Digital currencies

Hong Kong’s regulator halts initial coin offering, orders Black Cell to return tokens to investors

In the six months since the People’s Bank of China banned ICOs, crypto issuers had flocked to Hong Kong. Now the city’s regulator is calling a halt to the fundraising

PUBLISHED : Monday, 19 March, 2018, 9:06pm
UPDATED : Monday, 19 March, 2018, 11:31pm

Hong Kong’s securities regulator has ordered a company that is raising capital through an initial coin offering to halt the fundraising and return all tokens to investors, an unprecedented move to rein in the runaway market for cryptocurrencies.

The issuer, Hong Kong-based Black Cell, had been promoting the sale of digital tokens called KROPS to investors through its website. It said the ICO proceeds would be used to fund the development of a mobile application, and holders of the tokens would be eligible to redeem equity shares in the firm.

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But the Securities and Futures Commission (SFC) said the fundraising exercise may constitute “unauthorised promotional activities and unlicensed regulated activities”.

The size of the ICO and value of tokens to be refunded has not been revealed.

In a notice published on Monday evening, the SFC said the offering would qualify as a “collective investment scheme” that would require the regulator’s approval to sell or market to the general public. Under such a scheme, the tokens would be regarded as “securities” and would therefore legally fall under the SFC’s jurisdiction.

Black Cell, which began life in the Philippines but has a registered address in Hong Kong, has not immediately responded to emails and calls from the Post for comment.

What happened to initial coin offerings in China?

According to the ICO’s telegram group, Black Cell has been marketing its token across Asia, including at the Asean Agriculture Summit in Manila last year. The token would be used to fund an app, which Black Cell described as an online marketplace for farm products.

The SFC has been stepping up efforts to regulate ICOs and other activities involving digital currencies. Last month, the securities regulator said it had sent letters to seven unnamed cryptocurrency exchanges, warning them not to trade virtual currencies or tokens deemed as “securities” under Hong Kong law, without a licence. Those tokens were subsequently delisted by the exchanges.

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The SFC also wrote to seven ICO issuers asking them to immediately cease offering tokens to Hong Kong investors.

But Monday’s move marks the first time the watchdog has halted a specific ICO and demanded the issuer refund the investors.

ICOs have seen explosive growth since last year. However, while they have collected a large pool of money from investors, about half of them have come to nothing, according to Token Data. Of the 902 token sales launched in 2017, 46 per cent of them have failed and not delivered.

China completely banned the sale of ICOs in September last year, branding token sales “illegal and disruptive to economic and financial stability”.

Since then, cryptocurrency enthusiasts have flocked to Hong Kong to raise funds, but the SFC’s latest move may undermine that fundraising.