As a highly developed free market economy, Singapore was ranked as the country with the second-highest economic freedom in the 2019 Economic Freedom Index. True to its reputation, Singapore also is rapidly becoming Southeast Asia’s Security Token Offering (STO) hub, leading the region with 12 completed STOs that raked in a total of US$21 million as of the first quarter of this year.
As a progressive city-state that does not shy away from embracing digital technologies for national development, Singapore’s free market economy perfectly concords with the underlying ideals of crypto fundraising: to democratize investment.
Crypto fundraising mechanisms, in general, were devised as alternative public fundraising methods to conventional capital market frameworks. However, the STO, which features fractional ownership, is the crypto fundraising mechanism that is most coherent with the idea of democratizing investment compared to the Initial Coin Offering (ICO) or the Initial Exchange Offering (IEO).
In Singapore, where land is scarce and the population is booming, the fractional ownership of STOs may open the door for investors to enter the local real estate market. The tokenization of the real estate properties in Singapore would lower the barrier of entry to invest in local real estate, given their exorbitant prices.
The Security Token Offering has benefited the most from the decline of ICOs. As the number of ICOs plummeted 79% from the second quarter of 2018 to the first quarter of 2019, the number of STOs has conversely risen 130% quarter-to-quarter in the first quarter of 2019.
While Singapore, as the crypto hub of Southeast Asia, may be looking to ride the STO wave to further propel its local crypto industry forward, the highly disciplined jurisdiction is unlikely to compromise its regulatory oversight or sacrifice the strong fundamentals of its local crypto market for short-term benefits.
Case in point: the Monetary Authority of Singapore (MAS) in February this year blocked a local STO launch on the grounds that the issuer had failed to comply with the prohibition on advertisements, merely by posting a promotional article on a professional networking platform. However, it is precisely this sort of regimental enforcement by the MAS of its regulations that instill investor confidence in the integrity of the local crypto market and has, in turn, contributed to the sustained growth of Singapore’s crypto industry.
Nonetheless, the MAS acknowledges that the industry is still relatively nascent, and therefore needs a certain degree of regulatory flexibility to promote growth. Although STO tokens would generally fall under the definition of ‘securities’ in the Securities and Futures Act (SFA), the MAS has allowed some exemptions through its “Guide to Digital Token Offerings,” particularly regarding the requirement to file a prospectus with the MAS.
An STO issuer does not need file a prospectus if (1) the value of the STO does not exceed S$5 million (or foreign currency equivalent) within any 12-month period, (2) the STO is a private placement offer made to not more than 50 persons within any 12-month period, and (3) the STO is made available for subscription only to accredited and institutional investors.
This conditional exemption highlights the regulator’s understanding and awareness of the STO sector. Crypto investments are generally more diverse and fragmented compared to conventional securities investments. Realizing this, the MAS has chosen a more measured approach so as to not burden the local crypto industry with unduly cumbersome regulations.
On the industry front, the Singapore Exchange (SGX) has jumped on the STO bandwagon, backing two security token trading platforms — the iSTOX and 1X platforms. iSTOX began operating since May this year under the framework of the MAS’ financial technology (fintech) regulatory sandbox. It aims to become a full-fledged capital markets trading platform that facilitates the trading of tokenized securities by early next year.
Meanwhile, the 1X platform, which was built with the technical support of Ethereum-based startup ConsenSys, went live in July this year with the objective of leveraging the conventional Initial Public Offering (IPO) mechanism for private companies to raise capital, yet improving the liquidity of the primary capital market through the use of a public blockchain to validate transactions through the platform.
As regulators from jurisdictions around the world grapple the unconventional nature of STOs, especially walking the fine line between a stifling regulatory environment and a crypto Wild West, Singapore appears to have achieved that balance for guided industry growth, a chimeric approach not unlike its landmark Merlion.
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