Crypto-assets: regulators and regulations trying to catch up with innovation without stifling it?

A post by guest bloggers Ivan Peeters, Philip Van Steenwinkel and Frederik Stappers

1. Over the past few years crypto-assets have garnered significant attention from the media, financial analysts, governments, regulatory institutions and investors. However, this year interest in crypto-assets has skyrocketed. With big investments of corporates, investment funds and millions already being raised by Initial Coin Offerings, it shows that crypto-assets are maturing and here to stay. In this post we provide some considerations in relation to the legal and regulatory characterisation and regulatory treatment of token offerings and the most common crypto-assets.

What are tokens and related offerings?

2. In recent years, a number of public token offerings have been brought to market. Examples are the Initial Coin Offering (ICO), and more recently the Security Token Offering (STO). These offerings are a recent and alternative way for companies to raise funds: they issue crypto-assets called “tokens”, using distributed ledger technology (DLT)[1], and sell them to investors, often in exchange for cryptocurrencies or fiat currency.

3. Tokenization can be described as the process of creating a digital representation called a “token”, using DLT, which represents claims or rights of membership against a person, rights to property or other absolute or relative rights. To date, there is no official categorisation of tokens in Belgium or the EU. However, a commonly used classification comprises four main categories[2]:

  • Payment tokens: are tokens which can be used as means of exchange (e.g. to enable the buying or selling of goods / services by someone other than the token issuer). In practice, they are also held for investment purposes, although it is not their intended function. Examples of payment tokens include Bitcoin or Litecoin. A sub-category is “stablecoins”: payment tokens that have particular features to stabilise their value and which are typically backed by real assets or funds such as fiat currencies (e.g. Tether);
  • Security tokens: these tokens primarily function as an investment vehicle and represent an economic interest in the issuing entity. These tokens may provide rights related to companies such as ownership/equity rights and/or entitlements similar to dividends and/or similar to (interest bearing) bonds. When a security token is issued, reference is made to a Security Token Offering (STO) (e.g. a public offering of token-based bonds);
  • Utility tokens: are characterised by their utility as they provide their holder with a functional use in the form of access to a product or service (similar to a voucher); and
  • Hybrid tokens: which have features at issuance that enable their use for more than one purpose. An example would be a payment token / utility token which also carries an investment component. This is something we very often see in practice.

Crypto assets under current Belgian and EU Law

4. To date no token-specific regulation is provided for in Belgium. How are tokens to be legally characterised under Belgian financial law? The only form of regulatory guidance in Belgium which tackles this matter, can be found in a number of documents issued by the Financial Services and Market Authority (FSMA) and the National Bank of Belgium (NBB).[3] In its communication of 13 November 2017, the FSMA endorsed the view of the European Securities Markets Authorities (ESMA) on ICOs. The view taken, was that various financial regulations may be applicable to ICOs based on how they are actually structured. Potentially applicable financial regulation on an EU-level includes the Prospectus Directive (now the Prospectus Regulation), MiFID (now MiFID II), AIFMD, MAR, and AMLD4 (now AMLD5). For Belgium specifically, the FSMA stated that regulations such as the Law of 16 June 2006 (now replaced by the Prospectus Regulation and the Law of 11 July 2018) on public offers of investment instruments and admission of investment instruments to trading on regulated markets, the Law of 18 December 2016 on Crowdfunding and the FSMA Regulation of 3 April 2014 on the ban on distribution of certain financial products to retail clients, might apply. The applicability of the above legislative rules depends on the way in which the token offering in question is structured. This must be examined on a case-by-case basis as the characteristics of a (security) token may be similar to a “financial instrument” so that it would fall within the scope of the regulations discussed above. Unfortunately, the FSMA did not expressly mention the criteria it may apply when undertaking this assessment.

5. In January 2019 ESMA published its Advice on Initial Coin Offerings and Crypto-Assets, including an Annex on the legal characterisation of crypto-assets (based on an EU wide survey amongst national competent authorities).[4] There seemed to have been a broad consensus (or at least majority) that not all types of crypto-assets should necessarily be characterised as securities or financial instruments, but that those that do qualify as financial instruments under MiFID II should be regulated as such and (ii) all types of crypto-assets should be subject to some form of regulation. No clear criteria for determining when crypto-assets are “securities” or “financial instruments” under MiFID II were handed down in the advice.

Comparing with some other existing approaches abroad

6. The USA maintains a deliberate flexible “substance over form” approach which takes the shape of the Howey test.[5] Tokens can be brought under the scope of securities legislation when they cumulatively meet the requirements of the Howey test: (i) a person invests his/her money, (ii) in a common enterprise, (iii) is led to expect profits, (iv) solely from the efforts of the promotor or a third party.

7. In 2018, Malta introduced the first bespoke regime for regulation of tokens on a member state level. Under its Virtual Financial Assets Act (VFAA), the Maltese supervisor introduced a Q&A based, online “Financial Instrument Test”, which must be carried out by any issuer prior to the offering to the public in Malta.[6] Based on this test, it can be determined whether or not a token constitutes a “financial instrument” under MiFID II. If this is not the case, it will fall under the scope of a token specific regulation which is similar to the draft Markets in Crypto Assets Regulation (as discussed in paragraphs 10-12 below).[7] The approach used in the Financial Instrument Test for the proper characterisation of tokens contrasts with the approach of the Howey test discussed above. While the Financial Instrument Test seems more objective because it is based on the actual rights and characteristics of a particular token, the Howey test seems more subjective as it is linked to the efforts and intentions of the issuer and the motivation of the investor to purchase the token.

8. Switzerland is probably one of the most welcoming jurisdictions for activities in digital and crypto-assets. It is home to one of the richest and largest ecosystems globally for digital/crypto assets. This has been achieved without dedicated legislation but with guidelines issued by the Swiss financial supervisor FINMA, that seem to follow a more “substance over form” approach for determining to what extent crypto-assets are caught by existing, general financial regulation (incl. the principle of “same activity, same risks, same rules”).[8]

Upcoming EU regulation: the MiCA Regulation and the DLT Pilot Regime

9. The European Commission (EC) has proposed to clarify the existing definition of “financial instrument” under MiFID II to include financial instruments based on DLT.[9] This proposal is directly linked to the proposed pilot regime discussed in paragraph 13 below. The effect should be to prevent that the use of DLT technology would hamper the use and market of crypto-assets that otherwise qualify as financial instruments.

10. On 24 September 2020, the EC presented the Digital Finance Package (“DFP”). One of the key elements of the DFP is the Markets in Crypto Assets Regulation (“MiCA Regulation”). The MiCA Regulation is a regulatory framework to regulate crypto-assets not otherwise captured under existing EU financial services regulations and their service providers in the EU. Additionally, it provides a single licensing regime (so-called passport) across all member states by 2024. 

11. The MiCA Regulation will apply to:

(a) any person that is engaged in the issuance of crypto-assets or provides services related to crypto-assets in the EU;

(b) crypto-assets which do not qualify as “financial instruments”, “electronic money”[10], “deposits”, “structured deposits” and “securitisation” under the existing EU regulation.[11] A crypto-asset is defined as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. Therefore, the MiCA Regulation should cover utility tokens, asset-referenced tokens and a newly defined e-money token, but will not apply to tokens which qualify as “financial instrument” under MiFID II.

12. The MiCA Regulation defines an issuer of crypto-assets as “a legal person who offers to the public any type of crypto-assets or seeks the admission of such crypto-assets to a trading platform for crypto-assets”.[12] It seems that the EC has deliberately chosen for a broad definition. An issuer of crypto-assets will have to satisfy a number of general requirements.[13] These requirements are a scaled-back mix of existing EU regulations. For instance, an issuer of crypto-assets will be required to publish a crypto-asset whitepaper which is subject to certain form and content requirements thereby enabling potential investors to make an informed purchase decision and understand the risks related to the offering.[14] In contrast to a prospectus, there is no necessity for a competent authority to approve the whitepaper. However, it should be submitted to the competent authority with an explanation of why the crypto-assets issuance falls outside the scope of MiFID II. When an issuer of crypto-assets fails to comply with the requirements of the crypto-asset white paper, he may be held liable for the claims of token holders.[15]

13. Another key element of the Digital Finance Package is the proposed “Regulation on a pilot regime for market infrastructures based on distributed ledger technology”.[16] The use of DLT in token issuances, with all transactions recorded in a decentralized ledger, can expedite and condense trading and settlement to nearly real-time and could enable the merger of trading and post-trading activities. However, the current rules envisage the performance of trading and settlement activities by separate market infrastructures, imposing regulatory constraints that can inhibit the development of DLT market infrastructures. The DLT Pilot Regime is a regulatory sandbox for DLT market infrastructures providing trading and settlement services for DLT-transferable securities.[17] It is open for market participants running “multilateral trading facilities” or “securities settlement systems” using DLT, thus for the recording, settlement and safekeeping of crypto-assets. Such actors must be authorised as an investment firm or a market operator under MiFID II or as a Central Securities Depository under the Central Securities Depository Regulation (“CSDR”). If those requirements are met, the actor can apply for a specific permission[18] under the Pilot Regime, the consequence of which is the actor’s temporary exemption from certain rules under MiFID II and CSDR, that have hindered the application of DLT in the financial instruments markets.[19]

Recent market developments

14. We see that the token offerings market is maturing. In particular, more traditional securities are being issued as a token in a so-called Security Token Offering (STO). An interesting example is the Bitbond token which was very recently issued under German Law[20]: Under the STO, qualified subordinated token-based bonds with a total nominal amount of EUR 100,000,000.00 were issued at a fixed interest rate of 4.00 percent per annum with a term ending in 2029. Investors could subscribe to this STO using cryptocurrencies such as Bitcoin, Ether and Stellar or use the fiat currency euro. The token-based bonds create claims for the token holders against the issuer for redemption of the invested capital at the end of the term and payment of interest (which is paid in cryptocurrency) during the term. They do not grant any participation or voting rights in the shareholders meeting of the issuer. The issuer will not apply for admission of the token-based bonds to trading on a regulated market or any other equivalent market. The tokens will, however, be tradeable on the integrated decentralized exchange of the Stellar blockchain after the end of the subscription period. The clearing and settlement of the tokens happens nearly real-time as smart contracts are used on the distributed ledger. When certain conditions are met, such as receiving the cryptocurrency or fiat currency to invest in the tokens, the Bitbond tokens are automatically sent to the “wallet” of the investors. This “wallet” can be compared to a traditional security account as it is the place where the tokens are stored. Consequently, the investors are responsible to safeguard and keep their tokens in custody themselves despite the fact people often lose their private key to access their wallet, in which case the tokens cannot be retrieved. The introduction of a DLT Multilateral Trading Facility and DLT Securities Settlement System under the DLT Pilot Regime which ensures the initial recording, settlement and safekeeping of the security tokens, is also a welcomed initiative in order to develop a sound trading infrastructure. Interesting also, the principal activity of the Bitbond issuer is granting loans in crypto-currencies (such as Bitcoin or Stellar Lumens), with an express option to securitise such loans in the future!

Crypto-assets as property

15. As the use and economic value of crypto-assets is increasing substantially every day, the legal question how we should deal with the property aspects of this new “asset class” becomes ever more important. Can crypto-assets be used as collateral (e.g. pledge, repo) or can they be subject to a freezing order (bewarend beslag/saisie conservatoire) etc., in other words, to what extent can creditors rely on these assets to determine the credit worthiness of their debtor? In domestic law as well as conflicts of law solutions, this question typically comes down to identifying situs: the location of the asset will determine the applicable national rules. In a recent UK case Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited this question came up in the context of a freezing order in a fraud dispute where the location of Bitcoin would determine the jurisdiction of the court.[21] The court found that the situs of a crypto-asset is the place where the relevant participant in the Bitcoin system (in this case the person or company who owned the Bitcoin) is domiciled. Obviously this approach makes us think of the PRIMA rule for securities held in securities clearing systems[22]: the governing law is the law of the jurisdiction where the most relevant securities account is held; this is the jurisdiction where the ultimate owner of the securities holds his securities account with a financial intermediary. Knowing that economic value supposes recognition of property rights and its consequences vis-à-vis creditors, having a unique location for these purposes is at least recommendable, irrespective of the distributed recording of encrypted data that “represent” the Bitcoin. This case law is still subject to appeal and probably is the – quite rational – opening gambit of a discussion to be had in a very particular, because inherently internationally “distributed” context.

Some conclusions

16. Innovation always precedes regulation. Regulators and regulations are now trying hard to catch up with crypto-assets and the trading thereof. The stated intent of the EC is that with its legislative proposals it wants to ensure that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies. To what extent those objectives will be achieved of course remains to be seen. At first sight the proposals offer at least an interesting mix of business facilitating aspects and compliance type requirements. We summarise some reactions below:

(a)        imposing regulation on a growing, innovative sector always risks benefitting the bigger players with deeper pockets; compliance with new regulation requires investment;

(b)        the proposal of the EC to clarify the definition of “financial instrument” so that the use of DLT does not call into question the possibility to be characterised as a financial instrument is to be welcomed;

(c)        as in many EU jurisdictions to date, the proposals focus on the distinction between assets and services caught by existing EU financial services regulations on the one hand and the other assets and services on the other hand.

For operators’ compliance that distinction is key. We regret that the proposals do not go further to impose more precise/objective tests to assist in making that distinction. Now it is left to an interpretation of the existing EU financial services regulations on a case by case basis, which may involve discussions with national authorities and thus potentially local differences due to specificities in domestic implementation of the EU legislation. Looking forward, the European legislator may find inspiration in the “Financial Instrument Test” of Malta;

(d)        against the background of (a), the choice to absolutely want to regulate all crypto-assets and related services, is not the most obvious one; one could have considered to limit the regulatory intervention more to key areas where legal certainty is required to facilitate innovation (e.g. custody, clearing and settlement of crypto assets, investor disclosure);

(e)        the proposed DLT Pilot Regime could have the benefit of eliminating certain rules under MiFID II and CSDR, that have hindered the application of DLT in the financial instruments markets. Moreover, via this regime more legal certainty could be achieved in the very sensitive area of custody, clearing and settlement. Such aspects are also directly linked to questions related to the property law status of crypto-assets, questions which will in any event require a lot more debate and work. As with intermediated securities (i.e. securities held on accounts in multi-tier clearing and settlement systems) an EU wide and even global approach would be by far the best. The proposed MiCA Regulation together with the proposed DLT Pilot Regime certainly have the potential to harmonise the approach to crypto-assets and to provide more legal certainty for the issuance, clearing, settlement and custody of crypto-assets within the EU. However, these are still only drafts in advanced form, so there is still some work to be done and some amendments may still be made. There is no specific timeline yet for having these regulatory frameworks actually in place;

(f)         against the background of (c), in future sponsors and their legal counsel may want to consider carefully in the design of the crypto asset and related transactions whether or not they want to steer clear from one (EU securities regulation) or the other (MiCA) regulatory regime and whether or not that will be commercially and legally feasible.[23]

Ivan Peeters, Philip Van Steenwinkel and Frederik Stappers
Lawyers PwC Legal


[1] Distributed Ledger Technology (DLT) refers to the technological infrastructure and protocols that allows simultaneous access, validation, and record updating in an immutable manner across a network spread across multiple entities or locations. An example of DLT is Blockchain.

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0380&from=EN

[3] https://www.fsma.be/sites/default/files/public/content/EN/Circ/fsma_2017_20_en.pdf .

[4] https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf .

[5] https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets .

[6] https://legislation.mt/eli/cap/590/eng/pdf .

[7] The questions asked under the Financial Instrument Test include among others whether the token confers rights analogous to those of shares or bonds, whether the instrument is not an instrument of payment, whether the token is negotiable or capable of being traded on the capital market, whether it has features of transferable securities, whether the token is termed as an option / future / forward rate agreement / swap / other derivative contracts or has equivalent features, whether the token is designed for the sole purpose of and/or result in the transferring of credit risk from one party to another, whether the token gives the holder an economic exposure to the difference between the price of an underlying asset at the start of the contract and the price when the contract is closed, etc.

[8] See FINMA Guidance on the regulatory treatment of initial coin offerings (04/2017), FINMA ICO Guidelines (02/2018)  and the FINMA supplement to the guidelines for enquiries regarding the regulatory frameworks for initial coin offerings (02/2019).

[9] Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and EU/2016/2341 – COM(2020)596.

[10] Except where they qualify as electronic money tokens under the draft MiCA Regulation.

[11] Article 2 of the draft MiCA Regulation states that the Regulation does not apply to crypto-assets that qualify as “financial instruments” as defined in MiFID II, “electronic money” as defined in the E-Money Directive (except where they qualify as electronic money tokens under MiCA Regulation), “deposits” as defined in the Directive 2014/49/EU on deposit guarantee schemes, “structured deposits” as defined under MiFID II and “securitisation” as defined in the Securitisation Regulation.

[12] Offers of crypto-assets to the public are regulated under Article 4 draft MiCA Regulation. The authorisation and operating conditions for a trading platform for crypto-assets are also regulated under the draft MiCA Regulation. See Article 3 (9) (b), Article 68 (Operation of a trading platform for crypto-assets) and more generally Title V (Authorisation and operating conditions for Crypto-Asset Service providers).

[13] It should be noted that issuers of asset-referenced tokens and e-money tokens are subject to more stringent requirements.

[14] Please note that there are exemptions from the obligation to publish a whitepaper when the offering relates to crypto-assets that are issued for free, the crypto-assets are created through mining as payment of gas fee/price, the crypto-assets are unique and non-fungible, it is a small-scale offerings, i.e., up to 150 persons per member state or up to a total amount of EUR 1 million within 12 months; or offerings to qualified investors only.

[15] Issuers will also have to comply with the fair, clear, and non-misleading standards when communicating with investors and marketing their crypto-assets. Moreover, they should prevent, identify, manage and disclose conflicts of interest that may arise, maintain effective administrative arrangements and maintain all of their systems and security access protocols to an appropriate standard. The competent authority of the member state together with ESMA and the European Banking Authority (EBA), will be tasked with administering these obligations under MiCA Regulation.

[16] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a pilot regime for market infrastructures based on distributed ledger technology – COM/2020/594 final.

[17] A “regulatory sandbox” is a concept that enables firms to test innovative products, services or business models. Within such sandbox, regulatory obligations are partly not applicable.

[18] In order to be granted this permission, the applicant has to fulfil a number of special requirements under the Pilot Regime, which concern limitations on the securities, which are (going to be) traded on the market infrastructure as well as general requirements to avoid risks raised by the use of DLT.

[19] A DLT MTF may be permitted to admit to trading DLT transferable securities that are not recorded in a CSD in accordance with Article 3(2) of Regulation (EU) 909/2014 but instead recorded on the DLT MTF’s distributed ledger. A CSD operating a DLT securities settlement system may be exempted by the competent authority from the application of Article 2(4) on dematerialised form, Article 2(9) on transfer of orders, Article 2(28) on securities accounts, Article 3 on the recording of securities, Article 37 on the integrity of issue, Article 38 on the segregation of assets of Regulation (EU) No 909/201.

[20] The English prospectus of the Bitbond STO can be found here: https://www.bitbondsto.com/files/bitbond-sto-prospectus.pdf .

[21] Under this case, the court granted permission to serve disclosure orders on two cryptocurrency exchanges through which the claimants’ stolen Bitcoin had been traced, granted a world-wide freezing order against persons unknown, and gave ground-breaking guidance on the lex situs of crypto-assets.

[22] http://irep.ntu.ac.uk/id/eprint/33245/1/10754_Moffatt.pdf

[23] A relevant question to compare both regimes could be if there are relevant differences for passporting throughout the EU.

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