Are there any relevant regulatory restrictions or initiatives concerning tokens and virtual assets other than cryptocurrencies (e.g. trading of tangible property represented by cryptographic tokens)?
There are no regulatory restrictions concerning tokens and other virtual assets. The legal obligations and requirements applicable to any cryptocurrency, token or virtual asset will depend upon the rights which are attached to, and features of, them (as discussed above at section 8).
While Australia has not adopted any specific initiatives concerning tokens, virtual assets or cryptocurrencies, ASIC and AUSTRAC have established initiatives to assist fintech businesses more broadly in understanding their obligations such as setting up innovation hubs (see section 5). Section 15 outlines the co-operation agreements ASIC has entered into with overseas regulators to further understand the approach of fintech businesses in other jurisdictions.
Tokens which constitute “securities” (“titres financiers” – “financial instruments”), and related “investment services”, are subject to the existing legal and regulatory framework, both at the national (French) and at the EU levels. The definition of “securities” under French law (section L. 211-1 of the French Monetary and Financial Code) is largely copy pasted from MIFID II (Directive 2014/65/EU).
Other tokens and virtual assets (other than cryptocurrencies) are now (after the “loi PACTE”) generally designated as “digital assets”, and defined under section 552-2 of the French Monetary and Financial Code as (in substance) any intangible asset representing, in digital form, any right registered within a DEEP.
No general regulatory restrictions apply to such “digital assets”.
In order to fully comply with any legal requirements, the market participants must give careful consideration to whether the token constitutes a regulated instrument, for instance a financial instrument or a security.
The classification of a token as a security or a financial instrument within the meaning of the Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”) or MiFID II determines which of the relevant capital market laws and EU regulations apply, for example the Market Abuse Regulation, which contains relevant requirements for the trading on secondary markets.
The decisive factor is which rights are associated with the respective token. A typological designation is not a determining factor, although a categorisation – for example as an “investment token”, “utility token” or “payment token” – may give an initial indication of the token type.
Currently, there are no regulatory restrictions in place concerning most of the “Payment-Token”, unless they are qualified as financial instruments according to the KWG.
Utility-Token are not qualified as security pursuant to the German Securities Prospectus Act (WpPG) or investments pursuant to the German Capital Investment Act (Vermögensanlagengesetz, “VermAnlG”) so that no regulation is provided, even though regulatory steps are discussed in the key issues paper of the Federal Ministry of Finance.
Security Token, which grant rights to their bearers equal to the bearer of securities, are generally qualified as securities pursuant to the German Securities Prospectus Act (“WpPG”) and Securities Trading Act (“WpHG”), as well as financial instruments pursuant to the German Banking Act (“KWG”) and are regulated as a consequence.
There is currently no specific legislation or regulation in Ireland in relation to categories of tokens or virtual assets other than cryptocurrencies.
In the absence of a specific regime, where a token represents a tangible, real-world asset, any trading of the token would need to take into account the traditional legal rules applicable to the asset in question. For example, if a token represents an ownership interest in Irish real estate, the transfer of valid title would be subject to compliance with general rules applicable to the transfer of title in real estate.
Furthermore, if the token is structured in such a way that it qualifies as a 'financial instrument' (see question 8 above), trading or dealing with the token would be subject to the requirements set out in the MiFID II Regulations, MAR and also the Irish AML regime, to the extent that the activity is regulated. If the token is packaged as part of a regulated investment fund, the provisions of the AIFM Regulations may also need to be considered (for example, where the cryptoassets may qualify as units in collective investment undertakings). Subject to certain exceptions, it is not permitted to oﬀer 'transferable securities' to the public without ﬁrst publishing a prospectus pursuant to the Prospectus Regulations.
ICOs and crypto-assets were first identified as an issue requiring regulators’ attention in 2017, when ESMA – through its Standing Committee on Financial Innovation – highlighted the ICO-related risks for investors (i.e., particularly high price volatility and speculation).
Some EU member states have already acknowledged that specific regulations are needed for tokens, but Italy is yet to introduce any because of the novelty of the phenomenon and the uncertainties in qualifying it within the currently regulatory framework. Although the Italian regulator has been forward looking in its legal recognition of virtual currencies , it is encountering more difficulty in establishing a legal framework for tokens.
Indeed, only recently did Consob issue the Discussion Paper, which was aimed more at kick-starting a national debate on crypto-assets and tokens than establishing a proper, univocal, regulatory framework. Consob’s initiative has yet to move past this preliminary phase, and no specific restrictions have been issued on the offering/circulation of tokens.
Tokens issued by way of ICOs take many forms, and the Japanese regulations applicable to each token vary depending on the ICO scheme involved.
13.1 Securities-type Tokens
The FIEA Revisions introduced the concept of “Electronically Recorded Transferable Rights” (“ERTRs”), which clarify the scope of tokens governed by the FIEA as securities.
The concept of ERTRs relates to the rights set forth in Article 2, Paragraph 2 of the FIEA that are represented by proprietary value that is transferrable by means of an electronic data processing system (but limited only to proprietary values recorded in electronic devices or otherwise by electronic means), excluding those rights specified in the relevant Cabinet Office Ordinance in light of their negotiability and other factors.
Although Article 2, Paragraph 2 of the FIEA refers to rights of various kinds, tokens issued in “security token offerings” (“STOs”) are understood to constitute, in principle, “collective investment scheme interests” (“CISIs”) under the FIEA. CISIs are deemed to be formed when the following three requirements are met: (i) investors (i.e., rights holders) invest or contribute cash or other assets to a business; (ii) the cash or other assets contributed by investors are invested in the business; and (iii) investors have the right to receive dividends of profits or assets generated from investments in the business. Tokens issued under STOs would constitute ERTRs if the three requirements above are satisfied.
To put it simply, rights treated as “Paragraph 2 Securities” (i.e., rights that are deemed securities pursuant to Article 2, Paragraph 2 of the FIEA) and represented by negotiable digital tokens will be treated as Paragraph 1 Securities (e.g. shares, bonds and notes, etc.) unless they fall under an exemption. As a result of the application of disclosure requirements to ERTRs, issuers of ERTRs are in principle required, upon making a public offering or secondary distribution, to file a securities registration statement and issue a prospectus. Any person who causes other persons to acquire ERTRs or who sells ERTRs to other persons through a public offering or secondary distribution must deliver a prospectus to such other persons in advance or at the same time.
As ERTRs are expected to constitute Paragraph 1 Securities, registration as a Type I Financial Instruments Business Operator will be required for the purposes of selling, purchasing or handling the public offering of ERTRs in the course of a business. In addition, any ERTR issuer who solicits acquisition of such ERTR (i.e., undertaking an STO), will be required to undergo registration as a Type II Financial Instruments Business Operator, unless such issuer qualifies as a specially permitted business for qualified institutional investors.
13.2 Prepaid Card-type Tokens
If the tokens are similar in nature to prepaid cards and can be used as consideration for goods or services provided by token issuers, they may be regarded as “Prepaid Payment Instruments” (maebarai-shiki-shiharai-shudan), which are subject to the relevant regulations under the PSA (in which case, regulations in respect of Crypto Assets under the PSA would not be applicable).
13.3 Stable Coin
As noted under Q8 above, "Currency Denominated Assets" are excluded from the definition of Crypto Assets. "Currency Denominated Assets" is defined under Article 2, Paragraph 6 of the PSA as assets denominated in Japanese Yen or a foreign currency, or with respect to which the performance, repayment, or any other activity equivalent thereto will be carried out in Japanese Yen or a foreign currency. Based on this definition, a digital coin whose value is pegged to the JPY, USD or any other fiat currency (such as, for example, where the price of a digital coin is always fixed at one JPY or one USD, or where a digital coin is redeemable at one JPY or one USD) would fall outside the definition of "Crypto Assets".
Issuance of Stable Coins that fall within the definition of "Currency Denominated Assets" would likely be considered providing “funds remittance transactions (Kawase Torihiki)". "Funds remittance transaction" is not defined in the Banking Act or PSA. However, the Supreme Court, in a judicial precedent, has interpreted "funds remittance transaction" to mean "undertaking, or undertaking and executing funds remittance pursuant to the request of customers through a funds remittance system, without physical delivery of cash between distantly located parties." an issuer of Stable Coins would likely be deemed to be conducting funds remittance transactions by issuing Stable Coins in exchange for fiat money.
Under the Banking Act, no person other than a Bank is permitted to conduct funds remittance transactions in Japan unless certain exemptions apply . A person licensed as an FRBO would fall under such an exemption, although we note that the funds remittance transactions conducted by an FRBO are subject to a limit of JPY 1.0 million per transaction, unlike Banks, to which no such limit applies. As applications for Banking licenses require the satisfaction of very onerous requirements and involve a timeframe of a year or more, registration as a Bank would not generally be a practical option.
The Liechtenstein Blockchain Act presents a legislative initiative where the regulator is attempting to bridge the gap between pre-existing property law and the token economy. Even prior to enaction of the Blockchain Act, the Liechtenstein legal environment still proves favourable because the law looks to the underlying right embodied in the token as opposed to the token itself. Therefore, it is already possible to tokenize the right to tangible things, a task that will only be afforded more clarity after passage of the new legislation.
The sale of cryptos is not regulated in the Netherlands (but see question 9 for upcoming AML legislation). However, depending on the characteristics of the crypto that is offered, an entity issuing or selling cryptos in the Netherlands may fall within scope of the Dutch financial regulatory framework. For example, if the crypto qualifies as a security or investment object.
The regulatory qualification of cryptos is critical, as the consequences of both compliance with regulations (such as governance and transparency requirements) and non-compliance (such as fines and prosecution) can have significant impact. A crypto is assessed based on its characteristics – and it is important here to note that regulators look at the actual characteristics, not at the description assigned to it by the issuer. If a crypto qualifies as a security, its issuer, the involved brokers and the exchanges, where it has been listed, will all generally have to comply with financial markets' regulations. Just as with the qualification of the crypto, the impact of these regulations and the applicability of possible exemptions depends on the specific characteristics of the crypto.
Issuers of security cryptos
Generally, offering cryptos that qualify as securities (for example, bonds and shares) to the public is not allowed in the Netherlands without prior publication of a prospectus, which has been approved by the AFM. However, several exemptions from the obligation to issue a prospectus exist, depending on the type of investment (for example, whether the total consideration of the offer exceeds EUR 5 million or the per unit denomination exceeds EUR 100,000), and the type of investor (for example, whether the offer is made to consumers or to qualified investors). Most of these exemptions stem from European legislation and can therefore be utilised in multiple jurisdictions in the EU.
Service providers and exchanges
As a security, cryptos fall within the definition of a "financial instrument", and therefore parties involved are rendering financial services. By way of example, an entity that executes orders on behalf of clients, or that receives and transmits client orders, would qualify as an "investment firm", and therefore, this entity must comply with specific ongoing regulations, including those regarding (i) governance (for example, the suitability and integrity assessment for prospective board members); (ii) market conduct rules (for example, best execution, know–your-customer requirements, informing consumers about the risk of the products, and a sound and proper business operation); and (iii) prudential rules (for example, minimum capital requirements).
For the same reasons, crypto exchanges that allow listings of security cryptos on their platform which target the European market, will also be subject to regulation. The regulatory burden, as a result of accepting security cryptos, is often the reason that exchanges exclude such cryptos in their listing requirements.
Selling cryptocurrency as investment objects
Cryptos may also qualify as investment objects, in which case the selling of cryptos is a regulated service, which requires a licence from the AFM. The entity selling the crypto would need to comply with ongoing regulations on governance (for example, fitness of its board of directors and supervisory board) and market conduct rules (for example, information requirements, and a sound and proper business operation).
Selling cryptocurrency through fund structures
If cryptos are offered through a fund structure, the manager of this fund requires a licence from the AFM as an alternative investment fund manager ("AIFM"). There is an exemption to the licence requirement and to certain ongoing requirements otherwise applicable to AIFMs for small funds, which are offered only to professional investors.
Apart from the utility digital rights issues within the frames of a fundraising project on a special platform (see Q.11), there is no other specific regulation concerning tokens and virtual assets. The first draft law “On digital financial assets” contained the basic definitions and regulations of tokens and virtual assets, but since the act in still not adopted we may not assert the presence of some certain limitation or restrictions in this sphere. As for now, the transactions involving these assets remain unregulated. That means that such transactions, similarly to the ones involving cryptocurrencies, are neither directly prohibited, nor allowed and regulated by the actual legislation.
Korea’s leading blockchain research centers, Chain Partners’ CP Research and Coinone Research Center, have identified security tokens as the next important phase in the blockchain industry. Security tokens are strictly regulated by the government which distinguishes crypto-based investments from blockchain technologies. However, the Liberty Korea Party (Korea’s main opposition party) plans to unveil its final “2020 Economic Transformation” plan which seeks to authorize blockchain-based securities token issuance and asset tokenization. This plan offers a much more cryptocurrency-friendly stance than that espoused by the current administration and attempts to mitigate current regulatory uncertainty.
There are no specific regulatory restrictions or initiatives concerning tokens and virtual assets other than what is mentioned in the answer to question 8 above.
Please refer to questions 5 to 8 and 11 regarding the general classification of tokens and regulatory approach, incl. as far as tokens qualifying as securities are concerned.
With respect to representing tangible property in a blockchain token, it is worth noting that the Federal Council, in its DLT report dated 14 December 2018, takes the general position that tokens cannot represent rights in rem in a legally effective way in lieu of possession. However, where rights in rem are exercised through indirect possession combined with a contractual agreement between the party with direct possession and the owner, a representation of such rights in a blockchain token or other decentralised register entry is considered legally feasible by the Federal Council.
The opinions expressed in Swiss legal doctrine on this matter, as well as on the legally effective representation of securities in the form of digital tokens, vary. In particular with respect to the latter, the DLT legislative proposal presented by the Federal Council on 22 March 2019 can be expected to create more legal certainty. This will inter alia enable a more standardised approach to security token offerings in Switzerland and create further incentives for the creation of corresponding trading and exchange infrastructures.
There are no such regulatory restrictions in Uganda at the moment, although these are expected in the short to midterm.
Aside from the proposed ban on investment products referencing cryptoassets (referenced at questions 3 and 9 above), there are no prohibitions in the UK on issuing or trading virtual assets. In many cases virtual assets other than cryptocurrencies will amount to securities which will be subject to financial regulation by the FCA.
As discussed in more detail at questions 6 and 7 above, UK regulators are taking a keen interest in cryptographic tokens and virtual assets, undertaking consultations and publishing numerous reports. The FCA’s Regulatory Sandbox, the BoE’s Fintech Hub and the ICO’s data protection sandbox (discussed in question 5 above) also represent some practical initiatives taken by regulators/public sector bodies that are designed to facilitate innovation in this area in the UK.
At the federal level, the SEC and CFTC suggested little effort to distinguish between types of cryptocurrency, e.g., asset-backed tokens (deriving value based on the underlying asset that does not exist on the blockchain), utility tokens (deriving value from the demand for the issuer’s service or product). However, in April 2019, members of the US House of Representatives reintroduced the Token Taxonomy Act, which would establish digital tokens as a new digital asset, and would mainly address utility tokens, which would be exempt from securities laws and subject to a different tax structure.
Please see our responses to questions 3, 5, 6 and 8 above.
On 11 December 2017, the SFC published a circular on Bitcoin Futures and cryptocurrency-related investment products (referred to in the response to question 8 above), the primary purpose of which was to remind intermediaries of the legal and regulatory requirements for providing to Hong Kong investors any financial services in relation to Bitcoin Futures and other cryptocurrency-related investment products and the risks associated with these products. The circular was primarily in response to the launch of Bitcoin Futures on the Chicago Mercantile Exchange (CME), which is authorised by the SFC to provide automated trading services, meaning that Hong Kong investors may be able to trade in Bitcoin Futures through an intermediary which is a member of CME. The circular noted that Bitcoin Futures have the conventional features of a “futures contract” as defined in the SFO. Therefore, even though the underlying assets of Bitcoin Futures are not regulated under the SFO, Bitcoin Futures traded on and subject to the rules of those exchanges are regarded as “futures contracts” for the purposes of the SFO. Accordingly, parties carrying on a business in dealing in Bitcoin Futures, including those who relay or route Bitcoin Futures orders, are required to be licensed for Type 2 regulated activity (dealing in futures contracts) under the SFO unless an exemption applies. The SFC also expects that intermediaries should strictly observe the suitability requirement and the conduct requirements in relation to providing services in derivative products to clients under the SFC Code. In addition, marketing a fund investing in Bitcoin Futures will normally constitute Type 1 regulated activity (dealing in securities) and managing such a fund may constitute Type 9 regulated activity (asset management). The provision of advisory services in relation to Bitcoin Futures may also constitute Type 5 regulated activity (advising on futures contracts).
As described in the response to question 8 above, the SFC issued a further statement on 6 November 2019 warning investors about the risks associated with the purchase of virtual asset (e.g. Bitcoin) futures contracts, focusing on the fact that they are largely unregulated, highly leveraged and subject to extreme price volatility. The statement also notes that there have been reports of market manipulative and abusive activities on platforms offering or trading virtual asset futures contracts and that such platforms may not have clear and fair trading rules, with some platforms having been criticised by investors for changing their trading rules during the life of futures contracts, for example halting trades or rolling back transactions and causing significant losses to investors. The statement cautions that any trading platforms or persons which offer and/or provide trading services in virtual asset futures contracts in Hong Kong without a proper licence or authorisation may be in contravention of the SFO (if the virtual asset futures contracts are “futures contracts” as defined under the SFO) or the Gambling Ordinance (Cap. 148 of the Laws of Hong Kong) (if the virtual asset futures contracts are “contracts for differences” as defined under the Gambling Ordinance).
On 28 March 2019, the SFC published a statement on STOs (also referred to in the response to question 8 above), again reminding investors to be wary of the risks associated with virtual assets, but this time focusing on Security Tokens. The circular explains that STOs typically refer to specific offerings which are structured to have features of traditional securities offerings and involve Security Tokens which are digital representations of ownership of assets (e.g. gold or real estate) or economic rights (e.g. a share of profits or revenue) utilising blockchain technology. It goes on to explain that Security Tokens are normally offered to professional investors only and that in Hong Kong, they are likely to be "securities" as defined under the SFO and therefore subject to the securities laws of Hong Kong. Where Security Tokens are "securities" as defined under the SFO, then unless an applicable exemption applies, any person who markets and distributes Security Tokens (whether in Hong Kong or targeting Hong Kong investors) is required to be licensed or registered for Type 1 regulated activity (dealing in securities) under the SFO. Intermediaries which market and distribute Security Tokens are required to ensure compliance with all existing legal and regulatory requirements. In particular, they should comply with paragraph 5.2 of the SFC Code as supplemented by the Frequently Asked Questions on Compliance with Suitability Obligations by Licensed or Registered Persons and the Frequently Asked Questions on Triggering of Suitability Obligations. Under the Guidelines on Online Distribution and Advisory Platforms and paragraph 5.5 of the SFC Code, Security Tokens would be regarded as "complex products" and therefore additional investor protection measures also apply. In addition, intermediaries are expected to observe requirements which are similar to those set out in the SFC’s circular on the distribution of virtual asset funds published on 1 November 2018 and described in the response to question 8 above, namely enhanced selling restrictions, due diligence and information to be provided to clients.