Digital tokens and ICOs may be tied up in illegal activities, warn MAS and police

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The Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) of the Singapore Police Force today warned prospective buyers of digital tokens about fraud and other crime-related risks associated with the new funding method. The advisory note follows MAS’s statement last week that it would be exercising more regulatory scrutiny over “initial coin offerings” (ICOs) or sales of digital tokens by businesses as part of their fundraising efforts.

Digital token sales in particular are prone to being misused for illegal activities.

Repeating the gist of its earlier statement, MAS and CAD suggest in today’s advisory (PDF link) that the function of digital tokens – which a number of startups in Singapore have sold in crowdfunding initiatives – have evolved beyond that of purely being a virtual currency, and in some cases may more closely resemble a security interest in the businesses that have issued them.

The token sale advice offered by CAD and MAS is for the most part similar to what you’d expect in any investment scenario. Among other things, the note suggests that would-be token buyers “make it a point to understand the product” and “make the effort to find out more information about the underlying project, business, or assets.”

It points out that investing in schemes operating online or outside of Singapore are at a heightened risk of fraud and may be subject to foreign laws and regulations, and that digital token sales in particular “are prone to being misused for illegal activities” – the advisory specifically mentions money laundering and terrorism – “due to the anonymity of transactions.” The advisory suggests that prospective buyers check if vendors are registered with MAS.

Ask, check, confirm

Token sales and ICOs have been especially popular with early-stage companies that lack a proven track record. MAS and CAD underline that this makes it particularly difficult to establish their credibility. “As with all startups, the failure rate tends to be high,” the advisory says.

CAD and MAS provide the following to-do list for consumers:

1. Make sure you fully understand the benefits and risks of the product or service before committing.
2. Assess whether the features of the product or service offered meets your needs.
3. Before committing to an investment, you must “ask, check, and confirm”:
   a) Ask the seller as many questions as you need to fully understand the investment opportunity.
   b) Check if the information provided by the seller on itself or its scheme is true.
   c) Before investing, confirm the credentials of the seller or its representatives by using resources such as:
   – MAS’s Financial Institutions Directory
   – MAS’s Register of Representatives
   – Investor Alert List

MAS indicated in its statement last week that would-be issuers of digital tokens that entail an ownership stake or security interest must register a prospectus with it before launching an ICO. Furthermore, token issuers and secondary market operators hoping to facilitate trading of the tokens are subject to licensing requirements for securities vendors and must gain regulatory approval.

The US Securities & Exchange Commission similarly announced in July that it would now treat token sales as sales of securities.