrency service group Quoine, which has roots in Japan and Singapore, closed its ICO – which raised $105 million in an oversubscribed ICO – to fund the launch of Quoine Liquid, a platform for listing various digital tokens generated during ICOs, in order to provide a platform offering liquidity to token holders and investors.
Asked about how Singapore had emerged as an Asian ICO centre, Mike Kayamori, co-founder and CEO of Quoine, explained to this portal, “I think it is because the MAS has done a good job communicating with the crypto community. They have already made several official comments, especially around ICOs. I think it will continue to be a destination, especially for token issuers.”
Nizam Ismail, a Partner of RHTLaw Taylor Wessing, as well as the co-Founder of RHT Compliance Solutions, a dedicated financial services compliance consultancy/solutions provider, told DEALSTREETASIA that the rise of Singapore as a leading Asian ICO hub was “largely a function of several factors”.
He explains: “Singapore positions itself as an international financial centre. There is also regulatory clarity on the issue of ICOs. MAS has issued its regulatory position as early as of 1 August – that it is primarily concerned with tokens which are securities, and on anti-money laundering (AML) and combating the financing of terrorism (AML/CFT) risks.”
“This was iterated by MAS’ Chairman and Deputy Prime Minister, Tharman Shanmugaratnam in Singapore’s Parliament, as well as in speeches made by MAS’ MD, Ravi Menon. MAS then issued a set of detailed guidelines for ICOs on the first day of the FinTech Festival in November 2017. This is a positive development as it provides clarity to the industry. Underlying these regulatory developments by MAS is a tacit acceptance of the value that ICOs can bring to facilitate enterprise in Singapore, so long as these are done within the regulatory framework, and responsibly. ”
“It is also the practice of the MAS to put in place a public consultation framework, in relation to any policy change and also on any new legislation. This provides a measure of regulatory predictability – and minimise any risk of an overnight change in regulations,” he adds.
A partner at Redpoint Ventures, Tomasz Tunguz, a venture capital (VC) firm that deals mostly with early-stage software-as-a-service (SaaS) and data analysis ventures, offered in a blog post: “In terms of geographic breadth, US ICOs account for 57% of dollars raised across the top five countries. Switzerland, Singapore, Canada and Great Britain round out the top 5.”
“In short, these charts confirm ICOs are a massive source of funding for startups in the cryptocurrency ecosystem. They enable startups to raise potentially hundreds of millions of dollars. This new funding mechanism is a fascinating one, and one that raises a few parallels to the IPOs of the dot com era.”
“First, startups raising these ICOs tend to be pre-revenue. Second, retail investors are buying substantial fractions of these offerings. Third, the volatility of these offerings is enormous. If this trend continues and questions like regulation are answered, ICOs may be a novel and important mechanism for cryptocurrency based startups to raise capital,” he adds.
Notably, ICOs that raise up to $50 million are increasingly common, while there are some such as Filecoin ($250 million), Tezos ($232 million) and Bancor ($153 million) that have raised significant amounts. In fact, Tunguz notes, “For every six Series As, there is one ICO”, despite a decline in Series A rounds.
Earlier in 2017, companies raising capital through ICOs tended to raise more, with their median capital raised approaching the sums raised by Series A companies. Typically, such firms are early in their product development lifecycle and can be argued to be comparable to Series A company in terms of their business lifecycle maturity.
In a speech at the Singapore Fintech Festival 2017, Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS), said, “MAS does not regulate virtual currencies; in fact, we welcome them as an innovation that can potentially reduce the cost of financial transactions. But we regulate the activities that surround virtual currencies if these activities pose specific risks.”
“First, virtual currency transactions could potentially be exploited for money laundering or terrorism financing due to the anonymous nature of the transactions. And so intermediaries in virtual currency services will be subject to anti-money laundering requirements.”
“Second, virtual currencies can go beyond being a means of payment to representing ownership of assets, as we see in many Initial Coin Offerings or ICOs. This makes them look very much like a share or bond certificate. So, if the digital token is structured like a security, then the ICO must meet the requirements of the Securities and Futures Act. This is to protect investors.”
Worldwide, ICOs have attracted significant regulatory attention as regulators grapple with the legal dynamics and complexities surround ICOs, as well as the issuance of both utility and equity tokens.
According to the current MAS position, digital tokens – specifically equity tokens – can represent ownership or a security interest over an issuer’s assets or property. Such tokens can be considered “an offer of shares or units in a collective investment scheme under the SFA” or “represent a debt owed by an issuer and be considered a debenture under the SFA”
In this case, the digital token issuers would have to lodge and register a prospectus with MAS prior to their token generation event, with issuers and other intermediaries of these tokens subject to licensing requirements under Singapore’s financial regulations.
In an exchange with this portal, Anson Zeall, the chairman of ACCESS Singapore, the industry association that promotes blockchain and cryptocurrency in the city-state, told this portal: “In terms of MAS, we’re happy they came out with a statement in terms of clarifying that if token sales are very similar to the Securities and Future Act, there is regulation needed.”
“By being very clear on this, it makes token sales much more vibrant in the regulatory sense. Before this statement came out, I had many lawyers coming to me asking how to approach ICOs and I couldn’t tell them how to proceed. This was the thing that was needed. ACCESS is very supportive of having tokens that look like securities being regulated under the SFA if they need to be,” he adds.
Moreover, there is the issue of corporate governance, exemplified in the current turmoil involving Tezos, which raised $232 million to finance the development of another blockchain. The first token-financed organised to face severe governance issues, its founders opted to adopt a complex legal structure that involved a Swiss foundation controlling the ICO proceeds.
Token-financed organisations see founders, employees and users holding tokens. In theory, their incentives are aligned, with the outcome being token holders seeking to expand the user network, which drives up the value of their tokens.
This is coupled with smart contracts – computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract – to facilitate decentralisation and ensure no single group can control the tokens, as well as keep the organisation on track.
Asked how he saw the regulations in the city-state evolving as the ICO segment of the cryptocurrency ecosystem matures globally, Ismail explains: “We have seen interest in TGEs (token-generation events) by a widespread array of enterprises (not necessarily blockchain or cryptocurrency focused). This has also spawned interest in setting up exchanges, funds that invest in tokens, and even wealth management services catering to the needs of neo-crypto millionaires.”
He adds, “The investor segment will become more discerning – and push for better disclosures in White Papers. Some ICO issuers are also looking at working with custodians to provide another layer of investor protection. Some of the froth surrounding ICOs will dissipate, and a new equilibrium is likely to be set.”
Meanwhile, the growth of ICOs has seen offerings that differentiate between equity tokens and utility tokens. 2017 has seen most ICOs issue utility tokens, which provide users with future access to a product or service and are comparable to consumers paying for a product on a platform like Kickstarter.
Through utility token ICOs, entrepreneurial ventures can raise capital to fund the development of their blockchain projects. Fundamentally, users are purchasing future access to a future service or product, often at a discount to the finished product’s market price.
Equity tokens represent ownership of an asset such as debt, or company stock. In essence, by employing the blockchain technology and smart contracts, this means private enterprises can bypass the traditional initial public offering (IPO), which is used to access public capital markets, and issue shares and voting rights over the blockchain.
This is coupled with a lender generating tokens that represent debt, loans or convertible notes linked to the company, permitting them to be traded in a high-liquidity environment.
Asked whether the MAS would distinguish between utility tokens and equity tokens, Ismail notes: “If someone is issuing utility tokens which are not securities, there is no requirement for prospectuses. Under Singapore’s law, prospectuses are required to be issued and filed with the regulators if the offering involves securities. There are also certain exemptions (from prospectus requirements) for securities offerings if they involve small offerings (of less than S$5 million to a pre-defined class of investors) or for offerings to accredited/institutional investors.”
Given the emergence of platforms like Waves – which permits enterprises to design their own digital tokens – and Quoine Liquid to facilitate liquidity for listed tokens, Ismail believes that MAs and other regulators will follow ICOs with interest and respond appropriately to developments in the space.
“It is only natural that platforms that provide ancillary services for ICOs will emerge. There is considerable interest in setting up exchanges which facilitate the listing of ICO tokens. We have seen the emergence of specialist ICO advisers. Malaysia’s Bank Negara and the Monetary Authority of Singapore have both recently announced their intended regulation of cryptocurrency exchanges, especially to take into account AML/CFT risks.”