Legal Instruments Applied to Crypto-Assets and Related Activities Under EU Law
5 min read

Legal Instruments Applied to Crypto-Assets and Related Activities Under EU Law

This article has presented some of the key legal instruments applicable to crypto-assets and related activities under European financial law and highlighted the challenges in enforcing existing rules for fluid, constantly evolving and potentially short-lived financial applications based on DLTs.
Legal Instruments Applied to Crypto-Assets and Related Activities Under EU Law

Three General Token Categories

From a conceptual and methodological perspective, European authorities determine the legal treatment of tokens by classifying them into general categories: payment, investment and utility, associated with different, specific functions. These three categories, which are intended to separate crypto-assets into specific regulatory areas, should be considered as archetypes, while existing tokens usually combine multiple functions (hybrid tokens) and have fluid characteristics. While this classification is important, it does not obviate the need to take a case-by-case approach to assessing the risks and regulatory regimes for crypto-assets.

Crypto-License & Crypto-Exchange Company in Estonia
Register a Cryptocurrency Exchange in Estonia. Obtain a Crypto-License and start a cryptocurrency business. Cryptocurrency today is a growing business. More and more people are investing in virtual currency. The Estonian Government reacts by implementing new regulations.

Investment and Payment Tokens

Crypto-assets classified as investment instruments or electronic money fall within the scope of European financial regulations. In particular, tokens with an investment component are subject to the requirements for issuance and trading of securities, while the rules for electronic money and payment service providers apply to payment tokens.

However, such a simplified regime has several drawbacks. Attempts to bring investments in crypto-assets under existing security and investor protection regimes are justified by concrete risks, but existing requirements do not always fit the characteristics of companies and start-ups in the blockchain industry, their technical and operational processes, as well as their inherent incentive schemes.

On the one hand, some concepts and requirements related to DLT need to be better defined and understood; for example, what is meant by "custody or safekeeping of cryptoassets" should be clarified. On the other hand, the application of existing requirements is likely to be hampered by enforcement issues arising from decentralization, international nature and non-incorporation of entities.

Alternative Investment Fund in Estonia (AIF) | Registration
Small Alternative Investment Fund (AIF). The legal environment of the Republic of Estonia provides with the possibility of organising the collection and attraction of investments and further management of collective assets under the simplified regulation of small alternative investment funds.

Utility Tokens

Finally, not all tokens may be covered by existing legal regimes due to their specific functions. This is the case with crypto-assets, commonly referred to as utility tokens. To fill the legal vacuum, some EU Member States have introduced tailored legal regimes to provide a coherent, comprehensive legal framework for the growing industry.

However, a fundamental problem remains: The line between security, payment and utility tokens is blurred. Legal regimes may overlap or follow one another at different stages of the token lifecycle. For this reason, legal uncertainty remains a major concern, as tokens are functional components of evolving, innovative solutions that can hardly be reduced to pre-existing classes or defined a priori.

Beyond these drawbacks in the applicability of existing regulations, a normative stance on the regulation of blockchain-based financial applications must also take into account the socioeconomic dynamics that are shaping and reshaping these technologies and align them with the policy goals that regulation seeks to achieve. The question of how existing regulatory requirements and safeguards should be applied within the DLT ecosystem is primarily a question of the role of the various actors involved in that system.

Tokens Offered Under the ICO and Estonian Regulations Applicable to Them
This article contains the information that can be very useful for entities engaging with virtual currencies and ICOs.

Conclusion

Notwithstanding its decentralized, open-source roots, the crypto-asset market has been rapidly populated by a host of new intermediaries and financial service providers, i.e., exchanges, custodial providers, cryptocurrency landing platforms, remittance services, mutual fund managers-whose business models and organizational/technological arrangements may not allow them to be captured by current legal definitions and/or evade regulatory regimes. Against this backdrop, regulation of blockchain-based financial applications must not only be about combating illegal conduct, but also about balancing the conflicting interests at stake and preventing influential actors from exploiting legal loopholes and institutional failures.

The regulatory and technical enforcement challenges posed by DLTs epitomize a broader, ongoing struggle between technological innovation and legal compliance. The regulatory attempts registered to date demonstrate that regulation plays an important role in guiding the evolution of the technology: the practices it enables, its geography, and its public acceptance. However, establishing a regulatory framework for emerging blockchain-based financial technologies is not an easy task, as there are numerous, conflicting factors to consider.

The principle of technology neutrality mandates treating "like businesses under the same rules. At the same time, however, recognition of the (alleged) social and economic potential of DLTs is pushing policymakers (who are themselves attracted by the profit opportunities) to exempt innovative companies from burdensome legal obligations that apply to older types of economic actors.

Registration of Management Companies & Funds | AlphaLAW
Over the time, any asset manager who does more than plan to manage own assets faces the problem of a transparent and convenient management infrastructure.

Contact Us and Apply for a Crypto License in Estonia

Specialists from AlphaLAW will be happy to help you obtaining a cryptocurrency license in Estonia. Our assistance includes the preparation of the list of required documents, help in developing company procedural rules, translation of documents into Estonian/English and support throughout the whole licensing process.

In case you have any questions or are interested in obtaining an Estonian license to exchange cryptocurrencies and other virtual assets for a fiat currency (crypto license in Estonia), please contact us through the following communication channels.



WE ARE HERE TO HELP
Would you like to speak to one of our financial advisers?
Our team is happy to answer your questions.
AlphaLAW - Fintech Services Advisory Group in EstoniaAlphaLAW - Fintech Services Advisory Group in Estonia