In 2017 and 2018, the number of litigation related to cryptocurrency blockchain assets has increased dramatically, mainly in the United States. These litigations are of a different nature and include corporate disputes (R3 versus Ripple), claims of clients versus service provider companies ( US versus Coinbase ), regulatory actions in court ( SEC versus AriseBank ) and others.
The overwhelming majority of cases are related to allegations of fraud or claims for unregistered offers of securities made by supervisory authorities or individuals who participated in the initial offers of coins (ICO) .
The key legal question in such disputes is whether the token is considered a security by the law of the country where the company attracting the funds is located or by the law of the country where the person participating in the proposal was located or lived?
Tokens, in most cases, are classified according to:
- Functional;
- Technical specifications;
- The way of creation;
- Legal criteria.
Today, in terms of the right, cryptocurrency blockchain assets are correctly divided into two main categories: security tokens and all other tokens. This is due to the fact that the key differences in the legal regime for the existence of these rights objects take place precisely in this plane.
Inside these generic concepts, tokens can be classified into different types. When we talk about security tokens, we mean securities issued using blockchain technology. However, is a tokenized security a new object of law for which special regulation needs to be developed?
If we turn to history, the security, as an object of law, emerged as a way of securing a certain amount of rights on a certain carrier in order to simplify the transfer of such rights between the participants of civil circulation. Initially, such a carrier was paper, hence the name – “valuable paper”, that is, paper that represents value. With the advent of computers, this storage medium has become electronic. Now all the securities that are in circulation on the public market exist in electronic form and are recorded by the registrars and depositaries.
Blockchain technology is just a new way of securing rights to a security in electronic form. In theory, this is a more efficient way than current centralized accounting. Thus, a tokenized security is not a new object of law, which is somehow different from an ordinary security, but a new way of accounting for such rights.
Different jurisdictions have different views on the term “security”. The approach to the definition of what exactly is a security in the whole world (Europe, Russia, Asia) is more formal and is based on reading the corresponding definition in the relevant legislative act of the respective country. The list, as a rule, includes a share, a bond, another debt instrument, a certificate of ownership of shares in the fund, and so on. That is, everything that does not fall under this definition is not formally a security from the point of view of the law.
The American SEC regulator broadly interprets the term “security” and looks not only at the lists of instruments specified in US securities legislation, but also draws attention, first of all, to what particular rights such securities provide to their holders. For example, in the release released in mid-2017, the SEC analyzed in some detail the fact that tokens can be recognized as an investment contract, that is, a tool in accordance with which their owners invest money in certain enterprises for the purpose of making a profit and do not accept participation in enterprise management.
Hence, the key thesis of the crypto industry 2017–2018 – structure the token so that it is not a security, and sell as you want everywhere except in the United States and those countries where the sale of tokens is prohibited. The phrase “so that it is not a security” just means the requirement that the token does not consolidate the rights usually associated with the rights to such securities as stocks and bonds.
In general, the concept of financing for utility tokens has grown out of the crowdfunding industry of startups through prepaid products that are still being created. It was known before the appearance of the ICO, but there were other amounts of funding. The 2017–2018 ICO brought funding to the promise of future products or services to a completely different level, and this in itself should be alarming. But the key here is not this: the acquisition of a still uncreated product, for example, on Kickstarter, does not imply the creation of a secondary market for this product before its appearance.
In 2017 and 2018, the overwhelming majority of projects initially understood that the success of raising money for the realization of their ideas is possible only with the promise of a secondary market. The presence of a highly liquid secondary market on an empty, from the functional point of view, utility-token puts a big question mark regarding the correctness of the thesis that once such a token formally does not fall under the definition of securities, you can do anything with such an investment special regulation should not be applied. The correctness of this thesis is still subject to verification.
The issue of tokenized securities is not an improved version of ICO; rather, it is a traditional, in accordance with securities market legislation, method of raising capital, presented in digital format. From the point of view of the right, the issue and circulation of such instruments is subject to the same rules as the issue of classic securities. That is why the largest and most well-known tokens on the market structured the supply of tokens, taking into account the rules governing the global offering of securities.
The blockchain-ecosystem ecosystem is a combination of a number of elements that together ensure the implementation of a whole range of actions: from creating tokens to trading digital securities. Issuing tokens, complying with legal requirements, storing, carrying out subsequent transactions and realizing rights for such tokens — these relationships can be automated in many aspects.
Blockchain provides an interesting opportunity through the use of smart contracts . The release of securities as tokens theoretically allows you to automate the fulfillment by the issuer of its obligations under the securities (for example, to automate voting, dividend payment), which certainly provides very interesting and attractive opportunities.
Accounting for rights to securities and fixing the transfer of the right to them in many jurisdictions should be carried out in accordance with certain rules, often with the involvement of special professional intermediaries (registrars, depositories, custodians). In this sense, rights accounting using blockchain technology may contradict the law.
The main problem is that different countries have different systems of law and use different approaches to their accounting. In many states with a continental law system (for example, Germany) there are strict requirements regarding the registration of rights to securities of private companies (the need to attract a notary, keeping a register in paper form, and so on).
In other countries, such as Cyprus, there are no strict requirements as to where the registry is maintained. For the securities rights accounting system to work, changes will be required not only in the laws of countries with a continental law system, but also in the laws of countries with a common law system.
At the moment, special regulation for recording rights to securities using blockchain technology exists only in the state of Delaware and in France. The state of Delaware, in which most of the US companies are registered and which has the most developed corporate legislation, in 2017 approved a law allowing the use of the blockchain to record securities (rights accounting using a distributed registry).
In December 2018, a decree was passed in France, effectively securing the possibility of using the distributed registry technology for registering securities, fixing the transfer of rights on them and identifying the owner without the involvement of registrars, depositories and custodians as intermediaries. In a number of jurisdictions, such as Luxembourg, the countries of the Baltic region, as well as in Russia there are similar bills.
Thus, the recognition at the legislative level of the possibility of recording rights to securities using advanced technologies and systems, including blockchain technology, is one of the prerequisites for the development of the market for tokenized securities.
Publication date 06.02.2019
Share this material on social networks and leave your opinion in the comments below.
