Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law
44 Pages Posted: 30 Nov 2017 Last revised: 13 Dec 2017
Date Written: November 22, 2017
Cryptocurrencies, such as bitcoin and ethereum, have not only risen to public attention as novel means of payments. Rather, the current hype is fueled by financial applications built on top of these currencies that stand to potentially upend consumer and investment markets. The most remarkable and economically relevant of these applications are tokens sold via initial coin offerings (ICOs, also called token sales). In 2017 alone, the equivalent of more than $ 3 billion have been raised through ICOs. In these entirely online-mediated offerings, startup entrepreneurs sell tokens registered on a blockchain in exchange for cryptocoins traded on that blockchain (typically bitcoins or ethers). Investors receive tokens that can be understood as cryptographically-secured coupons which embody a bundle of rights and obligations.
In July 2017, the SEC released an investigative report that highlighted that such tokens can be subject to the full scope of US securities regulation. As a result, issuers increasingly structure ICOs such as to prevent US citizens and residents from obtaining tokens in order to exclude the reach of US securities regulation. However, for the time being, EU citizens and residents are free to invest in tokens. This raises the question to what extent EU securities regulation is applicable to ICOs and, particularly, whether issuers have to publish and register a prospectus in order to avoid criminal and civil prospectus liability in the EU. In conceptual terms, this depends on whether tokens are considered “securities” under the EU prospectus regulation regime. The question is of great practical relevance since, despite the high stakes involving more than $100 million in some ICOs, to our knowledge, up to now not a single token issuer has published or registered any such prospectus.
Against this background, this paper develops a nuanced approach that distinguishes between three archetypes of tokens: currency, investment, and utility tokens. It analyzes the differential implications of each of these types, and their hybrid forms, for EU securities regulation. While the variety of tokens offered necessitates a case-by-case analysis, the discussion reveals that at least some types and hybrid forms of tokens are subject to EU securities regulation. By and large, pure investment tokens typically must be considered securities, while pure currency and utility tokens are exempted from securities regulation in the EU. In identifying these archetypes, regulation and market oversight will have to put substance over form. Finally, we spell out criteria for the application of EU securities regulation to hybrid token types.
The paper closes by offering two policy proposals to mitigate legal uncertainty concerning token sales. First, we suggest tailoring disclosure requirements to the code-driven nature of token sales. Such an ICO-specific safe harbor would offer a clear and less burdensome path to EU law compliance for token sellers who suspect that their tokens may qualify as securities. This only requires the Commission to amend its delegated 2004 Commission Prospectus Regulation. Second, we propose that, on an international level, governments form a compact to bestow certainty about the application of their respective securities regulation regimes to token sales. This is, first, to avoid regulatory overkill on the one and regulatory lacunae on the other hand in online-mediated, global token sales. Second, overlapping, and partially contradicting, securities regulation regimes can nullify each other. In the end, only a joint international regulatory regime can efficiently balance investor protection and investor access in the face of the novel generation of decentralized blockchain applications.
Keywords: blockchain, ICO, token sale, initial coin offering, bitcoin, ethereum, prospectus, EU law, smart contracts, DAO, utility token, investment token, safe harbor, cryptocurrencies
Blockchains and Data Protection in the European Union
31 Pages Posted: 6 Dec 2017 Last revised: 16 Dec 2017
Date Written: November 30, 2017
This paper examines data protection on blockchains and other forms of distributed ledger technology (‘DLT’). Transactional data stored on a blockchain, whether in plain text, encrypted form or after having undergone a hashing process, constitutes personal data for the purposes of the GDPR. Public keys equally qualify as personal data as a matter of EU data protection law. We examine the consequences flowing from that state of affairs and suggest that in interpreting the GDPR with respect to blockchains, fundamental rights protection and the promotion of innovation, two normative objectives of the European legal order, must be reconciled. This is even more so given that, where designed appropriately, distributed ledgers have the potential to further the GDPR’s objective of data sovereignty.
Blockchain and the European Union’s General Data Protection Regulation: A Chance to Harmonize International Data Flows
40 Pages Posted: 6 Dec 2017
Date Written: November 6, 2017
Future economic growth is dependent on global data sharing. With the EU’s GDPR going into effect May 25, 2018, data privacy law in the EU will be uniform in text. The GDPR applies extraterritorially to any organization that can reach the EU market in terms of access by an EU citizen. While a consistent and coordinated interpretation of the GDPR provides organizations with the requisite assurances needed when operating in an international environment, stricter standards and higher fines require the organizations to rethink their international privacy compliance protocols. Trust-failures in society are the driving force behind such comprehensive regulatory frameworks, but emerging technology like blockchain can aid in minimizing these privacy concerns. Among other things, blockchain properties include decentralization, authentication, confidentiality, accountability, and access control management. By treating data flows as transactions, blockchain applications can work with regulations to facilitate the secure transfer of information. The purpose of this paper is to begin a conversation around utilizing blockchain technology and reducing harmonizing regulations like the GDPR to an automated protocol.
Bitcoin as ‘Digital Tulips Bitcoin demand and price appreciation may also be understood as the consequence of the historic levels of excess liquidity in financial markets today. Like technology forces, that liquidity is the second fundamental force behind its bubble. To explain the fundamental role of excess liquidity driving the bubble, one should understand Bitcoin as ‘digital tulips’, to employ a metaphor.The Bitcoin bubble is not much different from the 17th century Dutch tulip bulb mania. Tulips had no intrinsic use value but did have a ‘store of value’ simply because Dutch society of financial speculators assigned and accepted it as having such. Once the price of tulips collapsed, however, it no longer had any form of value, save for horticultural enthusiasts.What fundamentally drove the tulip bubble was the massive inflow of money capital to Holland that came from its colonial trade in spices and other commodities in Asia. The excess liquidity generated could not be fully re-invested in real projects in Holland. When that happens, holders of the excess liquidity create new financial markets in which to invest the liquidity—not unlike what’s happened in recent decades with the rise of unregulated global shadow banking, financial engineering of new securities, proliferating liquid markets in which securities are exchanged, and a new layer of professional financial elite as ‘agents’ behind the proliferating new markets for the new securities.Bitcoin Potential Contagion Effects to Other MarketsA subject of current debate is whether Bitcoin and other cryptos can destabilize other financial asset markets and therefore the banking system in turn, in effect provoking a 2008-09 like financial crisis………….Deniers of the prospect point to the fact that Cryptos constitute only about $400 billion in market capitalization today. That is dwarfed by the $55 Trillion equities and $94 trillion bond markets. The ‘tail’ cannot wag the dog, it is argued. But quantitative measures are irrelevant. What matters is investor psychology. ……For example, should cryptos develop their own ETFs, a collapse of crypto ETFs might very easily spill over to stock and bond ETFs—which are a source themselves of inherent instability today in the equities market. A related contagion effect may occur within the Clearing Houses themselves. If trading in Bitcoin and cryptos as a commodity becomes particularly large, and then the price collapses deeply and at a rapid rate, it might well raise issues of Clearing House liquidity available for non-crypto commodities trading. A bitcoin-crypto crash could thus have a contagion effect on other commodity prices; or on ETFs in general and thus stock and bond ETF prices.”
Max Planck Institute for Innovation and Competition; University of Oxford
Date Written: August 7, 2017
Abstract: This paper examines the emergence of blockchain technology and evaluates regulatory techniques designed to regulate the technology in its early stages.
Keywords: Blockchain, Distributed Ledger, Smart Contract, Law, Regulation, Co-Regulation, Law & Technology, Innovation
Bitcoin exchange platforms and “wallet” providers that hold the cyber currency for clients will be required to identify their users, under the new rules which now must be formally adopted by EU states and European legislators and then turned into national laws within 18 months.
There are many exciting developments coming to market both in terms of improving existing blockchain functionality as well as the consumer’s experience. However, given the rapid pace at which projects are coming to market, I’ve found it to be difficult to keep track of each and every project and where each one fits into the ecosystem. Furthermore, it’s easy to miss the forest for the trees without a comprehensive view of what the proverbial forest looks like. As a result, I have compiled a list of all of the decentralized blockchain-based projects that I have been following, was able to dig up through research, along with recommendations from friends in the ecosystem. This market landscape is the output of that work.
This paper is intended to contribute to the debate on blockchain’s financial regulation. First and foremost, it provides through the example of securities law an introductory overview of how American and French legal systems fail to properly handle the existing reality of blockchain. It subsequently identifies some of the peculiar issues that blockchain raises from a financial point of view and that justify a tailored legal regime. Finally, it examines the efforts made by blockchain’s stakeholders to compensate the lack of regulation and discusses how those efforts may fall within a broader reform movement. For the sake of clarity, this last section will focus on the French example.
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Animation: Visualizing the ICO ExplosionJEFF DESJARDINS on December 12, 2017 at 12:14 pmShareTweetShareRedditEmailSHARES 794Animation: Visualizing the ICO ExplosionIn our chart highlighting Bitcoin’s epic journey to $10,000, we also noted that 2017 was a landmark year for the Initial Coin Offering (ICO), a method used to raise initial funds for development and marketing of new cryptocurrencies or tokens.ICOs have become so popular that well over 90% of total funds raised through this mechanism came from this year alone.While it’s hard to put this sudden ICO explosion in context, we think today’s animation does the phenomenon sufficient justice. Coming from Max Galka at Elementus.io, today’s animation shows a timeline of ICOs and funds raised since early 2014.In an added dimension, each ICO is also classified based on geographic region. The colorful fireworks that happen throughout 2017 help to make it clear that we are indeed living in the year of the ICO.YEAR OF THE ICODespite bans in China and South Korea, there is no shortage of fervor for new cryptocurrencies or tokens.In their short history, there have been three ICOs that raised over $200 million – and six more that surpassed the $100 million mark.Here is a breakdown of the nine biggest ICOs so far. Note that eight of them took place in 2017:Name Location ICO Proceeds ICO YearFilecoin North America $257 million 2017Tezos Europe $236 million 2017EOS North America $200 million 2017Paragon North America $183 million 2017The DAO Stateless/Unknown $168 million 2016Bancor Middle East $153 million 2017Polkadot Europe $121 million 2017QASH Asia $112 million 2017Status Europe $109 million 2017It’s worth mentioning that with the price for bitcoins and ether both rising fast, that these ICOs have actually raised even more capital than initially shown. That’s because the dollar amounts above are based on the value of bitcoins and ether at the time of the raise.With billions in capital going into new projects, investors and speculators are anxiously waiting to see which coin or token will be the next Ethereum to take the market by storm.
By Dr. Martin Gramatikov, Senior Justice Sector Advisorand Georgi Chisuse, ScalatorCryptocurrencies, and its underlying blockchain technology, are everywhere today. Bitcoin’s revolutionary breakthrough provoked intensive research into the potential adoption of backend technology into a multitude of fields. Essentially, blockchain is a secure digital ledger which can record almost anything which has value – coins and financial transactions, ID documents and ownership titles, votes and shares, property and contractual rights, positive and negative reviews. It is clear that blockchain technology will transform and probably disrupt many areas of the law in the months and years to come.Based on mutual consensus between all participants and automatic authenticity checks, the decentralized blockchain technology has shown tremendous potential for building independent systems. Thus, the autonomy as well as the transparency of those systems would guarantee a broader access to justice to everyone involved.But is it going to remain a technology geared towards the needs of big business such as banks, insurance, the fintech sector and investors? Can blockchain help the billions of people who need the law for protecting their basic justice needs?Throughout the years, HiiL has asked tens of thousands of people around the world about their justice needs and experiences with access to justice. We find that worldwide, large numbers of women and men encounter legal problems that might have a legal solution. At a global level, people most often need accessible and fair justice journeys for: crime, land problems, disputes with neighbors, family problems, employment and money-related disputes. Problems around ID documents (i.e. birth, citizenship, marriage and death certificates) and welfare benefits are common among the most vulnerable groups.The answer to our question is – Yes, blockchain technology has huge promise for the justice needs of the people. Countries like Estonia, Ghana, Honduras, Ukraine, Sweden, the Indian state Andra Pradesh and Georgia already experiment with registering land titles and ownership rights using blockchain. There is a great hope that this will make land transactions more affordable, transparent and secure.In the field of family justice, there are already examples of e-marriage and marriage certificates encoded in public and private blockchains. The fields most likely to be innovated using blockchain are inheritance, dowry, and prenuptial agreements. Benefits of such innovation include smart contracts which can help women to secure and enforce their rights.Employment is about livelihood. Millions of people need protection against exploitative practices, unfair dismissal, unpaid wages and dangerous working conditions. Employment contracts and their clauses can be registered in a blockchain. Complex schemes of intermediaries can be hold accountable through transparency. Data can be exchanged with labour inspectorates and watchdogs. In Brazil, a startup called CreditDream works on decentralized blockchain applications for universal access to credit.Undoubtedly, there is a great potential for blockchain technologies to deliver just and fair solutions to millions and even billions of people who need justice. The creativity of the industry will lead the way. But there is a need for visionary leadership which steers innovation towards people’s most prevalent and pressing justice needs.