Security Token Offerings (STOs) can be described as the evolution of ICOs (Initial Coin Offerings), and are connected with crypto-currencies.
They are both an alternative means of payment, allowing people to earn money, and a crowdfunding instrument.
STOs allow to earn money in proportion to a company's economical and financial performances and to save money in terms of costs. In other words, Security Token Offerings allow investors to buy tokens in the form of securities, that is assets checked by the competent authorities and certified as negotiable financial instruments with monetary value. The above mentioned tokens can also take the form of debt securities or real properties.
In these last years STOs have become a means of financing start-up projects, since they allow a direct dialogue with investors, eliminating costs and delays relating to standard financial channels and traditional intermediaries.
Security token offering as financial products? Consob's opinion
By publishing a discussion paper in the topic, Consob has opened the Italian debate on how it is possible to regulate initial crypto-asset offerings.
Consob aims at categorizing crypto-assets, that is tokens differing from other financial instruments in that they are an autonomous category regulated by less strict rules than those set by the Italian Consolidated Law on Finance in matters of financial instruments and products.
Consob describes "crypto-assets" as "digital recordings representing rights linked to investments in business projects".
According to Consob, in order to define crypto-assets the following items have to be taken into account:
- Crypto-assets have to be characterized by new technologies, such as blockchain, so that investor's rights can be incorporated into tokens;
- Crypto-assets have to be aimed at being negotiable, and their transferability is closely related to the kind of technology they use, that is to its ability to record and give evidence of the crypto-asset holder's rights.
All the above allows us to conclude that Consob aims at regulating only crypto-assets and tokens which:
- Cannot be included in the categories of financial instruments or investment products, and
- Can be described as financial products.
Thus, according to Consob's opinion, in Italy only utility token offerings can be regarded as crypto-currencies, since they characterise as financial products with a clear expected return, thus differing from other financial instruments, usually negotiated on supervised exchanges, and aimed at being invested in business projects.
Security token offering (STO) and crypto-assets: ESMA's advice
Upon request of the European Commission, the European Securities and Markets Authority (ESMA) has published an "Advice on Initial Coin Offerings and Crypto-asset", aimed at identifying perspectives for regulating Crypto-assets, as well as illustrating the practises adopted by different national supervisory authorities.
In the context of a project aimed at analysing the coherence and applicability of the EU regulatory framework with respect to Initial Coin Offerings (ICO) and, in general, Crypto-assets, ESMA has carried out a survey involving different EU national authorities, for the purpose of understanding how the latter categorize Crypto-assets on the basis of the transposition of MiFID II in the different Member States.
More in detail, the European Authority submitted to the different national authorities six types of Crypto-assets, and in particular investment-type, utility-type and hybrid instrument with the features of the three different crypto-asset types.
ESMA's analysis has highlighted that, while existing general agreement on the need to regulate every type of Crypto-asset, the different Member States disagree about the applicability of MiFID II with respect to Crypto-assets which cannot be classified as financial instruments.
According to ESMA, due to the differences with which MiFID II has been transposed in the different Member States, regulatory asymmetries may arise, which could be overcome only by adopting uniform and harmonized regulations within the EU.
Anyway ESMA has also underlined that in case Crypto-assets cannot be classified as financial instruments pursuant to MiFID II, then investors are exposed to risks, since they aren't protected by the MiFID II regulatory framework.
In light of this, ESMA's Advice indicates two possible alternatives:
- Creating a specific regulatory framework for particular types of Crypto-assets not classifiable as financial instruments;
- Not taking action.
Preferring the first alternative, ESMA suggests that the Member States should:
- guarantee the application of anti-money laundering rules to any type of Crypto-assets;
- introduce risk disclosure obligations with regard to investments in Crypto-assets;
- introduce further supervisory resources.
Security Token Offerings: European regulation
Many EU and non-EU Countries today have a regulation in matters of STOs.
Switzerland and Lichtenstein rank first in matters of Security Token Offerings. Switzerland offers astonishing benefits for issuing STOs. Neither Licences nor Prospectuses are required for issuance on the primary market, and the only requirement is a simple "civil law prospectus" preventing misdeclaration by the issuing entity.
Switzerland and Lichtenstein are followed by Germany, where BaFin (the German Consob) for the first time has authorised a German company to conduct an Initial Coin Offering structured inf the form of a STO, where securities token are represented by bonds.
The Republic of San Marino instead, adopted a Delegated Decree regulating token issuance and marketing on blockchain. According to the Decree, in San Marino any company from any country in the world, provided that it follows to the transparency and lawfulness rules set out in the Decree itself can issue tokens recognized by the State, as well as sell them all over the world with an Initial Token Offering. All revenues from tokens are tax-free as long as money remains within the territory of the Republic, while they will be subject to local taxation rules when in the destination country.
Luxembourg has passed a law equalizing blockchain digital tokens to dematerialized financial products, which are already subject to regulation. Thus digital tokens acquire the same status as conventional securities.