The beginning of the year has brought some important regulatory news for crypto from the US, the UK and the EU.
USA
In the crypto-friendly and dynamic US State of Wyoming, 2 new legislative bills have been filed in January. The first one aims at classifying digital assets as “intangible personal property” within the applicable Uniform Commercial Code as well as introducing an opt-in framework for banks to provide custodial services for digital asset property.
The second one proposes to allow Wyoming corporations to issue “certificate tokens” and substantially recognizes “certificate tokens” as equivalent to normal stock certificates. Of course these are not enacted legislations and we will see how the process evolves before those bills can become law.
UK
In Europe, the English FCA has issued a consultation paper on its proposed Guidance on crypto assets which I have recently commented here.
ITALY/LUXEMBOURG
After the Italian Senate proposed to recognize the legal enforceability of both Smart Contracts and DLTs time-stamping, Luxembourg follows with the proposal to legalize the use of blockchains and DLTs for the holding and transfer of financial instruments. The Law proposal n. 7363 aims to introduce a new Article 18bis to specifically recognize the circulation of financial instruments via DLTs. This is the same procedure which was adopted in 2013 when the very same Law of 2001 was amended to take into account the circulation of dematerialized shares which were then given lawful recognition.
Luxembourg´s initiative seems to go a step ahead of the above mentioned recognition of the effects of DLTs time stamping by the Italian Senate.
However, both legislative moves do not seem to deal comprehensively with the issue: on the one side, Luxembourg recognizes the transfer of financial instruments using DLTs but does not expressly gives legal validity to the data embedded in DLT´s (time-stamping). Italy, on the other side, recognizes the legal validity of DLTs time stamping but does not expressly acknowledges the circulation of financial instruments via DLTs. Both seem to fall short of the objective. This is more material to analyze legal comparative aspects at ThinkBlockTank.
GERMANY — STO
On the tokenization of assets, the German BaFin has approved the first Prospectus for the issuance of a security token by German based Bitbond GmbH. The token represents a debt instrument paying an annual interest of 4%, plus a variable interest amount equivalent to 60% of the profits realized by Bitbond GmbH in its business activities. Two important points are worth noting: a) the token holder is paid back principal and interest in Stellar Lumens (XLM) thereby always bears the exchange-rate risk with Euro or other accepted Crypto such as BTC or ETH; b) Bitbond Finance will buy back the token at the original price of €1 at maturity after 10 years. In the meantime, with the German colleagues at ThinkBlockTank, we have looked into this Prospectus and here is my opinion on this interesting topic.
EU REGULATORS
On the EU regulatory side, the ESMA and the EBA have released 2 long awaited reports on ICOs and crypto-assets.
The EBA report is aligned with the ESMA report but specifically analyses crypto-assets in the light of the Payment Services and Electronic Money Directives (PSD2 and EMD2). The results can be summarized as follows:
(i) A crypto-asset qualifies as “electronic money” only if it:
- is electronically stored;
- has monetary value;
- represents a claim on the issuer;
- is issued on receipt of funds;
- is issued for the purpose of making payment transactions;
- is accepted by persons other than the issuer.
In all such cases, authorisation as an electronic money institution is required to carry out activities involving e-money, unless a limited network exemption applies in accordance with Article 9 of that Directive.
(ii) PSD2 will then apply only to crypto-assets that qualify as e-money as clarified above under (i).
(iii) Regarding the secondary market services — i.e. crypto-asset trading platforms and custodian wallet providers — the EBA voices again its concern about money laundering risks and risks to the consumers.
(iv) Finally, the EBA shares ESMA´s conclusions about the EU Commission´s need to create a regulatory level playing field across the EU.
The ESMA report is based on a survey carried out by 28 European NCAs (National Competent Authorities) on 6 different ICOs completed in 2017–2018, which tokens have differing characteristics that ranged from investment-type, utility-type, to hybrids and payment-type. Pure payment-type tokens were not included in the sample set on purpose, as they are unlikely to qualify as financial instrument.
The results of this survey can be summarized as follows:
(i) The crypto-assets sector remains modest in size and ESMA does not believe that it currently raises financial stability issues. However, ESMA is concerned about the risks it poses to investor protection and market integrity.
(ii) The outcome of the survey highlighted a NCA majority view that some crypto-assets, e.g. those with profit rights attached, may qualify as transferable securities or other types of MiFID financial instruments.
(iii) However, because of differences in the implementation of MiFID at national level, the definitions of what is considered a “financial instrument” differ among member states. This leads to confusion and jurisdiction arbitrage by the players.
(iv) if the “financial instrument” test is positive then the whole set of EU financial rules will apply such as MiFID II, the new Prospectus Regulation, MAR etc.
(v) if instead the “financial instrument” test is negative then such set of rules do not apply. In this case however ESMA advises that all operators shall be subject to AML regulations.
(vi) ESMA is concerned that the strategy of certain member states to regulate individually crypto-assets does not provide for a level playing field across the EU and therefore proposes that the EU commission steps in to coordinate an EU-wide approach.
Interestingly, if one bothers to look into the Annex of the NCA survey, the discrepancy in what constitutes for NCAs a financial instrument and then a security under different EU jurisdictions appears pretty clear. Take the CRPT (Crypterium) token for instance: for 15 NCAs it is a security, for 10 it is not and 3 do not even know the answer.
No doubt that some consistency is needed at EU level.
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This article was first published by Blockchainflashnews on 28/2/2019
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