Crypto-assets are clearly positioned as a new asset class. As always, when an innovative new solution emerges, there have been many publications and plenty of interest, hype and speculation in relation to crypto-assets, tokens, and ICO.
Regulatory bodies have not sat idly by while these recent changes have taken place. In fact, they have published multiple position papers, advisory documents, and recommendations aimed at industry stakeholders and investors.
The ongoing process of developing new investment token solutions means that the regulatory framework must be constantly updated in response. In this section, we will describe the approach followed by the European Securities and Markets Authority (ESMA) with regards to security tokens, analyze the regulatory implications, and review the risks and issues regulators must consider.
Regulatory approach
As highlighted in the ESMA SMSG (Securities and Markets Stakeholders Group) report, regulators have broadly followed one of the following three approaches in relation to crypto-assets.
- Case by case and assessment of the regulatory framework. This is the approach followed by most EU jurisdictions (Austria, Belgium, Germany, Ireland, Luxembourg, Netherlands, Spain, and the United Kingdom). These countries have not prohibited or restricted crypto-asset initiatives outright, but they do conduct a careful review of the various projects/initiatives to ensure compliance with local laws and other relevant EU regulations. We are also seeing multiple consultations
(AMF), dedicated taskforces (UK), and other regulatory forums facilitated by the authorities in order to address and assess the questions at hand.
- Creation of a dedicated regulatory framework. Malta, Switzerland, Italy and Luxembourg have developed and voted new law provision within their respective legal framework where the inscription and transfer of security is recognised within DLT (blockchain).
- No approach defined yet. Some jurisdictions/authorities have not taken a position or publicly stated their approach yet. This does not mean there are no regulations in place or that all crypto-asset initiatives are permitted.
In early 2019, the European regulatory authorities (ESMA and EBA) issued advisory reports on crypto-assets. Meanwhile, local authorities including the FCA and FINMA have issued final reports from the crypto-asset taskforce and a legal framework for DLT has been established in Switzerland.
These recent reports demonstrate that there is global consensus on the need for a well-defined classification system. Indeed, the first step in defining a regulatory framework for crypto-assets is to create a clear token taxonomy. While European regulators may quibble over small points relating to wording, they unanimously agree that tokens can be divided into three main archetypes:
- Payment (exchange) tokens, which are intended to be used as means of payment or value exchange
- Utility tokens, which are intended to provide access to a product service via DLT infrastructure
- Security (investment) token, which are intended to entitle the holder to a future cash flow or partial ownership of a company
European regulators also recognize that security tokens (as defined in our previous section) qualify as financial instruments.
As such, the criteria related to transferability (on a regulated market) and liquidity will trigger the application of relevant legislation (regarding issuance, trade and post-trade).
