Standard Kepler

Commentary on the Halted Black Cell ICO

Global regulators are gearing up for a crackdown on fraudulent practices, as evident by the SEC, AMP, and recent actions in China. Last evening, Hong Kong’s SFC halted Black Cell’s ICO to the Hong Kong public. This is by some seen to be the first step towards a crackdown on the market, and the beginning of further regulations.


Black Cell’s ICO is basically a fundraising activity for the KROPS mobile application. The application itself is a platform for matching buyers and sellers of agricultural products, such as livestock, fruits, and rice. The sellers of such products can upload photos with details on their products, while buyers can place orders. The company claims to have 6,480 registered farmers, and an estimated marketplace inventory for sale worth around US$293 million.

In the Black Cell project whitepaper, it says their KropCoins token can redeem shares in the company developing the abovementioned application, with the total issuance of the coin (20 million KropCoins) representing 20% of the company’s equity.

It is apparent that the company is involved in a crowdfunding activity with their shares, and activity which is clearly regulated as set forth by the SFC in Hong Kong. As a result, the regulatory body decided to halt the Black Cell ICO last evening.


Source: Project Whitepaper


According to current practices, an ICO and related token can be categorized into the following 3 types: cryptocurrencies, utility tokens, or security tokens.

Cryptocurrencies: The purpose of a cryptocurrency coin is to serve as an alternative to fiat currencies, and to facilitate an exchange in value. The design of the token focuses on technical performances, such as the speed of processing a transaction, security, and degree of transparency. With little intrinsic value due to their limited functionality beyond serving as a medium of exchange, their value is generally based on consensus. A good example of such a coin would be Bitcoin.

Utility Tokens
: A utility token should be a means of payment for a specific set of services built on a blockchain. For example, Ethereum is platform where developers can write and deploy smart contracts – programable and self-executable contracts, while Ether is the token users need in order to pay for the service. The value of the token comes from the facilitation of and utility on the platform where they are used.

Security Tokens: A token will be considered as a security if it falls into the following categories:

  1. It confers or represents ownership interest in a corporation, represents liability of the token holder in the corporation, and represents mutual covenants with other token holders in the corporation inter se
  2. It constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder
  3. It represents a right or interest in a collective investment scheme, or an option to acquire a right or interest in such scheme

To launch a security token is clearly forbidden in many jurisdictions, including the US and Singapore, two of the top 3 countries[1] launching ICOs. Dealing with security tokens in these countries will be considered no different form dealing with securities[2][3], and people or organizations dealing with the related activities should be licensed. And, as exemplified by HK’s SFC action last evening, Hong Kong’s attitude towards such behavior has become very clear.

It should come as no surprise to anyone that the SFC decided to shut down the Black Cell ICO, as legitimate ICOs support utility tokens, and due to their relatively recent arrival there are not yet any clear existing laws regulating these. As stated in a press release from SFC on 9 Feb, “ICO issuers are typically assisted by market professionals such as lawyers, accountants and consultants for advice to structure the offering as utility tokens to fall outside the purview of the SFO and to circumvent the scrutiny of the SFC.”


So does this mean that a business can and should offer a coin in support of whatever services they are currently offering? Would it make sense for Starbucks to issue Starbucks-coins to pay for their coffee, or a country to issue oil coins to receive payments for their oil?

No – there is further depth in to issuing a utility token, and in particular we look for projects that can answer the following questions as set forth in Standard Kepler’s Five Rules of Utility Token Evaluation:

1. What problem is the project attempting to solve?

Value is created when problems are solved. It does not matter if it is an ICO, an IPO, or other form of fundraising. If the project does not seek to solve a real problem, to generate real technological utility, then there is little point in funding the project.  Is there a problem with the existing buying and selling model for agricultural products? If yes, is a mobile application the best tool for solving that problem? How much value is created if the company applies this tool towards this problem?

2. How does blockchain play a role in solving this problem?

Technologies are invented so as to aid humanity in solving problems, and blockchain is just one of the many tech tools we have at our disposal. The nature of blockchain makes it particularly suitable for solving problems related to transaction costs. Make sure the ICO issuer convincingly explains what problems the project is solving, and why it needs blockchain to do so.

3. In the end does the issuer seek to create a centralized for-profit company, or a decentralized protocol that could one day exist without the developing team?

Alright, we have identified a problem, and as it so happens blockchain is well suited to potentially solve this problem. Still, why do you wish to raise funds via an ICO? You may as well be a blockchain company, earn profits and sell your equity for financing. A popular analogy looks at how the Internet relates to Internet companies. Internet is a network for sending information to people all over the world. It is also a universally available protocol. People invented and developed it, but no one owns it. On the other hand, anyone can build internet companies on top of it and own the companies.

If you plan a network protocol that you expect to be of value to a lot of people, you can pre-sell some of that value to people who might use the protocol. You then use the proceeds to fund its development and reward yourself for your labor. In the end you step out of the way. In this case, an ICO is right for you. But if you are building a company on blockchain that tries to earn profits and exercise power along the way, then you may as well fund yourself via equity from VCs.

4. Can the token issuer delivery on its vision?

Building a business is never easy, and building a business on blockchain does not make it easier. Has the team been working closely together or even successfully launched a product with existing users before.

5. Is the project compliant with the law?

While much of regulations on utility tokens is still not clear, it is important to make sure an ICO adheres to the laws that do exist. Talk to the advisor of the ICO, and to ask for legal opinions clarifying the token’s nature is generally regarded as a good practice.


The sector is still in its infancy. Not only is there a lack of regulations, indeed the research and development of the blockchain technology itself is still very immature. As stated by Ms. Julia Leung, the SFC’s Executive Director of Intermediaries, “if investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest.”

We foresee more regulation coming into effect in Hong Kong. Standard Kepler started as a group of developers on Ethereum, and we are very happy to see a healthy development of the market. The city and sector as a whole is full of terrible examples of how blockchain technology should not be applied. We see ICOs as a revolutionary way to fund real solutions to real human problems, and we look forward to a regulated and healthy development of the market, and the prospering development of the underlying technology.

© 2018 Standard Kepler