Want to invest in real estate, but can’t afford to buy a whole unit?
STOs (Security token Offerings) offer retail investors a chance to secure fractional ownership in real assets, such as real estate. Tokenized securities are obviously backed by real-world assets and thus by well-established value.
Bitcoin Market Journal has taken a look at the legal status of STOs world-over. Here’s what we found.
|In the EU, MiFID II covers most securities and security tokens. The relevant law in this regard is Art. 4 (1) (44), which defines transferable securities. Most security tokens do, indeed, fall into this asset category.
The “catch” is that newly issued security tokens need to fulfill the requirements of the Prospectus Directive. Issuers have to submit a prospectus to the financial regulator of the country where the STO happens.
This prospectus then needs to be approved. In some cases and in some countries, issuers are exempted from this requirement. In Luxemburg, for instance, no prospectus is needed if the total value of issued security tokens does not exceed the EUR 1.5 million mark. These conditions differ from one country to another.
A new law regarding prospectuses is expected later this year. It will apparently relax some of the existing rules, making STOs easier.
|Allowed and heavily regulated
|In the US, security tokens are subject to existing laws governing securities in general.
These laws are some of the strictest in the world, which is not necessarily a liability from the perspective of the investor.
Security tokens may be exempted from some of these laws in the future. If they are deemed crowd-funding vehicles, they will come under an exemption clause. More legal clarity is required in this regard, though.
|Like ICOs, STOs are banned in China. According to the deputy governor of the People’s Bank of China, STOs constitute illegal financial activity.
Chinese authorities have been consistent regarding the legal status of STOs.
The head of the Beijing Financial Supervision Authority also called security tokens illegal. Fundraising activities can only be undertaken with the express approval of the government.
|Australia was one of the first countries to set up a functional regulatory framework for STOs. The regulatory entity tasked with overseeing security token activity is ASIC.
Australian law treats financial and non-financial tokenized securities differently.
If the security token is financial, it is governed by the Corporations Act and the ASIC Act of 2001. If it is non-financial, it falls under the Australian Consumer Law. In both cases, ASIC is responsible for enforcement.
|The UK’s FCA boiled down the gist of the STO regulatory conundrum to definitions. The agency has clearly defined three categories of DLT tokens:
– security tokens (which fall under existing laws governing securities)
– exchange tokens (actual “currencies” such as BTC, ETH, etc. which are outside the regulatory perimeter of the agency)
– utility tokens
Of these, only security tokens qualify as Specified Investments. Thus, they come under the Regulated Activities Order and are therefore within the regulatory perimeter of the FCA.
|In India, there are no laws regulating digital security tokens and STOs. The country has been taking an increasingly hard-line stance against digital currencies such as bitcoin.
Security tokens are quite different beasts, however. They may yet earn the nod from Indian regulators.
|In France, STOs are legal and subject to MiFID II regulation.
French lawmakers have even raised the limit under which STOs are exempted from the requirements of the Prospectus Directive to EUR 8 million.
What this means is that STOs that offer security tokens the total value of which does not exceed EUR 8 million do not require direct approval from the AMF
|In Switzerland, STOs are legal and regulated under a series of laws defined by FINMA, the local financial markets regulator.
By and large, security tokens are governed by the same laws as traditional securities, such as stocks, bonds, etc.
In addition to that, they are also subject to KYC laws as well as to Swiss banking regulations.
Like the UK’s FCA, FINMA has defined three classes of digital tokens:
– payment tokens
– asset tokens
– utility tokens
|Lithuania has been at the forefront of the DLT revolution. Its regulatory efforts have had a positive impact on ICOs as well as STOs.
The country serves as the home base of the first STO in Europe.
|Entities looking to launch an STO in Brazil have to register their token offering with the Comissao de Valores Mobiliarios.
The law governing such crowd sales is the Securities and Exchange Act of the country.
Thus far, no one has attempted to register an STO with the CVM.
|Allowed/Some legal ambiguity
|Mexico has generally been friendly toward digital currencies and security tokens.
The country’s recently passed FinTech Act provides the basis of a legal framework for STOs. Further legal clarity is needed, however.
Entities looking to hold an STO also have to abide by the Securities and Exchange Act. Such activities require direct CNBV approval.
|Japan’s Financial Services Agency (FSA) has provided a proper framework for the regulation of security tokens and STOs. The FIEA (Financial Instruments and Exchange Act) has proved so successful that the FSA now wants to bring exchange/payment tokens under its umbrella too.
|Banned for now
|Like China, South Korea has unequivocally banned token sales.
That said, research shows that local regulators already see security tokens in a much more favorable light.
In fact, use cases for tokenized securities are already being considered.
STOs may be the future of South Korea’s digital asset industry.
|The Canadian Securities Administrators recommend the case-by-case assessment of STOs and ICOs. Tokens which qualify as securities are subject to security laws.
Such laws include prospectus requirements or exceptions, registration requirements or exceptions, as well as KYC requirements.
|Long story short about Israel’s STO regulation environment: security tokens are subject to the same laws as a public company.
STO issuers have to submit a prospectus and they have to deliver regular reports to the ISA. They also have to observe regulations concerning insider trading and they have to register with an exchange.
There is some regulatory ambiguity about where utility tokens stand in this picture.
|While Germany does offer a regulatory framework for STOs, an actual security token offer procedure is lengthy and convoluted.
The classification of the token is of the essence. Decisions in this regard are made on a case-by-case basis.
Security token issuers need to draft a prospectus and to submit it to BaFIN for approval.
The laws that govern such tokenized securities are the German Securities Trading Act, the European Markets in Financial Instruments Regulation, and the European Market Abuse Regulation.
|In the Russian Federation, there is currently no legislative framework to govern STOs.
The overall economic/bureaucratic atmosphere is not favorable to such activities either.
There are three draft laws currently on the table, addressing the issue of STOs directly or indirectly. Lawmakers have not really shown much interest in moving any of them forward though.
|Thailand’s SEC is preparing to set up legal criteria for companies wishing to tokenize securities.
The Thai National Legislative Assembly paved the way for this regulatory stage through a February 2019 decision.
The decision concerned the amending of the country’s Securities and Exchange Act to accommodate tokenized securities.
|No regulation yet; efforts underway
|UAE regulators have promised to deliver comprehensive STO regulation by mid-2019. Still, nothing has transpired yet.
The regulatory approach of the government is bound to be a conservative/strict one. There is a lot of concern about financial crime.
|Singapore has comprehensive regulation in place concerning STOs and the use of tokenized securities.
The law governing STOs is the Securities and Futures Act.
The authority in charge of enforcing the law is the MAS (Monetary Authority of Singapore).
Security token issuers have to draft a prospectus and submit it for MAS approval unless granted an exemption. Token issuers with such exemptions cannot advertise their offer.
What It All Means
It is clear that authorities and regulators world-over are more accepting of STOs than ICOs, in general. From a legal perspective, regulators find it easier to corral tokenized securities under existing securities laws. This class of tokens does naturally lend itself well to such a regulatory approach.
With that in mind, all regulators have to do is to properly define which tokens qualify as securities and which don’t. While this exercise may seem simple in theory, it is anything but. The case-by-case analysis approach is, however, a fail-safe solution.
- It is clear that STOs represent a natural evolutionary step for securities markets.
- Investing in unregulated STOs is not a good idea.
- Investors need to grasp the true depths of various regulatory jurisdictions to understand the extent and nature of the protections the laws grant them.
- This is where Bitcoin Market Journal can help you. We run in-depth analysis on regulations and we stay on top of changes as they happen. Sign up for the Bitcoin Market Journal newsletter now for direct access to all that and more.