Blockchain-based tokens can be described as digitally scarce units of value whose properties and circulation are prescribed via computer code. Because their uses are potentially unlimited, this article uses the term "crypto assets" to capture the wide variety of virtual currencies, virtual assets, and digital tokens that can be supported by the blockchain.
The first cryptocurrency, Bitcoin, was created as a means of payment, but quickly evolved into a shop of value subject to speculative interests. Later experiments, such as the Ethereum project, expanded the functions and distribution of crypto-assets based on "smart contracts" solutions and facilitated the ability to create and circulate digital tokens "on demand".
By mid-2018, the "token economy" is reaching significant weight in terms of market capitalization. Tokens are created and distributed by companies and platforms for a variety of purposes. Primarily, they may provide users with access to or participation in online services; they may serve as a means of payment or guarantee the right to purchase products; or they may represent an ownership stake in the issuer's business and, where applicable, convey ancillary rights such as voting rights within the platform's governance system. Based on these functions, cryptoassets are commonly divided into three main categories - i.e. utility, payment and investment tokens, each of which entails specific legal consequences.
Already since 2017, crowdfunding programmes based on DLTs - so-called Initial Coin Offerings (ICOs) - have gained prominence worldwide.
ICOs consist of the public sale of tokens through online websites and platforms with the aim of raising funds for the initial development of a project or start-up.
User participation in ICOs is motivated by a willingness to support a project and/or the expectation of future profits resulting from the token's increase in value. Unless specific restrictions apply, tokens can be traded on cryptocurrency exchanges that provide direct access to an extensive secondary market.
Due to their purely digital nature and their disconnection from traditional financial instruments and venues, ICOs have become a regulatory grey area, often falling outside the scope of existing legal frameworks. Typically, they take place without the application of public offering rules and without the involvement of traditional financial intermediaries. This saves some of the compliance costs, making this form of crowdfunding suitable for start-ups and innovative companies - including fraudsters - for which access to traditional funding channels may be difficult, too costly or unattractive.
European institutions and Member States have launched various initiatives to explore the potential of blockchain in the financial sector. However, regulators also believe that blockchain-based financial activities cannot develop in a law-free space, as they pose serious risks related to consumer/investor protection, market integrity and financial crime. Regulators and supervisors are therefore addressing issues related to the legal treatment of crypto-assets and seeking regulatory enforcement strategies for the businesses emerging around them.
To understand how to support the development of the industry while ensuring appropriate legal oversight, both European and National Competent Authorities (NCAs) have launched public consultations and published comprehensive reports on cryptoassets. On the one hand, legislators are willing to promote the "token economy" as a positive "long-term trend" and avoid burdensome regulation that could jeopardise the industry and crowd out the market for investment. On the other hand, they recognise that legal safeguards and regulatory certainty must be in place, not only to ensure investor protection, but also to ensure the sustainable development of companies and the entire ecosystem.
In an effort to maintain a precarious balance between liberal positions and legal protections, the European institutions have so far adopted a wait-and-see approach, refraining from passing judgement on the appropriate regulatory strategies to be adopted. In the meantime, however, some national initiatives threaten to fragment the regulatory framework in the European Union.
EU policymakers are concerned that not only a European, but an international approach would be needed to effectively regulate these new financial networks. Because crypto-asset market participants operate globally, regulatory and enforcement efforts at the national level could push firms into less regulated countries. This would mean missing market opportunities and jeopardising investor protection, as tokens can be sold to European investors from other jurisdictions. Given this risk of regulatory arbitrage, a balanced regulatory approach is preferable to bring crypto-assets and related businesses within the jurisdiction and enforcement capacity of the EU.
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