The regulatory scrutiny has morphed into a permanent reality in the crypto space. This much had become clear in early 2018. Regulators from all corners of the globe are looking to ﬁt the crypto phenomenon into some regulatory rules or framework. The main question however is to discern what crypto assets are? And whether crypto assets are securities? If they are, then the relevant law must be applied.
In the US, Securities and Exchange Commission (SEC) had announced that all crypto assets are investment contracts or – securities. This later corrected that all, except for Bitcoin and Ethereum (in its present stage) are to be deemed securities. [mfn]https://coincenter.org/ ﬁles/2019-03/clayton-token-response.pdf[/mfn]
The reality is the American legal system largely still relies on the 86 year old Securities Act, with exceptions made available with enacting the JOBS Act in 2012. And within this amendment, there is a place for security tokens to be issued as well. Small issuances of up to USD 1m can be effected as crowdfunding projects. Larger deals can be done as private placements or public offerings limited to accredited (professional or high net worth) investors. Either way, the registration of the issuing security is mandatory. It is likely that the Securities Act may see a major revamp to exclude most cryptocurrencies from the scope of federal securities law. In the meantime, the most recent discussion identiﬁes guidelines on how to assess if the publicly offered or sold digital asset is an investment contract and therefore a security. [mfn]https://www.sec.gov/ﬁles/dlt-framework.pdf[/mfn]
In Europe, on the other hand, the European Securities and Markets Authority (ESMA) has called to extend Europe’s revised Markets in Financial Instruments Directive (MIFID II) to include cryptocurrency products such as initial coin offerings with securities features among transferable securities or other types of ﬁnancial instruments. [mfn]https://www.esma.europa.eu/press-news/esma-news/crypto-assets-need-common-eu-wide-approach-ensure-investor-protection[/mfn] European Prospectus Regulations will apply in full from 21 July 2019 and replace the current directive. Under the Regulation each EU member state will be able to set its own limit between 1 and 8 million EUR when the mandatory prospectus requirement applies.
On the brink of Brexit, the UK’s Financial Conduct Authority (FCA) published an extensive consultation paper on the classiﬁcation and regulation of crypto assets. [mfn]https://www.fca.org.uk/publication/consultation/cp19-03.pdf[/mfn] The paper seeks to provide regulatory clarity for ﬁrms and consumers, when certain activities around “cryptoassets” or tokens themselves fall within the FCA’s regulatory perimeter. The FCA reminds that the breach of authorisation regime is a criminal offence and carries a maximum penalty of 2 years imprisonment or an unlimited ﬁne, or both. Following the consultation period, FCA intends to publish the ﬁnal Policy Statement in relation to cryptoassets by summer 2019.
Other pioneering jurisdictions, such as Switzerland, Malta, Estonia, Lithuania, Liechtenstein have reviewed the types of crypto assets and proposed a classiﬁcation thereof.
All the above mentioned jurisdictions offer more-or-less similar classiﬁcation of tokens. Largely separating tree or four types. It is a matter of not so distant future, when every national regulatory body will be compelled to put out their opinion or guidelines on the subject.
Tokenisation – digital and immutable proof of ownership
The rise and fall of the ICO exuberance has resulted in setting a ﬁrm precedent in demand for tokenisation. It has also set an example for how the future of securities will likely look. There will always be a law governing securities issuance. But there also will be a decentralised reﬂection of the issued securities on the blockchain. With transparent protocol implementation, everyone should be able to access smart contract speciﬁcations and assess overall market interest.
The IEO or initial exchange offering appeared to remedy some of the most lacking aspects of a typical ICO, such as reliability, custodianship, vetting, transaction speed, cost, and sales channels. But it is yet to be seen, if it turns out to be the most appropriate utility token issuance method. After all, tokenisation is adding to a healthy competition amongst issuers and issuance platforms.
A legacy exchange listing cannot be applied to tokenised securities. Legacy exchanges lack understanding of the underlying technology and regulatory clearance. This is why there are many new technologically advanced initiatives, looking to set up a regulated space for security token listing and secondary market.
For a small-capital company a KYC/AML compliant STO campaign can be considered as an alternative way to access funding. Tokenising businesses by offering equity tokens, revenue sharing or raising capital with debt tokens may become an inevitable part of a company funding life cycle. A security token offering may be equaled to initial or subsequent equity or debt offering in the form of a digital token.
When asset becomes a digital and immutable proof of ownership to a global community, that is when we have created a democratic access for everyone to participate in the growth of the global economy. Today, not all countries have harmonised securities laws. But we are well on the way to lowering barriers of entry for both investors and issuers.
About the author
Liza Aizupiete, the Managing Director of Fintelum, which serves the crypto industry by carrying out a technically sound and KYC/AML compliant token sale process, crypto funds co-custody, transfer agency, secondary token OTC desk and corporate actions.
Previously Liza was a founder and the Managing Director of a cyptocurrency exchange Globitex, as well as the General Director of Lithuanian e-money institution NexPay UAB. A Latvian native, Liza graduated from the University of Geneva, Switzerland, majoring in Philosophy. Liza is experienced in the ﬁnancial industry, including trading, fund and portfolio management. Since 2012, she has become passionate about Bitcoin and later crypto industry at large, as a proponent of a decentralised and sound monetary system.
Fintelum is a comprehensive ICO/STO token launch platform for businesses looking to tokenise their assets in the form of utility, equity, debt and other asset or revenue sharing token. Fintelum suite of services comprises a regulated KYC investor onboarding, and continuous compliance with the EU AML laws. The token sale process can be followed through a tailor made dashboard. The backofﬁce system allows data access and management as well as on-demand reporting. In addition, to help mitigate token sale process risks, Fintelum acts as a crypto currency co-custodian. The system incorporates an integrated multi signature cold/hot wallets. To serve the security token industry, Fintelum acts as a transfer agent, ensuring security token ownership amongst whitelisted investors. Fintelum is also able to provide secondary token OTC exchange desk functions, with ongoing corporate action services, such as voting, dividends and announcements.
Learn more at https://www.ﬁntelum.com
This is part 5 of a 5 part series.