Chris Page and Peter Ch’ng of Conyers Dill & Pearman Hong Kong discuss the brave new world of blockchain, cryptocurrencies and ICOs: the opportunities and challenges they present, and the benefits of establishing issuers offshore.
What is an ICO?
CP: We’re all familiar with initial public offerings (IPOs) of shares by listed companies – well an initial coin offering is just another corporate finance fund raising tool, but with a twist. We live in an age where technology enables direct interfaces, and traditional forms of middlemen are being phased out: think of Uber or Airbnb, where consumers and suppliers deal with one another directly online. ICOs have provided blockchain entrepreneurs with a means to raise funds, not by traditional routes, but directly online; instead of selling shares or securities, ICO issuers offer digital “coins” or “tokens”.
PC: It’s no wonder that lawyers and regulators are equating ICOs and IPOs; many jurisdictions are still grappling with distinguishing the concepts of “coins” and “securities”. The way things are heading, as the market morphs from a free-for-all to become more tightly regulated, there might soon be little distinction between the two.
How do digital coins or tokens work?
CP: A coin or token is an intangible, digital unit that has certain rights attached to it within the platform or blockchain project set up by the issuer. Some have certain inherent value or utility, and most of them can also be traded on a digital exchange at a market value that goes up and down. Often the proceeds of the ICO are used to fund the development of a platform related to a start-up blockchain venture and the coin is used to participate in the underlying product or service offered on the platform. Purchasers of the coins on the secondary market are betting on the popularity of the platform.
PC: Imagine gaming tokens issued by an amusement park, which you can use to pay for rides and food within the park. Now imagine that the tokens are limited in numbers but can be traded with anybody. Now let the walls and fences fall away and replace that with a virtual world with no geographical confines where tokens are accepted everywhere, you might get a sense of the infinite possibilities of a tokenized world.
What are cryptocurrencies?
CP: A cryptocurrency is a unique form of coin that is intended to be used as digital currency. Bitcoin was the first, created in 2009. It is basically money that is an alternative to sovereign currency accepted as a medium of exchange by an increasing number of establishments – you can use Bitcoin to subscribe and pay for your Netflix subscription, for example. People also use Bitcoin to buy tokens issued in ICOs.
PC: Ether is another well-known cryptocurrency, generated by Ethereum, which is the world’s leading smart-contract blockchain platform. It allows users to create smart contract applications for a variety of commercial purposes which traditionally require middlemen or intermediate verification. For example, if you want to buy a vintage camera online from a seller in another country, Bitcoin doesn’t solve the trust issue: if you send your Bitcoin before receiving delivery of the camera, you are risking your Bitcoins. Ethereum allows the condition of delivery to be written into the payment. In the Ethereum-based platform, both buyer and seller can see that money (in the form of Ether) has been paid into the e-wallet where it is held in escrow pending electronic acknowledgment of the parcel delivery by the courier, when the money will be released. So both the buyer and seller are comfortable parting with their Ether and the camera.