Hong Kong: Laws Related to Token Sales, Blockchain, and Digital Proof

Arguably the law has not yet fully caught up with jurisdictional and data protection issues raised by the DLT in Hong Kong. Adoption of DLT, particularly un-permissioned DLT networks, raises a number of core issues which must be addressed before DLT is unleashed, particularly in the consumer context.

This is a problem in that personal data would be disseminated very widely (to all nodes in an un-permissioned DLT network), and this would require informed consent of the data subjects to be obtained. Also, given the changing and potentially anonymous nature of the nodes, enforcement of transgressions of applicable data principles (which vary from jurisdiction to jurisdiction and so may not be universally accepted by DLT participants) would currently seem impossible. (For further information, please see Privacy & data protection-related laws section)

For the same reasons (geographic spread and anonymity) as raised in relation to data privacy, parties to transactions wishing to pursue legal proceedings against other participants in the DLT network may have significant barriers to (1) identifying the correct party to sue and (2) establishing jurisdiction in the courts of a particular law district.

DLT can be incorporated into contracts to make them (wholly or, more likely partially) self-executing. There is currently a level of uncertainty as to whether individual jurisdictions’ laws will recognise a contract which consist of software, or a mixture of conventional writing and software combined.

Quite apart from the question of legal enforceability is the question of what is the applicable law for the DLT arrangement. There are well established rules of private international law, aimed at establishing the laws to govern contracts, but as yet private international law may be inadequate to answer fully the challenges represented by DLT.

A recent statement by the Hong Kong Securities and Futures Commission states that ‘The Securities and Futures Commission (SFC) has noticed an increase in the use of initial coin offerings (ICOs) to raise funds in Hong Kong and elsewhere. This statement serves to explain that, depending on the facts and circumstances of an ICO, digital tokens that are offered or sold may be “securities” as defined in the Securities and Futures Ordinance (SFO), and subject to the securities laws of Hong Kong.’

ICOs typically involve the issuance of digital tokens, created and disseminated using distributed ledger or blockchain technology. ICO scheme operators may promise buyers of digital tokens that the proceeds of an ICO will be used to fund development of a digital platform or related software which the token holders can subsequently access. Some token holders expect to make a return on their investment by reselling on the cryptocurrency exchanges. Whilst digital tokens offered in typical ICOs are usually characterized as a “virtual commodity”1, the SFC has observed more recently that certain ICOs have terms and features that may mean that they are “securities”.

According to the statement there are 3 cases in which the token sales through ICO’s might be considered as ‘securities’ and has to be regulated by related government agencies. Those 3 cases are:

  • Where digital tokens offered in an ICO represent equity or ownership interests in a corporation, these tokens may be regarded as “shares”. For example, token holders may be given shareholders’ rights, such as the right to receive dividends and the right to participate in the distribution of the corporation’s surplus assets upon winding up.

  • Where digital tokens are used to create or to acknowledge a debt or liability owed by the issuer, they may be considered as a “debenture”. For example, an issuer may repay token holders the principal of their investment on a fixed date or upon redemption, with interest paid to token holders.

  • If token proceeds are managed collectively by the ICO scheme operator to invest in projects with an aim to enable token holders to participate in a share of the returns provided by the project, the digital tokens may be regarded as an interest in a “collective investment scheme” (CIS)2. Shares, debentures and interests in a CIS are all regarded as “securities”.

At the same time, SFC indicates that ‘virtual commodity’ itself is not a security. Therefore, a correct structuring of tokens makes a significant difference in how the sale of tokens will be regulated in Hong Kong as well as in all other countries under their securities laws.

As advised by the Hong Kong Monetary Authority, virtual commodities are not backed by any physical items, issuers or the real economy, so it has no fixed value. Bitcoin and other virtual commodities are outside the regulatory ambit of the Hong Kong Monetary Authority.


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