The future of finance: A blockchain-based capital market in Labuan IBFC
Introduction
According to a recent report by Boston Consulting Group and ADDX, it is projected that approximately USD16 trillion worth of assets will be tokenised by 2030 (Boston Consulting Group & ADDX, 2022). Tokenisation has the potential to encompass almost everything with value, with securities or financial instruments expected to constitute the largest portion. Consequently, many countries have responded to this emerging trend by introducing regulations for securities token offerings (STOs), leading to the birth of technology-based blockchain capital markets.
To meet future market demands, numerous technology companies are transforming into blockchain-based capital market infrastructure providers. This shift enables financial institutions to offer services such as digital securities, tokenisation, and cryptocurrency trading. Consequently, even traditional banks are investing in crypto-based companies to stay relevant in the evolving market. In response to these changes, many countries are actively embracing digital finance.
STOs represent a regulated and compliant approach to issuing digital securities, aligning with existing financial laws and regulations. Since their inception, STOs have gained recognition in key financial markets around the world, with jurisdictions such as the United States, European Union, Hong Kong, Singapore, and others establishing clear guidelines for their issuance and trading. By adhering to established regulatory frameworks, STOs provide a legally sound method for raising capital through tokenised assets, offering investors greater protection and transparency. As a result, STOs have seen increasing adoption, particularly in regions with well-established financial regulatory systems.
In Malaysia, the government has recognised the potential of STOs and has introduced regulations to govern their issuance, ensuring they align with the country’s broader financial regulatory framework by Securities Commission Malaysia. Additionally, Labuan International Business and Financial Centre (Labuan IBFC), as a gateway for foreigners to tap into the Malaysian market and vice versa, is expected to emerge as a key player in blockchain-based capital markets, especially in the APAC region. The Labuan Financial Services Authority (Labuan FSA), through its Strategic Roadmap 2022-2026, emphasises comprehensive financial offerings with a strong focus on digital innovations, including security tokens as a key component.
What are securities and tokenisation?
Securities
Securities are financial instruments that can be categorised into three types: equity (stock), which represents an ownership position; debt (bonds), which signifies a creditor relationship; and derivatives, which represent rights to ownership or other financial assets, typically through options or similar contracts.
Tokenisation
Tokenisation is the process of converting a real or tangible asset—such as physical goods, financial instruments, or rights—into a digital token on a blockchain or distributed ledger. These tokens can represent ownership, fractional ownership, or specific rights related to the underlying asset.
A blockchain is a secure, immutable digital ledger stored on a public database. It records data in blocks that include transaction details like timestamps, amounts, and participant identities, all verified by unique digital signatures.
A smart contract is a self-executing programme that automatically enforces, verifies, or executes the terms of an agreement or transaction when predefined conditions are met, eliminating the need for intermediaries.
A blockchain is a secure, immutable digital ledger stored on a public database. It records data in blocks that include transaction details like timestamps, amounts, and participant identities, all verified by unique digital signatures.
A smart contract is a self-executing programme that automatically enforces, verifies, or executes the terms of an agreement or transaction when predefined conditions are met, eliminating the need for intermediaries.
Securities Token
A securities token is a digital asset that represents ownership or other rights in an underlying asset, typically a financial security such as stocks, bonds, or real estate, and is issued and traded on a blockchain or distributed ledger.
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What is STO?
STO is a fundraising method in which digital tokens representing ownership in an asset, such as equity, debt, or other financial instruments, are issued on a blockchain. These tokens are considered securities, meaning they are subject to regulatory oversight and must comply with securities laws. STOs offer investors legal rights similar to traditional investments, such as dividends, interest payments, or ownership stakes, making them a secure and credible way for companies to raise capital through blockchain technology.
STO Process
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The tokenisation process begins with a tailored structuring advisory, designed to align with specific goals and objectives. This phase includes developing a comprehensive legal framework and preparing all essential documentation, such as the offering memorandum, offering structure and term, taxation. Every aspect is carefully crafted to meet regulatory requirements and market expectations, paving the way for a successful STO.
Building a Strong Foundation: Legal and Compliance Review
A thorough legal and compliance review forms the backbone of the tokenisation process. An in-depth analysis ensures that the STO adheres to all relevant laws and regulations, both locally and internationally. This comprehensive review safeguards the interests of both the issuer and future investors, minimising legal risks and facilitating a smooth market entry.
Unveiling Value: Property Appraisal and Valuation
A professional appraisal determines the value of the underlying assets associated with the security tokens. This valuation directly influences the token pricing and is crucial for establishing a fair and transparent offering. Accurate valuation builds investor confidence and lays a strong foundation for the STO.
Birth of the Tokens: Token Issuance
The issuance of digital security tokens marks a pivotal point in the STO process. These tokens represent ownership or rights related to the underlying asset, and their creation is managed to ensure compliance with regulatory standards. The issuance process includes ensuring that only eligible investors participate, maintaining the integrity of the offering.
Expanding Access: Listing on a Digital Exchange
Following the issuance, the security tokens may be listed on a secure and reputable digital exchange platform. This step opens access to a global pool of investors, providing enhanced liquidity and greater market reach. The listing process is conducted with precision, ensuring that the tokens are effectively positioned in the marketplace.
A Thriving Marketplace: Investor Engagement and Trading
With tokens available on the digital exchange, a dynamic marketplace emerges where investors can buy, sell, and trade their holdings. This fosters an active investment community, increasing the visibility and value of the tokenised property. Ongoing engagement with investors is crucial to maintaining interest and driving the success of the STO.
Reap the Rewards: Income Distribution
As the underlying assets generate income, such as dividends or interest, these earnings are automatically distributed to token holders through smart contracts. This process is transparent, efficient, and ensures that all investors receive their share promptly. The use of smart contracts eliminates the need for intermediaries, reducing costs and enhancing trust in the distribution process.
STO in Labuan IBFC
In 2023, Labuan IBFC issued the Guidelines on Labuan Securities Token Offering, reflecting its commitment to adopting blockchain-based capital markets. A key feature of the STO framework in Labuan is the clear categorisation of offerings into private and public STOs. Below are the requirements for each category:
Private STO:
Public STO:
These structured requirements provide clarity and security for issuers and investors, reinforcing Labuan IBFC's position as a forward-thinking jurisdiction in the evolving digital finance landscape.
Private STO:
- Limited to a specific, identifiable group of investors, typically not exceeding 50 persons.
- Investors must possess sufficient information to make a reasonable evaluation of the offer.
- The minimum investment for offerings is RM250,000 or its equivalent in other currencies.
- Private STOs may appoint competent agents or intermediaries, which do not necessarily need to be licensed by Labuan FSA but must be registered or licensed by other competent authorities.
Public STO:
- Open to a broader pool of investors beyond a private circle.
- Requires formal approval from Labuan FSA.
- Issuers must meet minimum capital requirements of MYR500,000 or its equivalent in any foreign currency.
- The issuer's management team, including directors and key officers, must be fit and proper persons.
- Public STOs require the appointment of licensed intermediaries, including a Labuan trust company or a bank licensee, and must adhere to stringent compliance and reporting standards.
These structured requirements provide clarity and security for issuers and investors, reinforcing Labuan IBFC's position as a forward-thinking jurisdiction in the evolving digital finance landscape.
Why Labuan IBFC?
Labuan is an attractive jurisdiction for several reasons, especially for those looking to engage in innovative financial services like Security Token Offerings (STOs). Here are some key reasons why Labuan IBFC is an ideal location:
Reputable International Business and Financial Centre: Labuan IBFC is well-established as a reputable international business and financial hub, offering a robust regulatory framework, political stability, and a strategic location in Asia, which is advantageous for businesses targeting the Asia-Pacific region.
Tax Efficiency: Labuan offers a favourable tax regime, including low corporate tax rates and various tax incentives, making it an attractive destination for businesses looking to optimise their tax obligations while operating in a regulated environment.
Access to Global Markets: By being part of Malaysia, Labuan IBFC benefits from Malaysia’s network of double taxation treaties with over 70 countries, providing businesses with enhanced market access and opportunities for international expansion.
Comprehensive Financial Services: Labuan IBFC offers a wide range of financial services, including banking, insurance, leasing, and wealth management, making it a one-stop centre for businesses seeking to diversify their financial operations.
International Recognition: Labuan IBFC is recognised globally as a well-regulated jurisdiction that meets international standards for transparency and compliance, which adds to the credibility of businesses operating within its framework.
These factors make Labuan IBFC an appealing destination for companies looking to raise capital through innovative means such as STOs, while benefitting from a supportive regulatory environment, tax efficiency, and access to global markets.
Reputable International Business and Financial Centre: Labuan IBFC is well-established as a reputable international business and financial hub, offering a robust regulatory framework, political stability, and a strategic location in Asia, which is advantageous for businesses targeting the Asia-Pacific region.
Tax Efficiency: Labuan offers a favourable tax regime, including low corporate tax rates and various tax incentives, making it an attractive destination for businesses looking to optimise their tax obligations while operating in a regulated environment.
Access to Global Markets: By being part of Malaysia, Labuan IBFC benefits from Malaysia’s network of double taxation treaties with over 70 countries, providing businesses with enhanced market access and opportunities for international expansion.
Comprehensive Financial Services: Labuan IBFC offers a wide range of financial services, including banking, insurance, leasing, and wealth management, making it a one-stop centre for businesses seeking to diversify their financial operations.
International Recognition: Labuan IBFC is recognised globally as a well-regulated jurisdiction that meets international standards for transparency and compliance, which adds to the credibility of businesses operating within its framework.
These factors make Labuan IBFC an appealing destination for companies looking to raise capital through innovative means such as STOs, while benefitting from a supportive regulatory environment, tax efficiency, and access to global markets.
Conclusion
The evolution of STOs is reshaping the global financial landscape, providing a secure and regulated avenue for digital securities. With Labuan IBFC emerging as a key player in the blockchain-based capital markets, the jurisdiction's forward-thinking regulatory framework and strategic advantages make it an ideal hub for innovative financial services. By embracing STOs, Labuan IBFC is positioning itself at the forefront of the digital finance revolution, offering both issuers and investors a promising gateway to the Asia-Pacific market and beyond.
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Established in 2011, BBS TRUST INT’L LIMITED is a licensed Labuan trust company under the Labuan Companies Act 1990 (LCA). They provide a wide range of specialised services to support businesses in navigating complex international markets. Their core expertise includes global business expansion, facilitating market entry, international corporate structuring, optimising business frameworks for efficiency; digital financial services, driving innovation with technology; global wealth preservation, safeguarding assets across borders, and business re-domiciling, ensuring smooth transitions to favourable jurisdictions.
For more details, visit bbstrust.com
