Conditions for qualification of a token as a security in the light of the European Union law

The issue of legal qualification of solutions based on blockchain technology all the time provides many new challenges. Such a situation occurs especially in the case of [...] https://www.pinterest.com/pin/1085437947660215829/

The issue of legal qualification of solutions based on blockchain technology all the time provides many new challenges. Such a situation occurs especially in the case of issuing cryptographic tokens, which may incorporate various rights and obligations, including those similar to those conferred by the ownership of shares or other securities. Why is token classification important? Deciding whether a token constitutes a security is critical to answering the question of whether it will be subject to financial market regulations, particularly those that define the requirements for conducting a public issuance. There are typically three types of tokens based on their function in trading, which also translates into their legal classification: Utility (utility) tokens; Payment tokens (e.g. bitcoin); Security (investment) tokens. Only investment tokens will qualify as securities under EU and, subsequently, Polish law. The EU MIFID II Directive defines securities by listing them. It is worth quoting here their definition contained in Article 4 (1) (44) of this directive: "transferable securities" means those types of securities which are negotiable on the capital market - excluding instruments of payment - such as: (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares; (b) bonds and other forms of securitised debt, including depositary receipts in respect of such securities; (c) any other securities giving the right to acquire or dispose of any transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest or yield rates, commodities and other indices or measures. Clarification of the Directive It is worth noting the term "such as" in the above definition, which ensures that the definition does not limit the catalog of securities to those listed therein. The frequent situation where tokens have a hybrid form incorporating both utility and investment powers, as well as the issuer giving them names that may not correspond to their real nature, means that in assessing whether a token is a security, it is necessary to apply a substance over form approach, which focuses on analysing the functions attributed to the token. Hence, the Community judiciary and regulators have developed a set of functional criteria for determining when a security is a security within the meaning of MiFID II: transferability; negotiability on capital markets the following characteristics apply similarity to already existing securities (comparability). Transferability is a feature that accompanies many tokens of different categories. We are talking about a situation when there are no contractual or technical obstacles to transfer a token from one person to another. In the case of the possibility to sell tokens on the capital markets, it is important to define what the capital market is. It is worth using a broad definition of this concept presented by the European Commission, according to which the capital market is any place where buyers and sellers of securities meet to carry out transactions. With such a broad definition of the term, there is no doubt that the capital market will be the so-called "cryptocurrency exchanges" and similar forms of activity, in relation to the investment tokens sold there. Often such platforms allow for trading of various types of tokens, including utility and payment tokens, but this does not make them securities, most often due to the lack of features that make them similar to securities already in circulation. Standardization comes down to recognizing tokens generated in a single issuance as co-creating a single class. In order for tokens to be considered as belonging to one class they cannot incorporate rights or obligations that make them different from one another. Some controversy is aroused by the last of the mentioned criteria, which is the functional similarity to already existing securities. It is impossible to agree with the opinion of some authors that meeting the first three criteria is sufficient to recognize a given token as a security. This would result in the need to apply legal requirements characteristic of securities also to many utility tokens, which serve as a voucher or access code to certain platform functions, as well as to payment tokens similar to traditional money. Some important differences It does not seem that the EU legislator wanted a voucher for the purchase of certain products in a store (only that in