Forget ICOs, STOs are coming - A global tour on STO regulation (Part II)

Monday 10 December 2018 | 08:45 AM CET


Daniel Chatelain, CEO, PayKademy: “From ICO-based funding, people are now looking at securities token offerings (STOs) as the new phase of crypto-based funding” 

Security tokens promise to increase liquidity of global assets, such as real estate, equity, debt and so many others. Maybe people are starting realizing that their “investment” in an ICO wasn’t really an investment as I discussed in my last article on The Paypers in November 2018 .

An old adage goes: more money, more problems. The rapid growth of ICOs in 2017 was also accompanied by an explosion of regulatory issues and concerns. Fraud and scams were rampant and even if I tried to find a number on the amount of money lost due to fraud, it is very difficult to differentiate between pure fraud and just bad execution in most cases. As STOs slowly gain traction, it should not come as a surprise if regulators are also all eyes on them as they ramp up their scrutiny and warnings to those doing STOs.

So how did the countries respond to this new trend in terms of regulation? It is what I will explain in this article. Some countries have taken a more proactive approach to regulation. Others are more cautious. At this stage, it is still too early to come up with a common international regulatory approach. Nevertheless, I will highlight the most active countries/regions:

  • Australia - the government saw that many of the startup companies rely on cryptocurrency for funding and decided to set up a formal security token offering regulation. It was quick at formulating and issuing registration requirements which are now in place. Among its requirements are a license, disclosure, and investment tracking documents.

  • Estonia - the Estonian Financial Supervisory Authority (EFSA) requires STOs to register a separate prospectus in the EFSA if their tokens are considered securities under section 12 of the Securities Market Act (SMA).

  • Malta - the Maltese government’s forward thinking when it comes to ICOs and STOs makes it an ideal place for fundraisers. The government has passed three bills to support this emerging market initiative. Now that STOs are becoming more visible, Malta is prepared and already has legislation in place to support it.

  • Lithuania - one of very few EU nations that have a legal framework on STOs, and the first member of the EU to regulate ICO and adopt a crowdfunding law. Lithuania’s Ministry of Economy and Ministry of Finance also support and endorse the world’s first platform for STO called DESICO, which allows users to legally raise funds in exchange for tokens.

Malta and Lithuania have established themselves as blockchain hubs in the world when they opened their doors to STOs and welcomed changes to regulations in order to accommodate crypto-related activities. I am sure other countries will follow closely what happens there.

  • Asia - compared to the rest of the world, it has the most mixed reception. The rules and regulations that were formulated were either strictly for or against cryptocurrencies.

  • Singapore - if the tokens are capital markets products, they might be regulated by the Monetary Authority of Singapore (MAS). In the guide to digital token offerings published by MAS, the Singapore Securities and Futures Act (SFA) defines capital markets products as “any securities, futures contracts, contracts or arrangements for the purposes of foreign exchange trading, contracts or arrangements for the purposes of leveraged foreign exchange trading, and such other products as MAS may prescribe as capital markets products.” MAS highlighted that no tokens representing securities have been approved to date but I wouldn’t be surprised if the situation changed soon.

The guide also states that MAS will determine if the digital token is a type of capital markets product under the SFA by examining its structure and characteristics including the rights attached to it. According to the guide, “offers of digital tokens which constitute securities or units in a collective investment scheme (CIS) are subject to the same regulatory regime under Part XIII of the SFA, as offers of securities or units in a CIS respectively made through traditional means.”

  • Japan - unless the person carrying out a regulated activity in Japan is exempt, he is generally required to comply with licensing and marketing rules. An activity is described as regulated if it relates to the offer of either Type 1 or Type 2 securities. Type 1 securities include government bonds, shares, and debentures whereas Type 2 securities include interests in partnerships or CIS. However, determination of whether a token is a security and if it falls within the scope of Japan’s securities regulations will depend on a case-by-case basis.

  • China - at a wealth management forum held on December 1, 2018, Beijing has declared STOs illegal in China. In September 2017, seven regulatory authorities in the People’s Republic of China issued a circular which demanded that all token offerings cease immediately, and that proceeds of those that have completed their offerings should be returned to investors.

The circular also stated that cryptocurrency exchanges could no longer provide any trading services either between fiat and cryptocurrencies, or between cryptocurrencies. It does not, however, specifically address whether the circular is only targeted at domestic token offerings although the penalties mentioned suggest that the focus is only on exchanges operating in China.

The National Internet Finance Association of China stated in January 2018 that most onshore token offerings have been “cleaned up”. While tokens have continued to be marketed to PRC residents on a cross-border basis, the association also stated that it was aware and has warned investors of the risks involved.

  • Thailand’s SECT is currently working to issue a draft regulation that will govern the pre-sale arrangements of digital tokens. It is expected to be published for public consultation real soon. In the November 29, 2018 issue of the Bangkok Post, deputy secretary Tipsuda Thavaramara said: “the regulator will have to consider how to deal with STOs for issues such as share ownership, voting rights and dividend.” He also said that at the moment, they have not decided whether STOs fall under the Sec Act or the Digital Asset Act, but it depends on the STO’s conditions and the details of its white paper.

Thavaramara also noted that an STO affiliated with Thai investors launching in an international market at this point would be guilty of wrongdoing under the Digital Asset Act as it would avoid regulated fund-raising channels.


The global crypto space is still a work in progress and full of new ideas. While some countries see the growth as a good thing, others don’t seem to agree, maybe for now. The introduction of STOs which analysts predict to eventually replace ICOs has also raised concerns among regulators around the world. Although STOs and regulatory measures are both in their early stages of developments, with Malta and Lithuania at the forefront, several countries have already made a move in coming up with regulations to adapt to these recent changes in the market.

Still, not many countries are ready for this shift yet. Supporters of STOs need to be more active in promoting the benefits that STOs offer and their advantages over other fundraising activities. Maybe then more countries would take security tokens more seriously and revisit their existing securities regulations. While writing this article, I have identified several areas of risk even with a regulatory framework in place but there is no more room for more opinions. And remember that if you are interested in the topic, we have great courses on PayKademy. I know I learnt a lot from them myself.


About Daniel Chatelain

Daniel Chatelain is a payment and fintech industry executive focused on innovation and sitting on the board of directors or advisors of emerging companies. He started The BayPay Forum and he is the CEO of PayKademy.


About PayKademy

PayKademy is the new school to learn Payments. Payments are more and more an integral part of a business and few people understand the competitive advantage that you get when you understand the complete ecosystem, how it works and its pricing models PayKademy provides courses in-person, on-site and online with a careful selection of instructors, experts in the industry and a particular attention to keep the students engaged with their instructors being face to face or online as well.