Are there any legal or regulatory issues concerning the transfer of title to or the granting of security over tokens and virtual assets?
ASIC has indicated how Australian financial services laws may apply to ICOs as an alternative form of funding. See section 8 as to how the legal status of an ICO may trigger licensing, registration and disclosure requirements if the tokens represent financial products. Regardless of whether a token constitutes a financial product, ICOs and STOs will be subject to ACL restrictions and AML/CTF reporting requirements. Entities engaging in lending activities within the scope of the National Credit Code, as contained in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth), will need to hold an Australian credit licence or be exempt from the requirement to be licensed. Credit licensees must also comply with a range of obligations including in relation to responsible lending.
Notably, there has been continuous development in the use of blockchain in debt capital market transactions, specifically bond issuances. Blockchain technology is being used to issue debt instruments, so all transactions (including issue, transfer of title and redemption) would be implemented through smart contracts and recorded on the blockchain. Currently, the majority of blockchain issued bonds only mirror off-chain transactions on the on-chain ledger, rather than effecting the transaction using blockchain. The technology generally has not yet not extended to allow for the recordings in the ledger to constitute a transfer of legal title to the bonds and consequently, transactions are executed through an off-chain bond register then replicated on the blockchain.
No specific legal or regulatory restrictions apply with respect generally to the transfer of title or to the granting of security over tokens and virtual assets. However it should be noted that whilst French law now specifically legislates for the pledge of “minibons” and unlisted securities (“titres financiers”) (see section 3 above) registered within a DEEP, such provisions have not, at this stage, been extended to cover tokens which do not qualify as (unlisted) securities.
A legal issue that might occur is that there is no civil law framework developed yet regarding the transfer of token and virtual assets and therefore the granting of security over token and virtual assets. There is a consensus that a security is to be understood as a deed, which securitises a private right in such a way that the right from the deed can only be asserted against the debtor if the holder of the deed submits it to the debtor. Since there is no physical deed concerning token, a transfer is only possible by assignment of the tokenised claim. In this case, it needs to be ensured, that the claim is inseparably connected with the token.
From a regulatory point of view, there are no concerns regarding the transfer of title to or the granting of security over token and virtual assets. The BaFin states, that as long as the token is not changed in its legal or technical content during the transfer, there are no problems.
As per question 13, this would depend on the nature of the tokens in question. There are no specific rules that apply per se to the transfer of title or granting of security over tokens and virtual assets under Irish law. However, in the case of a tokenized asset (for example, a token that represents an ownership interest in Irish real estate), the transfer of valid title or granting of security would be subject to compliance with general rules applicable to the real-world asset class. Equally, if the token qualifies as a 'financial instrument', the requirements set out in the MiFID II Regulations, MAR and Irish AML requirements would need to be considered.
Consob clarifies in the Discussion Paper that ‘tokenisation’ (i.e., the process of converting rights over an asset into a digital token) shows some similarities with the issuance of securities and with the securitisation process, as tokenisation provided by a DLT system can allow rights to be transferred quicker if they are converted into a token .
Although tokens can incorporate a huge set of rights ranging from physical goods to traditional financial instruments, Consob does not mention in the Discussion Paper the possibility of trading tangible property represented by cryptographic tokens. It instead focuses on the issuance of tokens that, due to their features, qualify as financial products. However, Consob not only suggests carrying out a case-by-case analysis to verify whether a token can be regarded as a financial product, but it also points out that a new regulation is needed for the issuance of any such crypto-assets through a DLT system.
Theoretically, to the extent that tokens can be considered goods, they could also be pledged as securities. However, given their range of functions, the features of each token will need to be analysed before determining what kind of asset it is and whether a security can be granted over it. To date, no significant issues have been raised in this respect, as the use of tokens in Italy is still at a very initial stage.
Currently, the legal characteristic of Crypto Assets under Japanese civil statute is still unclear. According to a judicial precedent of the Tokyo District Court dated August 5, 2015, legal ownership or title does not apply to Crypto Assets, as they are intangible assets. As a consequence, the transfer of a Crypto Asset does not equate to the transfer of legal ownership or title in such Crypto Asset under the Civil Code. Similarly, the grant of security over Crypto Assets would also difficult.
In the meantime, a person who deposits his or her Crypto Assets with an Exchange Provider will have a claim against such Exchange Provider for the return of the deposited Crypto Asset under the Exchange Provider’s terms of service, or the like. In such cases, the creditors of persons may create a security over such persons’ claim for Crypto Assets against the relevant Exchange Providers.
Liechtenstein has recognized dematerialized securities for almost 100 years. As opposed to some jurisdictions possessing a written form requirement upon transfer, the law here allows for internal bookkeeping mechanisms (ledger-entry or book-entry securities) as being sufficient. This means that transfers of securities via blockchain is an effective means of transfer from party A to party B.
No blockchain or token-specific requirements are in place concerning the transfer of title of granting security over tokens and virtual assets. However, existing requirements must be taken into account and may not always be easy to comply with. By way of an example, practical issues may arise with regard to accounting (that is, the valuation of tokens) or in instances where a notarial deed is required for the transfer of title.
Provided that the transactions with tokens and virtual assets remain unregulated in Russia, it is rather hard to speak about the transfer of title or granting security over them. For example, Russian IT experts usually express their frustration about the lack of regulation and legal protection of virtual assets in the gaming sphere.
There are multiple issues concerning the transfer of title or granting of security as the law does not define at which point the transfer is made. In general, control over the tokens/virtual assets (i.e., holding private keys to the tokens/virtual assets) is considered as having ownership over the tokens/virtual assets. However, there are instances were tokens/virtual assets are controlled by multiple parties. In such cases, it is uncertain how the law will define ownership in relation to the transfer of title. This area of security tokens of title and assets, however, has been a growing industry in Korea as new token products are being developed.
Under Swedish law, the pledgor must not have the right to dispose of the secured asset for a security interest or a transfer of title to be valid in relation to third parties. If tokens or virtual assets are held by a third party, a notification to that party should be sufficient to perfect the security, similar to the granting of security over dematerialised shares. If the tokens or virtual assets are not held by a third party and provided that it is technologically possible, the security may be perfected by letting the blockchain network know that the assets are pledged and that the secured assets may not be transferred without the consent of the pledgee. If such notification is not possible there might be an issue with the perfection of the security. As regards transfers of title, the blockchain technology would typically automatically meet the customary requirements for a valid transfer of title without the need of further actions by either party.
Where digital assets are intended to represent a claim against an issuer or another external party, there is a concern under Swiss law that the formal requirements for the transfer of such claim from one party to another cannot be fulfilled by a mere digital transaction on a distributed ledger. This is because Swiss law generally requires a written instrument for an effective transfer of uncertificated claims. Legal doctrine has developed various workarounds to this issue, which remain untested in Swiss courts. Similar concerns apply with regard to the granting of security over claims represented by blockchain tokens.
The DLT legislative proposal presented by the Federal Council on 22 March 2019 is intended to resolve the current legal uncertainty by creating a civil law foundation in the Swiss Code of Obligations for securities existing on the basis of a decentralised digital ledger only (so-called DLT securities). Furthermore, the new law will include specific rules regarding the creation of pledges over DLT securities.
It is worth noting that pure crypto currencies, being native units of value on a blockchain that do not constitute nor represent a claim against a third party, are mostly unaffected by the concerns set out above.
There are no such legal or regulatory issues in Uganda at the moment. Legislation is still silent with respect to the transfer of title or the securitization of tokens and virtual assets.
Whether UK law recognises title to tokens and virtual assets (and thus permits legal transfer of that title) and whether security (such as a charge or lien) can be granted over tokens and virtual assets, largely turns on whether tokens and virtual assets are considered property under UK law.
While the position is not settled, the current trend points towards tokens and virtual assets being recognised as property in UK law.
The main challenge from an English legal perspective stems from the fact that the common law traditionally only recognises property as either real property (land) or personal property, with all personal property being either a chose in possession (tangible property) or a chose in action (an intangible legal right to possess something that can be enforced by an action in a court). Because of this, English courts have historically refused to recognise information or data (other than intellectual property rights subsisting in that information or data) as property, as they are neither tangible nor are they a legal right capable of being enforced. Cryptographic tokens and virtual assets simply exist as information or data on a distributed ledger or blockchain with anyone who knows the relevant private key (itself simply information/data) having the ability to transfer those tokens or virtual assets. It is therefore possible to reason by analogy that they are not property for the purposes of English law.
However, it is recognised that tokens and virtual assets have many of the characteristics of property. A classic statement at common law of key characteristics of property comes from Lord Wilberforce in the 1965 case of National Provincial Bank v Ainsworth: property “must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability”. A virtual asset such as Bitcoin, for example, is readily seen as having all of these characteristics.
Several more recent court decisions support the view that English law may recognise tokens and virtual assets as property. In the 2012 case Armstrong DLW GmbH v Winnington Network Ltd, the High Court of England and Wales (“EWHC”) recognised EU carbon trading allowances as property. This was despite the fact that they were are not a chose in possession and do not neatly fit into the category of a chose in action. Instead, it is possible they are “some form of ‘other intangible property’”. In the 2019 Singaporean case of B2C2 Ltd v Quoine Pte Ltd, common law principles similar to those in England were applied to find that virtual currencies could be regarded as property under Singaporean law. Most recently, in 2019, in an unreported interlocutory decision in Robertson v Persons Unknown, Justice Moulder of the EWHC granted an asset preservation order over 80 Bitcoin, showing that the English courts are open to recognising virtual assets as property for certain purposes.
If this conclusion is correct, then under English law, security can likely be granted over virtual assets in generally the same way as it is granted for other intangible property.
Other than the securities issue (see question 10), one of the issues specific to tokens and virtual assets that have properties other than as a store of value and medium of exchange is the accounting for such assets. There lacks guidance on the accounting of such assets, which could fall under a variety of different standards. For example, purchased with the intention of resale, the tokens partially meet the definition of inventory under both U.S. GAAP and IFRS, despite not being tangible in nature. There is also the issue of accounting these as “intangible assets” because tokens and virtual assets have the potential of an indefinite use, with no expiration date or limit of the period within which they can be exchanged for cash, goods or services.
Cryptocurrencies have been recognised as property which may be held on trust in the recent case B2C2 Ltd v Quoine Pte Ltd  4 SLR 55 (“B2C2 Case”). However, the precise nature of the property right was not discussed in that case. Given that it is now recognised as property, it is now possible that security can be granted over tokens and virtual assets, although specifics in the practicalities of enforcement were also not the subject of coverage in that case.
The question of the extent to which legally effective transfers of title to, or granting of security over, legal tokens and virtual assets can be achieved will depend primarily on whether such tokens and virtual assets constitute “property” under Hong Kong law. To date, there has been very limited legal, regulatory or judicial consideration of this question, likely reflecting both the relative infancy of these asset types and the wide potential variance of characteristics between them.
Hong Kong is likely to follow the approach of other common law jurisdictions in this regard, which traditionally recognise property as either real property or personal property, with all personal property being either a chose in possession or a chose in action. These categorisations present difficulties when applied to tokens and virtual assets, which (in some cases at least) may exist solely in the form of information or data on a distributed ledger or blockchain, as opposed to being tangible (i.e. a chose in possession) or being legal rights capable of being enforced (i.e. a chose in action). Where the holders of tokens and virtual assets are given some form of right, then the Hong Kong courts should regard that right as a form of property.
Recent court decisions in other common law jurisdictions such as England and Singapore support the view that tokens and virtual assets may be recognised as property, notwithstanding that they may not sit easily within the traditional common law categories referred to above. See for example the 2012 case of Armstrong DLW GmbH v Winnington Network Ltd in the High Court of England and Wales, which recognised EU carbon trading allowances as property under English law; and the 2019 case of B2C2 Ltd v Quoine Pte Ltd in the Singapore International Commercial Court, which recognised virtual currencies as property under Singapore law.
Where tokens and virtual assets do constitute property under Hong Kong law, then it should be possible (subject to the terms of such assets) to transfer legal title to, and to grant security over, such assets in the same way as other intangible property.