June 20, 2019 / Tokyo, Japan / Security Token Alliance Kickoff Event
I’ve been in Tokyo for the 45 days working with STO and digital securities infrastructure companies, as well as Japanese regulators on building out the regulatory framework and STO market. As much as this is a challenge, it’s well worth the ride to innovate the securities industry.
This past Thursday I was asked to speak at the Security Token Alliance official kick off event in Tokyo. I discussed key topics on digitizing assets and smart contract technology, the life-cycle process from issuance to exchange, regulation in Japan and globally, education on compliance benefits of tokenization, and the still much needed focus on differentiating ICOs from STOs as there still a lot of confusion in the market.
Regulation Is Key
As the STO industry is growing, in popularity and in worth, so are the regulations enforced by various nations. Regulation is key to success of this industry. We wouldn’t want to re-live the days of “bad actor” ICOs going rogues, investors losing millions, and Blockchain as a whole being deemed notorious.
If there’s one thing that we’ve learned from past experience, as well as from last year’s 280% rise in VC investments, it is the fact that regulations have proven beneficial more often than not. While nations such as China have altogether banned ICOs and STOs, others are assuming a more nuanced stance in this regard.
Japan STO Regulation
Consider, for instance, Japan. Recently, a bill was passed in both the houses of Japan’s National Diet and was enacted on May 31. By amending the Act on Settlement of Funds, 2009, and the Financial Instruments and Exchange Act (FIEA), 1948, this bill subjects STOs to disclosure requirements. Also, to conduct STOs, issuers, and brokers in Japan will have to comply with certain registration requirements defined by the amended FIEA.
Now, there’s something very significant about all this. First thing first, these laws regulate STOs as defined by the SEC guidelines, namely Regulation D, Regulation A+, and Regulation S. In fact, their definition of security tokens is the same as that of the SEC.
Yet, the Japanese approach to these regulations is quite unique and recognizes STOs as “interests in a collective investment scheme that are represented by tokens”. Most importantly, the amended FIEA clearly defines cryptocurrencies as ‘money’, transacted for investments in a common business.
Also, it classifies tokenized securities as ‘Paragraph 1 Security’, alongside other liquid securities, including stocks, bonds, and so on.
And, as regards to the issuers or brokers, they must be registered under the FIEA as Type II Financial Instruments Business Operator or FIBO. Under the FIEA, they are also required to disclose details about itself and the product, just like any other financial product offering in Japan.
Other Asia STO Regulation
Apart from Japan, Hong Kong has also issued detailed guidelines pertaining to STOs and their issuers. Such endeavors, among many others, play a significant role in promoting a secure, safe and profitable crypto economy, wherein both the issuer and the investor is equally benefited.
As it is, tokenization has opened a great many avenues for future developments involving cryptocurrencies. Now, with conscious regulations such as these, we are on track to supporting innovations around the globe through these enhanced methods of funding.
However, to be able to actually realize the goodness, we must first be able to differentiate the ‘good’ from the ‘bad’. That is, the traditional, vulnerable, and often rogue ICOs and this new, regulated, secure form, known as STOs.
Shortly put, the former involves utility tokens while the latter involves security tokens. Primarily, investors in ICOs don’t get any stake in the company. Instead, it’s more of a speculative game, so to say, where you invest with the expectation that the token’s value will rise in the future. And, we all know what happened when things didn’t work out.