In a recent publication, Venture Capitalist Matus Steis described the current regulatory landscape for security tokens in Europe. While 2018 experienced successful security token offerings in numerous countries throughout Europe, Steis says 2019 will see new legislation to support the growing security token industry.
Current Security Token Regulations in the European Union (EU) Explained
At present, security tokens are regulated in Europe under MiFId II. The legislation is the most important in determining what constitutes a security. Though the European Securities and Markets Authority (ESMA) has been a bit unclear on its definition of ‘transferable securities’, this classification is the most likely to apply to security tokens.
The law we see concerning the initial issuance and secondary market trading of security tokens, says Steis, is working its way towards a gradual unification.
Currently, the compliant issuance of ‘transferable securities’ in an EU public offering require a prospectus approved by the national financial regulator of the relevant member country. As of now, this is regulated by the Prospectus Directive (2003/71/ES).
Despite the current prospectus as having a fairly straightforward and feasible reputation, a new prospectus regulation is planned for July 2019. Many expect the new prospectus to allow for even easier tokenization of securities.
2018 already witnessed several compliant security token issuances. Countries such as Liechtenstein, Germany, Switzerland, Estonia, Malta, and others have seen the successful implementation of security tokens.
The following is a closer examination of some of the progress noted in individual EU member states.
The Current Laws for Digital Assets in Europe Explained
Switzerland has been one of the most successful countries for ICOs: Swiss-based ICOs raised over $500 million in 2017, accounting for 14% of the global ICO market. They’ve established a so-called “crypto valley” where a plethora of companies focus on blockchain development and see notable support from the Swiss government. While Switzerland isn’t part of the EU, they are part of the European Economic Area (EEA), which much of the EU’s laws apply to.
In addition, Swiss lawmakers have promised to allow for the larger cryptocurrency industry to have full access to its conventional banking systems. In fact, the Swiss Financial Market Supervisory Authority (FINMA) has publicly declared an official stance on ICOs, where it identified four categories of tokens:
- Payment Token
- Utility Token
- Asset Token
- Hybrid Token
Notably, on the asset token is to be treated as a security, according to Swiss authorities.
Estonia’s law taxes and virtually absent cryptocurrency regulations have attracted many enterprises in the blockchain space.
The Estonian Financial Supervisory Authority (EFSA) has been cautious when it comes to a blanket statement regarding crypto and securities. They’ve said that every ICO is unique and should therefore be examined according to their own distinctive characteristics.
The Maltese government has been a huge advocate for creating Malta as a hotbed for digital asset issuance.
In June of 2018, they passed three bills into law, which effectively provided the world’s first regulatory framework for cryptocurrencies.
The clear regulatory guidance has labeled Malta as the most security token-friendly country in the world.
The London Stock Exchange has publicly claimed that it will offer security tokens in the future. However, the Financial Conduct Authority (FCA), the UK’s financial watchdog, has yet to release any official guidance on the use of blockchain-based assets. Most hold that the FCA maintains a ‘technology-neutral’ stance when it comes to the compliance of blockchain integrated finance.
The French financial regulator Authorité des Marchés Financiers (AMF) has published official guidance for ICOs. The AMF can approve and issue permits to enterprises who wish to launch ICOs in France. Issuers are forced to provide full disclosure to the AMF, in order to provide prospective investors with the most informed decision possible.
Issuers therefore have to define their token, what it represents, its associated rights, how it’s registered, etc. Ultimately, the idea behind these requirements are to provide fair opportunities to investors, while minimizing the opportunity for companies to exploit unwitting investors.
In September 2018, the 4th Criminal Division of Berlin Court of Appeal ruled that Bitcoin trading without any license is perfectly legal. The reasoning was that bitcoins are not a financial instrument according to the German Banking Act. Bitcoin activity is therefore not applicable to any requirements established by Germany’s securities regulator— BaFin.
BaFin did later approve at least one security token issuance which involved equity offered to the general public in token form. The offering went on to raise €3 million in its security token offering.
What do you think 2019 will hold for security token legislation in Europe? Will we see the existing laws continue to modify for the integration of distributed ledger technology? Let us know what you think in the comments below.
Image courtesy of Fortune.