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Hong Kong. Cryptocurrency: prohibitions and warnings

With the increasing popularity of ICO (Initial coin offering, where percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. The term may be analogous with 'token sale' or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date) many regulators of the world expressed concern about this method of funds raised. ICOs are digital token sales that have seen unchecked growth over the past year, raising $1.6 billion.

On September 4, 2017, the People's Bank of China published an Announcement on Preventing Risks relating to Fundraising through Token Offerings (Announcement) announcing such practices illegal. According to this Announcement, all banks and financial organizations of China are prohibited from carrying out any activities related to the trading of crypto currencies. Moreover, platforms, through which trade of crypto currencies are carried out, are forbidden to convert them into official currencies. Digital tokens can not be used as a currency on the market. With the issuance of the Announcement, the Chinese authorities have clearly indicated their position that token offerings such as ICOs are classified as illegal fundraisings

According to official data, 65 ICO were conducted in China, which resulted in attracting about 2.62 billion yuan (about 400 million US dollars) from more than 100,000 individuals. As a result, according to the decision of the People's Bank of China, organizations and individuals who have already raised funds in this way should return money to investors. Failure to comply with the Announcement and relevant Chinese laws and regulations may lead to the shutdown of websites and mobile apps, the removal of mobile apps from app stores and the revocation of business licenses held by token fundraising and exchange platforms.

Hong Kong Securities and Futures Commission (SFC) follows Chinese regulator in cracking down on ICO activities and also published an official Statement on raising funds, by selling crypto currencies to investors. The Hong Kong SFC indicates that the ICO are likely to fall under securities laws. Crypto exchanges that offer secondary trading of ICO tokens will also be subject to Hong Kong securities laws, the SFC says.

The SFC warns that ICOs are subject to different regulatory regimes in different jurisdictions, therefore it is important for any business that is contemplating conducting an ICO to obtain multi-jurisdictional securities law advice and to consider whether any jurisdictions (or categories of persons) need to be excluded from the ICO; and carry out investor identification checks to facilitate and support any such exclusions. Also, the Hong Kong Regulator warns about possible fraud, the risks of money laundry and financing of terrorism, which the ICO bears, and recalls that security measures should be taken. Thus, individuals who plan to invest funds in ICO must fully understand the features of the products or projects are offered them and carefully weigh up all the risks before investing.

In addition it should be noted that US regulators said in July 2017 that ICOs were subject to securities laws and Korean regulators have also pledged a crackdown.

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