Financial Markets Authority (FMA) of New Zealand recently announced that businesses which issue cryptocurrencies and tokens in exchange of investment shall be deemed to be issuing securities. FMA said that:
“A security is any arrangement or facility that has, or is intended to have, the effect of a person making an investment or managing a financial risk. If appropriate, we can designate any security to be a particular financial product based on its economic substance.”
Thus such crypto forms shall be given the tag of being a security irrespective of them coming under the definition of being a financial product or not.
Usually cryptocurrencies and tokens are classified as an equity security, a debt security, a derivative or a managed investment product dependant on the “specific characteristics and economic substance” which the particular asset has to offer. Business houses of New Zealand have to meet the requirement parameter of various regulatory benchmarks for issuing the same. FMA clearly mentioned that businesses issuing cryptocurrencies and tokens which are not a financial product or service need to comply with the country’s Fair Trading Act. The legislation shall apply to domestic offerings as well as “overseas-based tokens and cryptocurrencies offered in New Zealand.”
Issuers of such tokens or cryptocurrencies in New Zealand also have to comply with a few more regulatory requirements such as paying related fees for financial services provided, getting a formal registration, complying with anti-money laundering and ‘fair dealing’ and rules and becoming a member of the dispute resolution scheme while providing services to retail customers. Such fair dealing rules totally “prohibit misleading conduct and deceptive statements being made in relation to financial services”, according to FMA.
ICO or Initial Coin Offers are gaining popularity as a mechanism of raising corpus. Usually business houses come up with a digital token like their exclusive proprietary virtual currency and then begin the hunt for investors who would purchase the same in return of cryptocurrencies like Bitcoin, Ripple, Ether etc rather than fiat options like Euros, Dollars or Pounds.
Blockchain mechanism is used for recording such token trade. Investors can make use of peer-to-peer exchange platforms for selling such tokens at profit provided its value increases. They are even encouraged to buy such tokens and are being awarded with a share of profit of the business ventures which benefit from such investments.
The FMA agreed to the fact that ICO activity in New Zealand can help business houses to “determine if tokens are ‘financial products’, and, if so, whether any exemptions are appropriate”. It can also exempt certain businesses from following regulatory obligations in regards to their ICOs, “to promote innovation and flexibility in our financial markets”.
“We want to play our part in making markets work, and greater regulatory scrutiny of token offers may be necessary to ensure this innovation can become a sustainable method of fundraising. Our focus is to enhance New Zealand’s reputation by promoting fair, efficient and transparent financial markets,” the FMA said indicating that it is open to industry suggestions regarding addressing the ICOs in future.
Financial authorities across the globe has given mixed reaction to the ICO market growth. Those in Singapore and US offered detailed views on ways to apply existing regulations to ICOs and the Hong Kong’s Securities and Futures Commission (SFC) outlined the positioning of the same in its regulatory framework. However, UK’s Financial Conduct Authority (FCA) have issued a risk warning to consumers in September over ICO investment. South Korea and China have completely banned ICO trading spreading shockwaves through crypto world.
Financial Market Supervisory Authority (FINMA), a Swiss regulator recently issued an ICO guidance and confirmed that it is “investigating a number of ICO cases to determine whether regulatory provisions have been breached”. Yvonne Dunn, a Financial services and technology law expert working at Pinsent Masons pointed out that the banning of ICO’s cannot be the ultimate solution to solving its inherent problems.
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