News13 Sep 2017

Malaysia:Securities Commission warns of Initial Coin Offering risks

| 13 Sep 2017

Securities Commission Malaysia has issued an advisory warning investors of the risks of initial coin offerings (ICO), given the emergence of digital token-based fundraising activities and investment schemes in the country and elsewhere.

In the statement issued last week, the SC, a government entity supervising exchanges, clearing houses and central depositories, warned of the following risks:

  • scheme operators may not have presence in Malaysia and it would be difficult to verify the authenticity of the scheme and the recovery of invested monies may be subject to foreign laws or regulations;
  • some ICO schemes and the parties involved operate online and may not be regulated, investors may be exposed to heightened risks of fraud, money laundering and terrorism financing;
  • digital tokens traded on a secondary market may give rise to risks of insufficient liquidity or volatile and opaque pricing; and
  • the structure of these ICO schemes might limit the legal protection and recourse for investors against scheme operators.

ICO scheme operators have been raising funds through the issuance and sale of digital tokens, in exchange for investors paying for these tokens through virtual currencies, of which the most commonly known are Bitcoin or Ethereum.

The SC noted that the schemes, though with the common aim of raising funds, can be structured in many forms, including direct investments in projects, seeking funding through foundations where investors are not entitled to seek any returns on their investments and issuance of tokens which entitle the investors to enjoy rights to a future product or service generated by the project managed by the operator.

“As the terms and features of ICO schemes may differ in each case, investors who wish to engage or invest in ICO schemes are reminded to seek legal or other professional advice if there are doubts on the legitimacy of these schemes,” said the SC.

“Investors should also fully understand the features of an ICO scheme, and carefully weigh the risks before parting with their monies. For example, investors should be aware that ICO scheme operators issues a whitepaper, which typically contains descriptions of the ICO scheme but may also carry disclaimers which absolve the operators from certain responsibilities and obligations.”

The SC’s statement comes after the Monetary Authority of Singapore, which also observed the rise of investment schemes in the city-state, issued a consumer advisory last month warning of the risks of such schemes. MAS has also clarified that the offer or issue of digital tokens, will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act, given that their function has been growing beyond being just a virtual currency to representing ownership or a security interest over an issuer’s assets or property.

Australia announced last month that it is looking to regulate digital currency exchanges, while Japan already does so and China declared a ban just last week on all ICOs and digital currency launches as ‘illegal public financing”. Across the globe, however, the majority of jurisdictions have not yet taken a firm stance to regulate these currencies.

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