iSTOX is supported by Chongqing, can the Greater China STO compliance process start?

Editor of this issue | Colin Wu

Editor of this issue | Colin Wu

REITs, the prequel of STO legalization

1. The value and significance of STO and REITs

STO (Security Token Offering) refers to the issuance of securitized asset tokens, such as real estate security tokens and oil security tokens. The goal is to conduct public issuance of tokens under a legal and compliant regulatory framework.

REITs (Real Estate Investment Trusts, real estate investment trust funds) is a way of issuing income certificates to collect the funds of a specific majority of investors, and the real estate investment management is carried out by specialized investment institutions, and the comprehensive investment income is distributed to investors in proportion a trust fund.

Both STO and REITs can increase the liquidity of high-quality assets, effectively revitalize stock assets, fill the current gap in financial products, broaden social capital investment channels, increase the proportion of direct financing, and enhance the quality and efficiency of capital markets in serving the real economy. A financial institution may not be able to directly purchase land, but it can indirectly hold warrants issued with land as the underlying asset through REITs or STO.

As a high-profile version of REITs with digital tokens, STO can create digital equity, asset ownership and investment tools on the blockchain platform, and simplify the resale of other illiquid assets by creating a strong and liquid bilateral or even multilateral market. asset process.

2. The difference between STO and REITs

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From the perspective of REITs, the dawn of legal promotion of STO is emerging

It is not only extremely difficult to formulate a set of regulatory policies for digital financial products alone, but also may generate uncertain risks. Regulatory agencies in various countries, especially the US regulatory agencies represented by the US Securities Regulatory Commission SEC, have been trying to introduce blockchain technology into the traditional financial market without introducing too many new regulatory policies.

STO is a digital token version of REITs. As long as REITs develop smoothly, STO will naturally become a legal financial derivative during the transition from traditional finance to digital finance in the future. From another perspective, the relevant departments are constantly improving the supervision of REITs, and these rules and policies can be transplanted into the supervision of STO soon after they are mature.

1. Recently, domestic regulatory agencies have repeatedly issued important rules and policies on REITs: 1) On January 29, 2021, the Shanghai Stock Exchange issued three main business rules for infrastructure securities investment funds (REITs), namely "Public Offering Fundamentals" Facilities Securities Investment Funds (REITs) Business Measures (Trial) (hereinafter referred to as the "Business Measures"), "Guidelines No. 1 for the Application of Publicly Offered Infrastructure Securities Investment Funds (REITs) Rules - Audit Concerns (Trial)" (hereinafter (referred to as "Review Concerns"), "Guidelines No. 2 for the Application of the Rules for Publicly Offered Infrastructure Securities Investment Funds (REITs) - Offering Business (Trial)" (hereinafter referred to as the "Guidelines for Offering Business"). The official release of these three rules marks the staged progress of the Shanghai Stock Exchange in promoting the pilot work of infrastructure public offering REITs. Experts pointed out that with the official launch of infrastructure public offering REITs, a new trillion-dollar investment and financing market will be activated, which is a milestone in the construction of China's capital market and the guidance of equity investment in the infrastructure sector.

2) As early as April 2020, the China Securities Regulatory Commission and the National Development and Reform Commission jointly issued the "Notice on Promoting the Pilot Project of Real Estate Investment Trusts (REITs) in the Infrastructure Sector", marking the official launch of the Chinese version of infrastructure public offering REITs.

3) On June 18, 2020, the Chongqing Municipal Government issued the "Chongqing City New Infrastructure Major Project Construction Action Plan (2020-2022)". In three years, Chongqing will invest a total of 398.3 billion yuan to implement and reserve 375 major new infrastructure projects on a rolling basis. The document pointed out that Chongqing plans to "take 2020-2022 as the cycle, implement the construction and reserve of major new infrastructure projects in the city on a rolling basis, and promote the deep integration of the digital economy and the real economy."

2. Chongqing pilot process

As early as November 2020, iSTOX received strong support from the Chongqing Municipal Government and the Chongqing Financial Administration and signed a memorandum. The two parties agreed to establish a digital stock exchange in Chongqing to serve the Chinese market, and at the same time accelerate the pace of iSTOX's business development in China. The Chongqing Financial Administration stated that it will actively coordinate and seek policy support for matters that need to be approved by relevant Chinese financial regulatory agencies and implement them.

3. Hainan Regulatory Sandbox Pilot

In May 2020, the "Notice on Printing and Distributing Several Policies and Measures for Accelerating the Development of the Blockchain Industry in Hainan Province" proposed to "support leading enterprises to explore the construction of digital asset-based trading platforms, explore digitalization, digital asset rights protection, global flow of digital assets, Standards and technical models for digital asset transactions will promote digital asset-related businesses to be first tested in Hainan."

On December 1, 2019, in the construction of Hainan International Offshore Innovation and Entrepreneurship Demonstration Zone and Blockchain Digital Asset Trading Technology Innovation High-end Forum, Vice Governor of Hainan Province Wang Lu said in his speech, "The next step is the blockchain We are still not very clear about how to do digital asset transactions, but we have a wish that Hainan will become the center of the offshore innovation and entrepreneurship demonstration zone, and that Hainan will become the center of national blockchain research and application demonstration, and we also hope that we will become the center of national blockchain research and application demonstration. Digital asset transaction demonstration zone.” Chen Yang, Director of the Local Financial Supervision and Administration Bureau of Hainan Province, specifically mentioned that Hainan will introduce a “regulatory sandbox” model.

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A brief analysis of the regulatory development trend of STO

1. International regulatory methods for STO 1) Regulatory requirements for registration and exemption The US Securities Regulatory Commission (SEC) was the first to include STO as a financial product in the scope of supervision. There are two ways to legally issue public fund-raising projects in the United States. One is to register according to the requirements of the SEC and raise funds through IPO listing; Under supervision, STO projects that are exempt from registration must still meet the SEC's requirements for anti-money laundering AML, KYC and qualified investors. At present, the most feasible way to issue security tokens in the United States is the second method, which is to use the exemption conditions listed in the regulatory act to legally issue STO. Due to the requirements of fundraising and the cost of information disclosure, most of the STO project plans currently issued in the United States include the exemption Regulation D 506 (c).

The Monetary Authority of Singapore (MAS) released the "Digital Token Issuance Guidelines" in November 2017. It did not specifically require STO, but regulated all digital token projects. In addition, due to the strict control of financial licenses in Singapore, the biggest difficulty in issuing STO projects in Singapore is not whether the project itself is compliant, but whether the issuing institution has obtained the corresponding license. "If digital tokens constitute securities or futures contracts, those who build or operate trading platforms related to digital tokens in Singapore must obtain permission from MAS to establish an exchange, or be recognized by MAS as a market operator under the jurisdiction of SFA."

securities"securities"1, and is therefore subject to Hong Kong securities laws. "In addition, in the statement, SFC also covered the STO distribution requirements involved in the "Circular to Intermediaries-Distribution of Virtual Asset Funds" issued on November 1, 2018, from sales restrictions, due diligence, and the need to provide customers with A key overview of the data and other aspects.

2) The "regulatory sandbox" method generally adopted in Singapore, the European Union and other places. In November 2016, the Monetary Authority of Singapore (MAS) issued the Fintech Regulatory Sandbox Guidelines, providing a relatively isolated space for fintech innovation. January 21, 2021 – iSTOX, the world's leading digital securities platform, announced today that it has officially completed its Series A financing of US$50 million. This round of financing has received investment from two Japanese state-owned institutions, including the venture capital branch of Japan Investment Corporation (JIC) and the Bank of Japan (DBJ), which is a financial institution wholly owned by the Japanese government. Newly introduced investors also include Sixteen Bank and venture capital firm Mobile Internet Capital (MIC).

Regulatory agencies at the EU level do not have a particularly negative attitude towards STO, and only require compliance with the corresponding securities regulatory regulations. European countries have other detailed requirements for STO. On March 6, 2020, the French market regulator AMF announced that it proposed a European "Digital Lab" regulatory sandbox, allowing local regulators to waive requirements related to security solutions. The project aims to study The broader concept of STOs and blockchain-based financial instruments. Regulators hope the measures will boost the development of the securitization market.

2. The ban of ICO will not affect the legalization of STO in China. Whether it is digital finance or traditional finance, financial derivatives must serve the real economy in order to avoid becoming a P2P bubble.

Don't think that STO is just an evolutionary form of ICO. There is a fundamental difference between the two in terms of underlying assets. The essential reason why ICO is banned is not because it is a virtual token issuance, nor is it because of the use of blockchain technology. The most fundamental reason is that the issuance of ICO is not linked to real assets, which can easily become a financing scam. Indeed, there has been a plethora of frothy aircoins and pyramid schemes. According to the "Announcement on Preventing Token Issuance and Financing Risks" issued by the five ministries and commissions on September 4, 2017, "Token Issuance Financing refers to the financing subject raising bitcoin, ether, etc. from investors through the illegal sale and circulation of tokens." The so-called "virtual currency" is essentially an act of illegal public financing without approval, and is suspected of illegal and criminal activities such as illegal sale of token coupons, illegal issuance of securities, illegal fundraising, financial fraud, and pyramid schemes." It can be seen that China What the regulators are resisting is not digital tokens, but financial fraud and pyramid schemes.

The financial products that policymakers hope to approve are financial products that can serve the real economy and are risk-controllable to a certain extent. STO is a digital token version of REITs, "under the legal and compliant regulatory framework, the issuance of securities with Token as the carrier on the blockchain," and the most critical point is "linked to tangible assets." This is the essential difference between STO and ICO, and it is also the reason why ICO is completely banned, while STO may obtain regulatory approval in the future.

3. Recently, Chinese regulatory agencies are constantly improving the rules of REITs. Combining the recent regulatory exploration models for STOs in Hainan and Chongqing, on the one hand, it means that the dawn of STO legalization is coming soon, and on the other hand, it also means that the application of REITs in China In the case of immature regulation and supervision, STO will have to wait for a while. The large-scale promotion of the legalization of STO in the future must be based on the establishment of perfect REITs rules for reference. Once REITs are fully promoted as mature financial derivatives, with the development of digital finance, it is the general trend for blockchain technology to gradually integrate into traditional financial derivatives, and the full implementation of STO will also be gradually realized in the future. (picture from topofblockchain)