The European parliamentary committee charged to frame legislation that would determine the status of ICO funding is caught up in a hot debate over just how to classify tokens, sources close to the EU Commission have said.
The bill, Proposal for a Regulation of the European Parliament And Of The Council on European Crowdfunding Service Providers (ECSP) for Business (2018/0048 (COD), is now before the Parliamentary Committee on Economic and Monetary Affairs (ECON).
Over the summer, sources said that the Committee was well united in following the lead set by the recent French legislation on this subject, and one faction still supports this viewpoint.
Faction 1 – The French
French Finance Minister Bruno Le Maire announced via Twitter on September 13 that the legislation, known as Article 26, had been “adopted in committee” and had created “a legal framework (for) ICO.”
The French approach, if approved by parliament, creates what is effectively a new asset class called the “token” (jeton in French), which is not necessarily under the oversight of any existing regulator.
To improve investor perception of a token offering, an ICO issuer may voluntarily apply for what is called a “visa,” issued by the Autorité des Marchés Financiers (AMF, Financial Market Authority, the French regulator), which would certify a set of requirements concerning transparency and diligence with regard to investors.
One caveat in the French approach: A token offering that functions as an effective offering of securities would be regulated as an offer of shares in the same way that any other securities offering is overseen. There is, however, no test in French law equivalent to the US “Howey Test” to aid in making this determination.
Nonetheless, many in the cryptocurrency industry hoped that the EU Parliament would simply take up this truly new approach (no other country has similar legislation).
Faction 2 – A radically conservative approach
Instead, another faction on the committee supports the radically conservative view that all token offering are security token offerings. They would like to see ICOs fall under the regulation of the Markets in Financial Instruments Directive (MiFid). In that case, tokens would be regulated strictly as financial instruments. This would impose a heavy burden of compliance.
“Having token offerings fall under the MiFid financial instruments regulation would be the death toll for European ICO and blockchain startups in a globalized, digital world,” warns one lawyer who is expert in cryptocurrency law.
Faction 3 – A Swiss compromise
There is yet another faction, a compromise faction, on the ECON committee, one that favors an approach based on that of Switzerland. The Swiss regulator, Financial Market Supervisory Authority, elaborated its approach in a statement published on 16 February 2018.
“In assessing ICOs, FINMA will focus on the economic function and purpose of the tokens (i.e. the blockchain-based units) issued by the ICO organizer. The key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable.
“At present, there is no generally recognized terminology for the classification of tokens either in Switzerland or internationally. FINMA categorizes tokens into three types, but hybrid forms are possible:
• Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
• Utility tokens are tokens which are intended to provide digital access to an application or service.
Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.”
Payment tokens, and utility tokens that do not act like security tokens – i.e. that do not finance development in return for a share in profit – would not be regulated at all. Security tokens, as elsewhere, would be treated just like securities and subject to the appropriate watchdog.
The committee is to meet on October 9, and members will be carefully scrutinized for factional behavior. It isn’t clear when a vote will be called. Clearly, it will be one that will change the game throughout the financial world.
FINMA’s statement does point to one issue that affects the regulation of token offerings all over the world – there is no legal justification for “contracts executed via blockchain technology” – i.e. smart contracts, to be treated as legally binding contracts. This points to just how much more remains to be classified under current law in the nascent blockchain universe.