Are tokens securities? How should Security Token Offerings (STO) be conducted? What does the future hold for the security value chain?
Are tokens securities?
A security token is defined as an instrument that provides a right of ownership and an entitlement to a share of future profits or cash flows. For example, a token may represent partial ownership of a specific property or of a financial instrument such as a government bond or other debt security.
Some regulators have opted to treat security tokens as securities in most instances. This is because they take the view that these tokens are intended to represent a promise as regards a future cash flow or a claim to partial ownership of a company. In this sense, security tokens are similar to traditional financial assets (equities, bonds, futures, options, etc.) for which there is clear existing legislation.
Issuers can also design tokens in a way that ensures that they qualify as securities by meeting the three main criteria under European law: transferability, negotiability, and standardization.
Transferability
Transferability means that units can be assigned to any other person, irrespective of whether certificates exist that record or document the existence of the units. Certificates are not used to prove the existence of tokens, but tokens can generally be sold on secondary markets. Therefore, they are typically transferable.
Negotiability
While “transferability” refers to the mere fact of passing on ownership in securities, the term “negotiability” refers to how easy it is to do so. Securities are classed as negotiable if they can be traded on a regulated market, multilateral trading facility (MTF) or organized trading facility (OTF). Tokens clearly meet this criterion for classification as transferable securities.
Standardization
MiFID defines transferable securities as “classes of securities” that share certain qualities. This implies that the issued units must share a number of characteristics so that they can be considered a class. Most importantly, the claims represented by the units must not be individually negotiated with investors. Units must be defined by common characteristics so that it is sufficient to refer to the type and number of units to trade them.
