Paris Hilton is the latest celebrity to endorse an ICO. REUTERS/Stephane Mahe LONDON — Hong Kong's financial regulator has said that "initial coin offerings" are likely to fall under securities laws, a day after both China and South Korea announced a crackdown on the controversial fundraising mechanism.

2017 has seen an explosion of financing using so-called "initial coin offerings" (ICOs), where startups issue their own virtual currencies in exchange for real money. Over $1.5 billion has been raised using this digital method in the first half of the year alone. Observers have termed it a "wild west" of financing due to its unregulated nature.

However, watchdogs around the world are slowly beginning to crack down on the sector, which in many cases offers little investor protection and high volatility.

The Hong Kong Securities and Futures Commission (SFC) said on Tuesday: "Whilst digital tokens offered in typical ICOs are usually characterised as a "virtual commodity”, the SFC has observed more recently that certain ICOs have terms and features that may mean that they are "securities"."

The SFC said tokens that offer ownership rights to a startup, dividend rights, or own a debt to their owner will all qualify as a security and be subject to local equity laws. Similarly, if a startup that raises cash through an ICO pools the funds to "invest in projects with an aim to enable token holders to participate in a share of the returns provided by the project," then it will also be subject to local 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: "As digital tokens involved in ICOs are transacted or held on an anonymous basis, by their nature they pose inherent and significant money laundering and terrorist financing risks." It calls on trading platforms "to take all reasonable measures to ensure that proper safeguards exist to mitigate these risks."

The SFC follows US, Chinese, and South Korean regulators in cracking down on ICO activities.

US regulators said in July that ICOs were subject to securities laws and the People's Bank of China on Monday banned all ICOs, calling them "illegal fundraisings." Korean regulators have also pledged a crackdown.