Libra - Facebook´s digital currency project - has been a very popular talk lately. Even US President Trump tweeted about it. But few have looked at what may be the hidden implications of Facebook´s project. Libra´s whitepaper is far from exhaustive. It is the first published version and what in the end may be left after the regulators have looked into it may be very different indeed.
All in all the whitepaper is well written and has been put together by a competent team of people, the Libra protocol describes a distributed blockchain which components are open source and can be permissionless built. It is a very "politically correct" whitepaper with mandatory and comforting statements about "banking the unbanked" and "creating an inclusive financial system for the public good". However, if this project will go through, what we will see coming out will be very likely something different. And this for a number of powerful and compelling reasons which are not immediately apparent.
Is Libra a cryptocurrency or a stablecoin?
Libra has been defined by the media as a (crypto)currency and/or a stablecoin. The whitepaper correctly defines Libra as a "digital (crypto)currency". In fact, even if it has none of the features of the classic cryptocurrency paradigm originated by Bitcoin - i.e. being a fully decentralized, trustless, open, censorship resistant and strongly resilient system of payments - it has though the features of other cryptocurrencies such as being cryptographically secure, runs on a permissioned blockchain and it can be global and fungible, at least in theory.
The whitepaper also clarifies that Libra has two more features: stability and low inflation. Stability will be achieved by means of a reserve made up of bank deposits and government securities which backs up the digital currency. Low inflation is guaranteed by the commitment not to issue coins unless an equivalent amount of fiat funds has been deposited in the reserve. This is the first issue which comes up with Libra. It introduces the element of "trust" where otherwise the aim should be being trustless. What the whitepaper basically says is: trust us that we will not debase it and that we will keep it backed up all the time 1:1. We all know how this usually ends. It remains to be seen though what auditing mechanisms will be implemented in practice to check that the back up ratio is effectively maintained and that the digital currency is not debased.
Moreover, the widespread perception that we are dealing with a stablecoin is also misplaced. Libra is different from how classic stablecoins work.
A classic stablecoin is Tether USDT. This stablecoin has 2 features: (i) a digital coin is issued in exchange of the fiat equivalent and (ii) the fiat equivalent is kept in a reserve to back-up the digital coin. In practice the monetary supply does not change at all since 1 unit of fiat money is subtracted from the real economy and lies unused in the reserve, while 1 unit of digital coin circulates. That is at least how a stablecoin should work and let´s leave aside for the moment the issue that even USDT seems to be 74% fractionally backed (see, yet again the issue of "trust" comes up).
Despite statements like this one in the whitepaper - Users do not need to worry about the association introducing inflation into the system or debasing the currency. For new coins to be minted, there must be a commensurate payment of fiat by resellers into the reserve - Libra seems to be differently built.
The key issue here is how the reserve - which is being created with the fiat payments made both by founding members/investors and Libra coin users - will be used. According to the whitepaper the reserve will be a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.
Differently from the workings of classic stablecoins - where the reserve should remain UNUSED in cash form solely to back up its digital equivalent - here 1 unit of fiat money goes into the reserve fund and buys 1 unit of, say, treasury bond; at the same time though 1 unit of digital Libra is created and transferred to the user who will use it to buy goods and services in the real economy. The result is that the money supply is doubled: 1 fiat unit goes in and buys an investment while at the same time 1 unit of Libra is created and goes to the user who buys goods and services worth 1. This key issue was first highlighted by Alex Lipton in this interview.
Therefore, as it is conceived, Libra is an inflationary digital currency definitely not a stablecoin and far from non-inflationary or outright deflationary store of values like gold or bitcoin. It will affect directly the monetary supply of the country in which it is spent: by introducing more money which chases the same goods this will increase price inflation and the purchasing power of the local currency will decrease. This can have important geopolitical implications which will be dealt with in Part II of this article.
Accordingly, Libra has been designed from its inception to be an inflationary digital currency to be spent rather than be held as a SOV, both because it affects the monetary supply of the country in which it is spent and because the assets that constitute the reserve are not hard assets (like gold) but financial assets based on fiat currencies which are themselves debased and inflationary.
Also note that it is not clear how price stability will be maintained. If, for instance, there will be arbitrage to keep the intraday fluctuations of the Libra coin in line with the net asset value of the underlying investments in the reserve, basically like ETFs do.
Libra will compete with commercial banks and central banks not with Bitcoin
Libra may well succeed in totally reshaping the retail banking sector. This is where the impact can be massive. Libra can be digital banking on steroids: 4,9 billion potential customers between Facebook, Instagram and WhatsApp to start with, immediate cross-currency convertibility, global usability, minimal transaction fees, immediate payment settlement and a low to no-cost digital wallet that replaces a physical bank account and can be used to pay for a whole range of services and investments, including crypto tokens. Libra can become the largest retail bank and investment broker in the world without need to open one single branch.
And it may also become a strong competitor for central banks around the world. By affecting local money supply and by bringing inflation in the countries in which it is spent, Libra effectively acts like a central bank. If it gains traction it may well be a better alternative to any fiat currency. Andreas Antonopoulos pointed out in a recent interview that Libra is also similar to the Special Drawing Rights issued by the IMF and which derive their value from a basket of international currencies.
Libra: how to make your money work for ... Facebook&Co.
The project will be managed by a Swiss based not-for-profit association. It is not the purpose here to examine the workings of this association but simply to focus on some important economic aspects. Just consider that being a not-for-profit organization does not mean that excess revenues (i.e. profits) cannot be legally channelled back to its members. Among the founding members of the association are large financial institutions such as Mastercard, VISA and Paypal. They will pay US$ 10 million to be among those who will drive the project and they are not usually known for doing charity work. Therefore, despite all the niceties and politically correct statements in the whitepaper, Libra is only about one thing: making money.
Few things are better than making money with someone else´s money and no risks. It´s one of the oldest jobs and it´s called banking.
The funds invested by the founding members will go towards financing the start-up and create the initial reserve. As soon as the venture gains traction and users come on board, fiat funds will start flowing in and generate more reserves. The revenues generated by the reserve will not go to the users of the Libra coin but only to the founding members (it is not clear what type of security token they will be given in exchange for their US$ 10 million equity investment). Regardless, lets make a simple conservative calculation. WhattsApp, Instagram, and Facebook have collectively over 4,9 billion users; now let´s assume that when the project gains traction we might have three possible scenarios which range from low (30% wallet adoption rate), medium (50% wallet adoption rate), and high (70% wallet adoption rate). This is conservative since it does not even discount the possibility that Libra might well grow beyond Facebook & Co. current users to grab a share of the global financial market. Let´s then play two additional scenarios where users can spend with their Calibra wallets anything from US$ 10 per month to US$ 50 per month, again very conservative. In the Table 1 below you see the results.
Depending on the scenarios, the annual interest yield for Facebook & Co. could range from the low US$ 3,5 billion in case 30% of its users adopt the wallet and spend only US$ 10 per month, up to well over US$ 41 billion in case the adoption rate is 70% and they spend in average US$ 50 per month on their wallet.
More conservative in between figures will make Facebook & Co. salivate as well.
By adding the transaction fees which Alex Lipton, in the referred interview, has estimated in over US$ 100 billion per year, you have a very powerful business incentive for Facebook & Co. to act like good philanthropists and "unbank the unbanked". Described in simple terms Facebook´s new business strategy is to pivot to a more profitable fee based business model - which is called digital banking - and leverage on their 4,9 billion users to promote their own fee based digital payment system which, by turning your fiat money into a digital coin, can yield them tens of billions without any risk. Of course nothing new but it is brilliantly set up, smartly sold to the crowds and it will be a massive money making machine for Facebook & Co.
Libra will not solve the "unbanked" problem
The unbanked are "unbanked" because of regulations. KYC and AML compliance is so burdensome and costly that pushes poor people out of the legacy financial sector. Achieving financial inclusion by simple means of a fully regulated and centralized coin like Libra is just a fairy tale. If the regulatory and compliance barriers to entry into the legacy financial system are not lowered we will never achieve real inclusion. Because Libra will effectively lower transaction costs in respect to traditional banking, it will achieve some higher level of financial inclusion, but it cannot solve the regulatory compliance problem which is the root of financial exclusion. This can be solved solely by building an alternative parallel financial system which is decentralized and which does not have to comply with the red tape and regulations of the legacy financial system. But Libra will never be allowed to play such a role by regulators, and it is not even remotely in their interest. Therefore "true financial inclusion" will remain the prerogative of Bitcoin and other fully decentralized privacy cryptocurrencies, but Libra can positively contribute to it by lowering banking costs.
Libra will be never fully decentralized
Libra´s aim at future decentralization will never be realized. You cannot start such a project fully centralized, with Facebook on a lead role and then empower an Association made up of 100 or so powerful corporate entities, with heavyweight business partners such as VISA, Mastercard, Paypal, Uber, etc. and achieve true decentralization. You cannot have both permissioned and permissionless states and claim to be open to everyone:
"Essential to the spirit of Libra, in both its permissioned and permissionless state, the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services"- Quote from whitepaper.
It will not work. There are too many "central points of failure" and "pressure joints" to which regulators and governments worldwide can apply pressure if necessary. Crucial geopolitical issues are at stake here to think that Facebook and Co. - when summoned by some authority - could hide behind Libra´s association charter and say "it´s not us...sorry we can´t do anything for you" (more on the next paragraph).
Libra can achieve a good distribution with its nodes, but it will remain a centrally controlled corporate digital currency. It may well get quickly traction, work really well as a digital currency and become a successful means of payment, but it will be not different from traditional banking as far as censorship, lack of privacy and limited financial inclusion are concerned. But it can be a great business success for Facebook & Co. if they play it smartly with governments and regulators (more on the next paragraph).
Libra is the geopolitical tool that the US government needs to strengthen the US$ reserve status for time to come
Since holding fiat funds in cash in a bank account nowadays will end up either yielding nothing or costing some because most of the fiat currencies - in Japan, Switzerland, Euro area, Sweden, Denmark - have negative rates, the funds will have to be invested in those few government securities which still have a positive yield. And with over US$ 13 trillion bonds in negative territory this leaves only a handful of investment grade possibilities. If you then want to guarantee high liquidity and around a 2% yield, you are left substantially with only one option: the king US Treasury.
Now let´s go back to the Table 1 above.
The assumption is that Calibra wallet users may commit anything from US$ 176 billion to US$ 2,05 trillion to the Libra reserve fund depending on wallet adoption rates and average monthly expenses. Just consider for a moment that the current annual supply of US Treasuries is approx US$ 1 trillion. Libra could then satisfy anything from a low 17%, up to almost twice the total annual debt offer by the US government. This can become a very powerful geopolitical tool for the US government, an opportunity that they cannot lose. When large part of the world is looking for alternatives to the US$ as the global trade currency, a corporate global digital currency could be stealthily used to foster once again US geopolitical interests in those very same countries which are trying to escape them, such as in China, Russia, EU, Iran, Venezuela, Syria, Turkey etc. Add then that what Facebook wants to do, others like Google, Apple, Amazon, Uber and Twitter will also likely do, and it is pretty clear that the incentive for the US government to strike a deal "do ut des" with the above corporations is enormous. US President Trump knows how to negotiate a good deal and this is an enormously mutually convenient deal for both the US government and for Facebook and Co. The US government may grant Facebook & Co. the necessary support to smooth regulatory hurdles and bring the project to fruition. In exchange it will get an indirect control over the use of Libra for geopolitical advantages and to foster financial colonization of the rest of the world. The reserve will be invested mostly in US Treasuries and this will help perpetuate ad infinitum the demand for US debt and the global reserve status of the greenback. If Nixon and Kissinger did it with the Saudis in the ´70s, why Trump should not do it with Facebook, Amazon and the others? One cannot stress enough how powerful and how strategic this mechanism can become to perpetuate US financial hegemony. And clearly the door of the major US tech companies has always been open for the US government. Look how quickly and diligently Facebook, Twitter and Microsofts´ Github implemented the sanctions by immediately shutting down the accounts of their users in affected countries.
If you agree - like I do - with economist Michael Hudson´s thesis about the ongoing de-dollarization of the world economy and the problems that this will bring to the US hegemony, then we´d better rethink. Libra might well be the antidote that the US goverment badly needs. And it may well succeed in reversing the course of the ongoing de-dollarization. Just watch out for a change of tone in the Libra narrative by US politicians and this will signal that they understood and a deal can be close at hand. In the meantime, lobbyists are already at work.
Libra can help create the network infrastructure for Securities Token
Another key area in which Libra should try to leverage its portfolio of users is the opportunity to broker crypto investments via its Calibra wallet. This may open a massive market for token issuers around the world. And not only.
I have often discussed the potential for security tokens here and here. But in order to foster security token adoption a number of external factors need to play a pivotal role such as liquidity and market makers, smooth regulation, on chain programmability and interoperability chain on chain. Another key aspect is the creation of a network infrastructure for security tokens and even decentralized exchanges. As computer scientist Jesus Rodriguez points out here, only a handful of players can have a meaningful role in building up the necessary network infrastructure and one of them may well be Libra. Again, all the synergies are there. It can rapidly scale to become the largest security token network infrastructure by leveraging Facebook´s 4,9 billion potential wallet users and launching digital securities globally attracting pools of liquidity providers, investors and entrepreneurs.
What I have highlighted above are only a handful of factors which will likely make the Libra coin a very different animal from what the whitepaper initially describes. In 1976, F.A. Hayek - the 1974 Economics Nobel Prize winner and one of the most prominent late members of the Austrian School of Economics - wrote a pamphlet titled "Denationalisation of Money", in which he foresaw the emergence of privately issued moneys which could compete among themselves and against the governments´ monopolies, which, in his words, has the defects of all monopolies as "it prevents the discovery of better methods of satisfying a need for which a monopolist has no incentive". True, in theory. In practice though, it takes a lot of firepower to take on governments and challenge them on their own turf. Bitcoin was the first to successfully do it, but it could do it because its creator remained anonymous, there were no precedents to start with and governments could not fear yet an "animal" they did not know. The Bitcoin protocol was designed to be truly decentralized, open, borderless, permissionless, without central point of attack, censorship resistant and truly resilient. Bitcoin was never born a "sweet puppy", it was ready to fight back from birth, it already had long teeth and claws to bite hard if challenged.
Facebook´s Libra is nothing like that. If Facebook & Co. do not cooperate governments will ban the Libra and shut it down. If they do cooperate and they find a mutually convenient agreement, then governments will let them play their digital currency game. This might create a sort of superstate made by the confluence of powerful interest of both corporations and governments. A highly corruptive power which will carry strong influence over governments worldwide. This is already apparent with the globalization. If you give global powerhouses like Facebook or Amazon - which already hold most of your personal data - control over your finances, over your spending habits and now over your money as well, they end up controlling your entire life. And if they do not approve what you do or are being told by the government to censor you, they will take it away from you. They will just shut down your account. Click.. sorry ... your account was disabled. please visit the FAQ page...
This is what they have repeatedly done in many instances (see above the paragraph on geopolitical issues). This will always happen until there is a central point of failure which can be attacked or put under pressure.
In this scenario the last stand remains Bitcoin and other fully decentralized privacy projects which stand in between both state currencies and future corporate currencies like Libra. This is the only thing that still separates us from the dystopian Orwellian future which Ms Lagarde already dreams for us.
An elitist cabal of powerful global corporations and politicians may try to take a totalitarian control of all the aspects of our lives. It is nothing new. It has been a recurring feature throughout history and it has been called corporatism. So far it has always been a national issue but now, with technology advancements, digitalization and the controlled use of permissioned, centralized blockchains, is evolving into a global corporatism. A global Orwellian nightmare.
An interesting and maybe worrisome time awaits us.
#blockchain #bianconiandrea #crypto #thinkblocktank #bitcoin #libra #facebook #currency #calibra #cryptocurrency #dollar #reservecurrency
Ray Dalio´s recent post on economic cycles and the coming paradigm shift is very well written. His usual capability of putting into simple terms complex concepts (if you are interested in understanding how the economic machine works have a look at his video here), coupled with his knowledge of economic and monetary history are very rare even among the most accomplished and successful macro investors. Even rarer - unfortunately - among policy makers, central bankers and politicians. Personally, when Dalio speaks, I always listen carefully and - more often than not - I agree.
But not this time, at least not entirely. Even Dalio´s flawless macro-analysis misses something. And it is something big, something very important. Possibly the biggest paradigm shift since the early ´90s and the internet.
Dalio´s view of the current economic cycle and the coming paradigm shift
You can read Dalio´s full post here or here, but I will try to summarize his conclusions to facilitate our discussion. In short, the last decade (since the 2007-2008 crisis) has been characterized by "easy money/credit" i.e. central banks quantitative easing policies and zero interest rates have inflated asset prices which have greatly benefited investors owning assets such as bonds, stocks and real estate.
Growth was slow, and inflation remained low. Equities rallied consistently, driven by continued falling discount rates (e.g., from central bank stimulus), high profit margins (in part from automation keeping wage growth down), and, more recently, from tax cuts.
Now this is the status quo. Mr Dalio proceeds then to highlight what the incoming paradigm shift will be:
- central banks "easy money/credit" policies are unsustainable and sooner or later they will have no ammunitions left to support the economy (or rather the financial markets, if you do not believe the “trickle-down” BS economics for the super wealthy)
- Right now, approximately 13 trillion dollars’ worth of investors’ money is held in zero or below-zero interest-rate-earning debt. That means that these investments are worthless for producing income
- US Liabilities (like Medicare and Social Security) are coming due and cannot be met if not with (i) higher taxes or (ii) bigger deficits which will be monetized. If I may add something, the situation is even worse in the EU, in the sense that here the option will be - differently from the US - either do not honour the liabilities (i.e cut pension entitlements like they did in Greece) or increase taxes, since monetizing debt seems not an option with the current political standoff between the northern block and the rest of EU countries and the position of the BCE. That is one of the reasons why, I add, the EU is inevitably going to face the collapse of the Euro. But that is another story.
So given this scenario Dalio asks: which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts. It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system.
And his answer is GOLD. Now his post stops there and in a follow up post he will explain why gold is a good portfolio diversifier in this case.
What Dalio misses
So what is wrong with Dalio´s analysis? Nothing really. It is flawless. Except for one thing: he looks only backwards, to monetary history and not even one bit forward into the future. To be fair with him, at the moment of my writing, he has not yet published the second part of his post in which the role of gold will be analysed and maybe, just maybe, he will also consider the role that cryptocurrencies, born out of disrupting software technologies, can have in the future in a modern investment portfolio.
Crypto assets are still very little understood
To be clear this is not about taking up "ideological" positions, this is not about being a crypto or a gold "fundamentalist"; it is about making a rational evaluation of what can be the role of cryptocurrencies - in addition to that of gold - in the difficult times to come. Since gold´s role remains undisputable (at least in the short term and I will explain below why this may change in the future) and it will be the subject of Dalio´s follow up post, let me make here the case for crypto.
First of all a caveat: the fact that most of the famous investors, mainstream economic commentators and economists speak generally in negative terms of the crypto sector does not necessarily mean that they have an "agenda" to fulfil or an interest to defend - tough some certainly do - but it is more likely a sign of a lack of competence and very superficial knowledge of the crypto sector. I cannot really blame them.
The first problem is that there is a very high barrier to entry in this sector which makes it very difficult to grasp, specially at the very beginning. It is a challenging sector where new complex technologies meet finance, monetary theory, economy and the law. If you approach it strictly from your professional background - which is normal - you only see that little part of which you have direct knowledge; but if you do not make an effort to understand all the other interdisciplinary implications you will necessarily have a restricted, incomplete and inaccurate view of the sector. Fortunately (or unfortunately) only few people can invest the necessary amount of time to acquire such interdisciplinary expertise and get - at least the basics - to enjoy a 360° view of what the crypto sector really is and can offer.
The second problem is that here very complex technologies play a pivotal role. And technological innovation is very subtle. At the very beginning it is understood by very few only within restricted circles of tech proficient people before it becomes of mass adoption and, until then, it is very difficult to predict what changes such innovation can bring into people´s lives and businesses.
It is not by chance that even very well known tech people - the likes of Robert Metcalfe, Steve Chen or even Steve Ballmer - famously failed to predict how technology they knew very well would evolve.
1995: "I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse." — Robert Metcalfe, founder of 3Com.
2005: "There's just not that many videos I want to watch." — Steve Chen, CTO and co-founder of YouTube expressing concerns about his company’s long term viability.
2007: “There’s no chance that the iPhone is going to get any significant market share.” — Steve Ballmer, Microsoft CEO.
Imagine then how proficiently the likes of Buffett, Mnuchin or Roubini - just to name few of the most "admired" contrarians - can discuss such topics.
Another problem is that, if the technology is really disrupting and affects established powerful lobbies and interest groups (like crypto is), it is fought tooth and nail until it is either defeated or it defeats its opponents.
The next true radical paradigm shift: Crypto
To understand where the crypto sector is going it is necessary to grasp its historical evolution.
The Bitcoin blockchain protocol invention enabled for the first time in history the trustless and decentralized creation and transferability of a global monetary value which is cryptographically secured and thermodynamically guaranteed - educate yourself here. Then the Ethereum protocol went a step forward by enabling programmers to write codes onto the blockchain to control and transfer values and the so called smart-contracts were born. Assets can be now digitalized into tokens and trustlessly transferred peer to peer. A system of incentives can be created to encourage fair play within a community and remunerate participants with economic values which are trustlessly pre-programmed and assigned, crypto-economics is born. ICOs peaked and then Security Token offers started. Decentralized crypto exchanges - where traders can exchange tokens and cryptocurrencies directly peer to peer without the need of a broker - are coming.
This is what´s happened so far. See, it is like an avalanche. And because protocols, apps and technological layers are built upon each other this innovation avalanche is unstoppable.
What more this will bring?
One of the most interesting posts I have recently read on the subject was authored by Kyle Samani of Multicoin Capital, The Crypto Mega Theses.
He points out to 3 areas where crypto will bring more disruptive innovation: decentralized finance networks, Web3 decentralized networks and digital gold as a store of value.
Again more technological complexities which render a fair evaluation of the sector hard to make for anyone and especially for those who are not full time involved in those topics.
Take decentralized finance for instance. Protocols are being built on top of other applications. They do not provide a service to customers, they are not visible from the outside. Only programmers understand what is going on and how they perform functions and enable new applications to function. Multicoin Capital´s article does a great job for the struggling non-tech professional like myself to explain that, so I won´t repeat; but the important point they make is that the magnitude of this breakthrough cannot be overstated. For the first time, financial markets can be global, permissionless, and for many kinds of derivative contracts, free of counterparty risk. This was impossible until recently. This is happening now. They expect this mega trend to compound over the next decade. As a sign - only in the last 18 months - the amount of capital locked in decentralized finance smart contracts has grown from $0 to over $400M.
Courtesy of Multicoin Capital
What about Web3 then? We all know the problems of centralized Web2 networks and the abuses of consumers´data by such companies (Facebook docet). But the future will be Web3 networks i.e. decentralized networks where the data is owned by its legitimate owner, the consumer. Such networks are built on top of public decentralized blockchains and will use necessarily crypto-tokens for a frictionless functioning. Note that this change will not be driven by consumers but by entrepreneurs who will choose to build their networks in this new way for a simple matter of trust. They have learned the hard way that they cannot trust centralized networks, therefore they will go independently the alternative route. Consumers will always passively opt for what brings them more utility and when decentralized networks will be better developed they will start to switch from centralized to decentralized networks. It will take some time but it will happen. This will create a new wave of business value creation which will generally benefit the sector and the market capitalization of the largest cryptocurrencies.
Finally let me elaborate on Kyle Samani´s thesis for digital gold, as he calls it. If one agrees with Dalio that physical gold should have an important part in an investor portfolio, especially in the coming times, I would argue that bitcoin - as a sort of digital gold for the lack of a better word - should also have a part in that portfolio. The two can coexist, for - even if with many similarities - they are different and can also help hedging one another weaknesses. I have put together the following table to facilitate a rational comparison of both physical gold and bitcoin.
Click below for the hyperlinks since they are disabled on the tables:
From the above comparison it is clear that gold and bitcoin have indeed many similarities. Where gold is superior is in its proven historical track record of acting as an inflation hedge and a SOV. Bitcoin is clearly little proved in comparison.
Now, however, gold will face new hard tests against entirely new conditions and parameters.
Why? Simply because Bitcoin (the protocol) has introduced new criteria against which gold´s historical role as a SOV should now be measured. Let me clarify.
Since the Bitcoin genesis there has been a massive and
radical paradigm shift in how the issues of trust, money, store of value and transfers of economic values will be dealt with in the future. There has never been before such a radical shift
enabled by a new and disrupting technology. This is the whole point.
If I may try to make a comparison, it is like the impact
that the internet - as a vehicle for exchanging information - had on traditional media, newspapers and magazines. Their role today is undoubtedly not the same it was back in the ´90s and who
could have predicted such dramatic changes back then?
Similarly gold - as a SOV - has never before been impacted so heavily by the invention of an artificial alternative SOV which scarcity is algorithmically induced and which has so many revolutionary features such as being censorship resistant, resilient, portable, transferable, cryptographically secure and without counterparty risk. All those features make bitcoin a very strong competitor to gold´s role as a SOV, if not superior in some instances.
And since this is the first time that this happens, the mandatory question to answer is: what if investors slowly become aware of that and start migrating towards a crypto based digital version of gold? What will be the need for the huge hoarding of gold? Is there a place, in a smart investor´s portfolio, for some bitcoins next to the traditional physical gold bars? If so then, which portion of one´s portfolio should be allocated to the crypto sector? 1%, 3% maybe 5%?
Any intelligent investor should find the answer to the above questions. And because the most rational and likely answer is that bitcoin will impact in a number of ways the future of gold as a SOV, then investment strategies need to be modified accordingly and crypto investments must become a part of the portfolio of any rational smart investor. Certainly not yet to replace it, but rather to be an hedge against gold´s weaknesses. And vice-versa.
Furthermore, if you subscribe - like I do - to Kyle Samani´s investment thesis which provides a very rational ground in favour of the growth of decentralized finance networks and decentralized web3 networks as well as to digital gold as a future SOV, then the investment case for crypto is even more compelling.
Finally, if institutional investors, family offices, HNWI and UHNWI start allocating even only 1% of their portfolios to the crypto sector what will be the impact on the price of bitcoin? This is exactly the trend that I have described in this recent article.
At this very moment all the above technology driven changes are taking place and this is producing a dramatic, massive and radical paradigm shift that will impact our future lives and the way we do transact economic values.
Smart and highly skilled investors like Ray Dalio should not miss that, cannot miss that. I´d love to read a post of him commenting on the above topics.
PS: The following past articles can be useful to understand more about bitcoin and how it relates to issues such as gold, money, currency and store of value.
- Will Bitcoin vindicate Hayek? May 2018
- Why we should not listen to Warren Buffett May 2018
- Bitcoin a scary chameleon March 2018
- What if...bitcoin is not a bubble December 2017
#blockchain #bianconiandrea #crypto #thinkblocktank #bitcoin #gold #digitalgold #raydalio #kylesamani #multicoincapital
The FATF (Financial Action Task Force) has recently issued a new set of guidelines which are applicable to the crypto sector, mainly with regard to Virtual Assets (VA) and Virtual Assets Service Providers (VASPs). But let´s bring some order into something that might otherwise be slightly confusing and which implications have generated some degree of alarm in the crypto community.
What is FATF
This financial task force was created back in 1989 by the then G7 ministries to set standards and promote the implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is not a legislative body, it does not have binding regulatory power, it is therefore merely a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. Its guidelines are just that, guidelines, which means they are neither laws nor regulations and are not binding for anyone until they are adopted and implemented within national jurisdictions by member states. However, FATF power shall not be underestimated. In fact, member states who do not comply with its guidelines could be blacklisted and therefore subjected to stricter controls in their interactions with other countries within the legacy financial system. At present only two countries, Iran and North Korea, are blacklisted while a number of other countries are being closely monitored, among them Panama, Syria, Bahamas, Pakistan and Tunisia. Since 1989 FATF has grown into a network of 38 member countries covering over 200 jurisdictions worldwide thanks to a number of affiliate organizations. Its reach is undoubtedly global.
Recommendations and Guidelines
FATF has operated by releasing a set of Recommendations and subsequent interpretative guidelines. The latest set of Recommendations was released in 2012. Periodically then - whenever new developments arise - it is necessary to re-interpret the Recommendations based on the new developments. Therefore new interpretative guidelines are regularly released. In February 2019 an Interpretative Note was issued, which then became final in June 2019 when this new set of guidelines - dealing with VA and VASPs - has been released.
Background - Virtual Assets and Virtual Asset Service Providers
This new set of guidelines is applicable to VAs and VASPs as they were defined in the previous October 2018 guidelines.
Just to recap, a Virtual Asset is a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. The guidelines exclude digital representations of fiat currencies such as e-money or stablecoins, as well as security tokens or other financial instruments already covered elsewhere by the recommendations. Cryptocurrencies - such as BTC, ETH or XMR - and various types of non-security tokens are falling under the guidelines. As far as utility-tokens are concerned, it seems that the deciding factor which makes the guidelines applicable or not - according to para § 47 - it is whether a token is transferable, exchangeable, fungible or not. Indeed FATF clarifies that it does not seek to capture the types of closed-loop items that are non-transferable, non-exchangeable, and non-fungible...such as airline miles, credit card awards, or similar loyalty program rewards or points, which cannot be sold in a secondary market.
Virtual Asset Service Providers are defined as natural or legal persons who carry out one or more of the following business activities:
i) exchange between VAs and fiat currencies;
ii) exchange between different VAs;
iii) transfer of VAs
iv) safekeeping and/or administration of VAs or instruments enabling control over VAs
v) participation in and provision of financial services related to an issuer’s offer and/or sale of VAs.
The above definition is wide enough to include exchanges and transfer services, wallet providers, custodial services such as those that host wallets or maintain custody or control over another person’s VAs, wallets, and/or private keys, as well as providers of financial services to an ICO.
But that´s not all. Included might be escrow services, like those involving smart contract technology, when the entity providing the service has custody over the funds; brokerage services that facilitate the issuance and trading of VAs; order-book exchange services, which bring together orders for buyers and sellers, typically by enabling users to find counterparties, discover prices, and trade, potentially through the use of a matching engine for buy and sell orders; and advanced trading services such as trading on margin or algorithm-based trading.
How VASPs will be impacted by the Guidelines
The guidelines update and impact in particular the existing Recommendations nr. 10 and 16.
Under Nr 10 the threshold above which VASPs should carry out a customer due-diligence for the purpose of AML/TF (Anti Money Laundering/Terrorist Financing) is lowered to a transfer of merely €ur/US$ 1.000, instead of the normal €ur/US$ 15.000 applicable to fiat transfers.
Under Nr. 16 the VASP of the transferor must identify and collect all personal information about the transferor and share it with the VASP of the transferee. The same should do the VASP of the transferee. Basically both parties to a transfer must be identified (just like it happens with bank wire transfers).
Comments and practicalities
Frankly, I miss the rationale behind the above provisions which are mostly unenforceable and of little practical use and which will not adversely impact ML/TF activities but will rather increase compliance costs, needless paper-work and maybe slow down the growth of the crypto sector in those countries which will implement them.
How lowering 15x the threshold for occasional VA transactions can be effective against ML when - facts based - crypto laundering represents only 0,081% of the annual US$ 2 to 4 trillion global fiat money laundering problem?
It is like reducing global CO2 emissions by prohibiting farts.
Moreover, how do you practically identify the beneficiary of a non-custodial BTC address? (i.e a new address of which someone privately holds the keys and not an address at an exchange or broker or custodian). No way.
In addition, this provision will encourage peer-to-peer transfers via non-custodial wallets, which makes it much harder - if not impossible - to track and control for the authorities. For example, I could send funds from an exchange to a non-custodial wallet (where I control the private keys). From that wallet I could then send the coins to a different exchange, and neither platform would see both sides of the transaction.
Unless you believe that the FATF is staffed by grossly incompetent people on crypto
related matters, then the only conclusion to be drawn is that the real reasons for implementing both impractical and unenforceable guidelines lie somewhere else.
Is this a try to damage the sector? Is this maybe a clumsy attempt to strengthen the grip of the legacy financial industry on the crypto sector, like they did with the infamous Bit-Licence in New York?
Or maybe is this a US led move to make it more cumbersome for sanctioned countries - such as China, Russia, half of the Middle East, half of Central and South America, half of the African continent and maybe soon also the EU - to circumvent the sanctions by using crypto instead of the greenback?
I ask: Cui prodest?
Time will tell.
Luckily, truly decentralized blockchains (like BTC) were born for that very same reason: to be censorship resistant, resilient and without central points of failure.
Now, the FATF can blacklist financial institutions in non-complying countries. But what the blacklisting of a VASP will practically achieve? Let´s assume X country does not implement the guidelines. Assume also that FATF blacklists a crypto exchange in X country. The blacklisting can only apply to fiat transactions between financial institutions within the legacy financial system which will be subject to more scrutiny. It will affect investors wanting to transfer fiat funds to that exchange. But as shown in the above examples it cannot affect peer-to-peer crypto transfers and it will not prevent you and any other individual and business from transferring - from any non-custodial address - cryptos to such blacklisted exchange regardless of the sanctions/blacklisting. And vice-versa.
As always, draw your own conclusions.
blockchain #bianconiandrea #crypto #thinkblocktank #fatf #bitcoin #moneylaundering #terroristfinancing
The latest news are that Block.one, the developer behind crypto-token EOS, will use some of the record US$4 billion it raised in the 2018 ICO to buyback - in a private deal - at least 10% of Block.one´s shares from early investors. According to Bloomberg, which released the news, this will value the company at a record US$2,3 billion from the US$40 million evaluation of its seed round in 2017.
More details about who are the fortunate shareholders who will benefit from a stellar 6,657% return in 1 year are not known, nor are the modalities of the buyback.
The problem with ICOs
ICOs have raised only US$300 million in 68 deals so far in 2019 compared with US$6,2 billion in 2018. Regardless of that and despite the many obituaries, ICOs can still play an important role in funding blockchain based projects with a native token. ICOs will find their place along with STOs. The problem is that, so far, they have been used instead of STOs, as a way to circumvent securities´ regulations and raise equity - disguised as utility tokens - in an unregulated manner.
The simple lessons which ICO investors should learn here are:
The difference with STOs
If Block.one had done an STO instead, it would have been different. Depending on the terms and the rights attached to the security token you would have either bought equity rights or a profit participation. Likely, you would be granted voting rights to influence the management of Block.one. To circumvent those rights would be much more complicated and you could still be able to enforce some of your basic rights as a security token holder. Ultimately, you could also benefit from such a buyback (though this is not automatic, it largely depends on shareholders´ agreements and corporate bylaws, which is why a proper due-diligence is very important).
The EOS ICO, red flags were everywhere
For EOS token holders, there have been plenty of warning signs since the very beginning. The amount raised was out of proportions. The company did not have a product. They did not have - and still do not have - a clear plan on how this money should be invested. According to Bloomberg they invested the cash raised in Treasuries, BTC and also US$174 million in VC deals either directly or through Novogratz firm - Galaxy Digital - which was then bought-out with another fat US$71 million check paid with the ICO funds.
Worse, the promoters of the ICO - i.e. Block.one wealthy shareholders - were Wall Street investors who did not need any of that money to bootstrap a blockchain tech start-up. They could have done it easily with their own pocket money. The ICO was a windfall for them, practically a gift, a US$4 billion wealth transfer from naive token-holders to wealthy, smart and unscrupulous WallStreeters.
That such people would pocket the money was predictable. The signs were everywhere to be seen. The following thread was posted on Reddit more than 9 months ago:
Token holder 1: Imagine if Block One did an EOS buyback of around $1 billion and then got rid of the coins lowering the supply? Or what if Block One at least comes out and says what they plan on doing with the remaining $3 billion? Either of these could more than double the current price.
Token holder 2: It’s a nice idea, but the reality is that “cash” on hand doesn’t and shouldn’t translate into token valuation very well.... Simply put, tokens are not equity: as a holder, you have no contingent claim on the assets in the event of liquidation, so cash cannot effectively be used as a means to determine market cap. All that cash would go to the shareholders of B1 in the event of liquidation. Very important difference.
Token holder 3: All true, but do not think B1 are doing a good job at deploying resources...
Which is why I would love for B1 to declare where the other $3 billion is going, but of course I guess they could always not honor their promises... Luckily it’s founded by US citizens and has Peter Thiel as an investor (top startup investor)...not likely this is a fly by night in my opinion.
Token holder 4: Bernie Madoff was a US citizen with a stellar reputation as an investor too, and had many prominent people invested with him.
Token holders taken for a ride
The token holders´ faith was clearly misplaced. Indeed the buyback will happen, but it will benefit solely the shareholders. And the fact that the shareholders were well known US citizens and Wall Street investors did not change a thing. Pecunia non olet, specially for Wall Streeters.
Talking about ethics and principles on Wall Street is clearly naive. If principles and ethics have ever been there, they are now long gone. That is not the issue.
More importantly though, this questionable buyback shows that token holders are not worth the slightest consideration. In fact, by pocketing the ICO funds, Block.one´s management and shareholders signal a total disregard for token holders´ legitimate - though not legally enforceable - expectations. If anything they will pat their shoulders and will be congratulated by their pals for taking naive token holders for a ride. Their Wall Street reputation will not suffer, this is just another successful deal on their CV. They will pay themselves and their Wall Street buddies a stellar return and this will secure them plenty of funding opportunities for the next deals. Otherwise - if they had the slightest consideration for the token holders and concerns that their actions may somehow backfire - they would act differently.
At least - before cashing in on a 6.500% plus return - they would give some back to EOS token-holders who are losing 70% plus from the peak and say - at least - thank you.
So token holders, now ask yourself this simple question: if the EOS developer gives you the finger, how much is the EOS token worth for the developer? Moreover, how much should then the EOS token be worth for the market?
Draw your own conclusions...
I will sum it up with Gordon Gekko´s famous quote "Greed, for lack of a better word, is good... Greed captures the essence of the evolutionary spirit. Greed, in all of its forms... has marked the upward surge of mankind...".
In the meantime though, the only upward surge is that of Peter Thiel and his pals´ wealth among the Forbes billionaires...thanks to your money.
Disclosures: I do not own any EOS tokens nor have any interest whatsoever in Block.one activities and businesses
#eos #blockone #blockchain #securitytokens #bianconiandrea #crypto #thinkblocktank #sto #ico
After a long winter the optimism is back in the crypto world. Sure enough I also share this widespread feeling... though for mostly different reasons.
So which are the real reasons behind the recent crypto run up?
pointed to the Chinese fearing capital controls and to a general flight to safety because of the global geo-political tensions. Although both motives
may well be (temporary) concurring reasons - which incidentally also increases the risk for short term speculative spikes and painful wash-outs - my
optimism never faded in this long winter and it is much more long term based because it lies with fundamental factors.
Simply, it is the institutional money - increasingly attracted to the sector - which drives the growth and will continue to do so.
The long term planned allocation of institutional funds is enabled by new services being made available to the sector. And this is clearly a far more important and a long term bullish driver than the temporary/speculative flight to safety of the last month.
Institutional investors have increasingly positive sentiment
Fidelity Investments, one of the largest asset managers in the world, recently announced that it will start
trading BTC for its institutional client base. They clearly see the potential. In a recent survey 46% of their institutional client base
expressed their willingness to invest in crypto. And this despite BTC was - at that time - down 80% from the 2017 high. Surprising? Not really, institutional investors think long term and are
less influenced by short term price fluctuations.
New stablecoins are being created
Also JP Morgan announced its new JPMCoin. It is an important step. Stablecoins are fundamental to enable frictionless transitions from fiat funds to crypto-tokens. The sector cannot appeal to institutional money without trustworthy and well functioning stablecoins. And the issue here is mainly subjective rather than technological. Can we trust the issuer of the stablecoin? Can we trust that funds are kept segregated? Can we trust that the coin is fully backed up with fiat?
The Tether (USDT) story is revelatory. Leaving personal opinions aside, the facts are that the latest official declarations by the company point to a back-up ratio of 74% of the coins issued, this despite the company had always maintained that the coins were fully backed-up by fiat funds 1:1.
With Tether´s credibility tattered, the JPMCoin - or Goldman´s Circle-USDCoin for the sake of it - are very much needed in order to channel investments into the sector.
STOs and STexchanges are coming
Slowly yes, but this is the key to open the door to investments from the VC sector, from the real estate sector and create regulated markets where tokenized securities can be traded. The tokenization of bonds/debt is already a fact. But the tokenization of real assets and equities needs to overcome regulatory hurdles in most jurisdictions. Still, a few countries are getting ready and the rest will - sooner or later - be obliged to follow. A new regulatory prospectus regime is also coming into force in the EU, which will facilitate investments flowing into the sector.
New custodial, clearing and settlement services for institutional investors are being set up.
Self-custody, frictionless peer to peer transfer, easy clearing and nearly immediate settlement of crypto transactions are often touted as great benefits and advantages compared with the complexity of the custody, clearing and settlement chains of the legacy financial sector (see figure below).
Source: Richard Gendal Brown - A simple explanation of how shares move around the securities settlement system - 5.1.2014
I tend to agree...but only for us individuals. The sector can grow exponentially only thanks to the trillions which will be invested by the legacy financial sector. And institutional money does need institutional grade custodial, clearing and settlement services to operate, the likes of what Nomura, JPMorgan, BNY and Northern Trust are interested into and Fidelity starts to offer or BitGo recently announced here. Clearly, until events like the Quadriga CX can happen, institutional money will wait on sidelines.
Surely this means that some of the complexities of the legacy financial sector (see figure above) will be replicated also in the crypto-sector and that the likes of the DTCC and Clearstream or Euroclear will be needed, but there is no alternative way for institutional money to operate.
To illustrate, in the recently announced services by BitGo one recognises all the tracts of the legacy custodial, clearing and settlement services adapted to the crypto-sector:
- one party acts as trustee, custodian and settler for buyer and seller
- assets are held in trust in segregated accounts (in cold storage)
- firstly an off-chain settlement of the transaction is completed and then the on-chain reconciliation follows
- both parties must have accounts with the trustee to enable the frictionless clearing and settlement of the respective positions
Such new services address fundamental operational issues and risks for institutional investors. The only risk that cannot be taken out of the equation is the solvency risk of the custodian. But this is a risk that the legacy financial system is accustomed to and which will be dealt with more stringent regulations, capital requirements and insurances.
Does this mean that the too big to fail issue - which was one of the core motives for inventing the Bitcoin protocol - is going to become an issue also in the crypto-sector? Possibly yes, but at least only for the big boys. Let them play the way they like. We individuals can continue playing the decentralized, peer to peer and self-custody game. But - most importantly and despite the daily critics - the big boys like the crypto-game, they want to be part of it and want to make it big so that they can make a lot of money with it. As a consequence they will mobilize their trillions, they will invest heavily to engineer a suitable for them infrastructure to trade crypto-tokens and this investment wave will lift all boats. And this will be inevitably reflected also in the appreciation of BTC and all correlated cryptos. This process is ongoing and it is irreversible.
That is the real reason for being - long term - very, very bullish in the sector.
#bitcoin #securitytokens #bianconiandrea #crypto #thinkblocktank #sto #stablecoin #custody #settlement #clearing #tether
The time is ticking. On 21st of July 2019 the new Prospectus Regulation (2017/1129) will become applicable in all the EU member states. This regulation will repeal the previous Prospectus Directive 2003/71/EC and introduce a new set of important provisions which may just well be the boost needed by the crypto sector to launch intra EU public offerings of security tokens (STOs).
This new regime was conceived with the purpose of allowing SMEs easier and cost effective access to capital markets across the EU. The regulation enters into force in two different phases.
Exemptions from the obligation to issue a prospectus.
Firstly, as of 21st of July 2018, member states have adopted a new set of provisions in order to exempt security issuers from the obligation of drawing up a prospectus if the offering is under the thresholds set out in the Table below. The thresholds have been discretionally set by member states according to Art. 3.2 (b) of the Prospectus Regulation. The regulation however sets the discretionary range for such exemptions, which is between €ur 1 Million (non-discretionary lowest threshold which is exempted in all EU member states) and €ur 8 Million (highest discretionary threshold that could be set by any member state).
Countries such as Italy, France, UK, Denmark and Finland have opted for the highest threshold, which could theoretically favour STOs in such jurisdictions. It goes without saying that those exemptions suit really well the average sized crypto startup to enable an easier access to funding within the home jurisdiction. Please note that, because no prospectus is issued here, the fundraising must be limited to the home country and the passporting regime does not apply.
The updated country list can be found on the ESMA website https://www.esma.europa.eu/sites/default/files/library/esma31-62-1193_prospectus_thresholds.pdf
The new Growth Prospectus regime for SMEs
Secondly, as of 21st of July 2019, EU companies not falling under the exemption thresholds mentioned above - and willing to issue security tokens - may do so by taking advantage of a new simplified prospectus regime called "Growth Prospectus". This should be a relatively straightforward and cost effective process if compared with the standard/basis prospectus otherwise needed.
Art. 15 has broadened the definition of SMEs, which could issue the Growth Prospectus, to include companies which meet at least two of the following criteria:
Likely, most SMEs in the EU would fall under the above definition. But the EU legislator has gone further than that. It has opted for extending the benefit of the Growth Prospectus also to non SMEs, in particular to:
- the offer of securities to the public is of a total consideration in the EU not exceeding €ur 20 Million over a period of 12 months, and
- such issuers have no securities traded on an MTF, and
- such issuers have an average number of employees during of up to 499.
The specific format and the information content of the Growth Prospectus have been laid out in a delegated act recently adopted by the EU Commission.
Simplified passporting of prospectuses within the EU
Thirdly, also as of 21st of July 2019, the process for obtaining the certificate of approval attesting that the prospectus has been drawn up in compliance with this regulation should become simpler. In particular, the previous Prospectus Directive was implemented differently across the EU. This created a number of frictions with sporadic requirements by certain member states of additional burdens for the issuer - such as the publication of the prospectus on magazines, more publicity requirements, payment of fees and translations. Conversely now, because this is a regulation and not a directive, no implementation is required by member states in their national legislations. This regulation will be therefore automatically enforced in the national legislations, thereby eliminating the risk for the above mentioned inconsistencies.
Once a Growth Prospectus for an STO is approved in a member state it will be therefore valid for any offer of security tokens to the public across the EU.
The entry into force of the new Prospectus Regulation, with clear exemptions for some security issues coupled with the new Growth Prospectus regime and the simplification of the passporting procedures, should become a potent instrument for companies willing to tap EU capital markets by issuing new security tokens or by tokenizing existing securities.
In the summer 2020, after one full year from the entry into force of the Prospectus Regulation, we will be able to assess its impact on the crypto sector.
#securitytokens #bianconiandrea #blockchain #crypto #thinkblocktank #EUCommission #regulation #sto #prospectus #growthprospectus #prospectusregulation #prospectusdirective #passporting
Nowadays, tokenized securities are the hottest crypto topic. Of all possible tokenizations - debts, real assets or equities - that of equities catches the most interest. This despite the fact that it is really debt tokenization that presents the "low hanging fruit", because it is fairly straightforward to implement and it has very little regulatory constraints. In fact, the first EU debt tokenization was recently completed in Germany.
Instead, the tokenization of equities is much more complex due to the amount of regulatory constraints.
The regulatory hurdles to equity tokenization
Understandably, the tokenization of equities is highly appealing to VC firms, investment bankers, business angels, and SMEs; all salivating at the opportunities that this may bring.
Nonetheless, although increased liquidity, tradability, and low issuance and transfer costs are frequently touted as the biggest advantages of the tokenization of equities, few are fully aware of the legal constraints that still limit these potential advantages.
At a recent thinkBlocktank event - organized in Warsaw by Wardynski & Partners - the most prominent among European blockchain specialist lawyers met to discuss recent regulatory developments; such as, the progress made by Switzerland and Liechtenstein towards implementation of a frictionless regulatory environment regarding tokenization.
The main obstacles surrounding tokenization of equities remain: (i) the format of the shares, (ii) the means and the proof of the transfer, (iii) the link between the shares and the token, and (iv) the objective and subjective requirements for DLT based security token registries. Whenever a jurisdiction prescribes - for instance - the paper format for the shares, the need to enter them into a register held by a public authority, a written form requirement for the transfer, or a notarial authentication to prove it, then such regulatory constraints clearly nullify the purpose and the benefit of a tokenization.
The Swiss solution
At the meeting, Stephan Meyer, a colleague from the Zurich and Zug based MME law firm - which already played an instrumental role in setting up the Ethereum foundation - has explained the legal and regulatory basis for creating equity tokens in Switzerland. This has been done by a joint venture tokenization platform recently created in partnership with Swisscom.
Under Art. 973c of the Swiss Code of Obligations, uncertificated shares can be issued and the issuer shall keep a book recording the ownership of the shares. Since no other requirements are prescribed under Swiss law, tokens representing equities can be registered and transferred using a blockchain/DLT infrastructure. To illustrate, the Daura platform was set up to run on the private/permissioned Hyperledger Fabric blockchain, where uncertificated shares are registered and corresponding equity tokens are issued and managed via smart contracts.
The transfer of the equity tokens is structured as tripartite agreements to avoid the written form, otherwise legally required also in Switzerland. From 2020 the introduction of a new "DLT-right" is expected in Switzerland. The Swiss Federal Council proposed in March 2019 several legislation amendments to further facilitate blockchain projects and security tokens in specific. The legislation optimization is now in the formal consultation process.
Furthermore, there are additional advantages which make Switzerland an incredibly friendly jurisdiction for issuing equity tokens. No licences and no prospectuses are required for direct primary market issuances, the only requirement being a very simple "civil law prospectus" which implies civil law liability in case of unfaithful declarations by the issuer. Although, a simplified "regulatory" prospectus will be required from 2020.
Moreover, there are no compulsory AML duties for the direct primary market issuer of security tokens to comply with. Finally, while centralized exchanges do need a secondary market licence - such as the currently proposed DLT Trading Facility license - per to peer transactions remain unregulated; and, as a consequence, also fully decentralized exchanges.
The German complication
One can contrast the flexible, straightforward, and "light" approach of the Swiss legislators with the corresponding intentions of the German legislators. Regarding the very same issue of the registers in which securities tokens can be held, the German legislator - in a proposal issued by the Ministry of Finance the 7th March 2019 - intends to limit the ownership of blockchain based security token registries to either governmental authorities or authorized intermediaries under MiFID. This defies the very purpose and the properties of a blockchain. If anything, the debate should focus on the type of blockchain which can be used for such registries, rather than bring the blockchain based security register under the direct supervision of an authorized intermediary - which is by no means more trustworthy than a properly set up blockchain. Blockchains are intrinsically suited for issuing and transferring tokens, because they are tamper-proof and allow for tracking of the legal title. Consequently, the issuing, clearing, and the settlement of securities´ transactions on blockchains should be one of the main applications and uses for DLTs. Although currently the German legislator seems to completely miss the point, hopefully they will reconsider the issue in the future.
The far sighted Lichtenstein approach
Liechtenstein, on the other hand, is more aligned with Switzerland.
This draft law is a comprehensive piece of legislation dealing with DLTs, tokens, and their legal treatment. As far as security tokens are concerned, it also deals with issues which the Swiss law does not explicitly address, such as a bona-fide purchase of rights and the liberation/discharge of the debtor from its obligations.
This will be achieved through the §81a clarification of the Persons and Companies Act (PGR) of 1926, and additional provisions including the following:
- an explanation of the pre-existing provision within the PGR which has allowed for the existence of dematerialized shares for almost 100 years;
- the format of the register which will hold uncertificated rights is not defined by law but "Trusted Technologies" expressly include DLTs;
- in case DLTs are used, the transfer of uncertificated rights is only valid when done on the DLT; this excludes - by law - the potential conflict between a "real world" pledge or assignment of the uncertificated rights outside the blockchain and the blockchain based transfer of the token representing such rights;
- anyone acquiring uncertificated rights on the blockchain shall be protected, even if the seller did not own the underlying "real world" rights;
- the debtor making payments to a creditor entered into the DLT based register is liberated from their obligations.
This Liechtenstein draft legislation is also - at least so far - one of the most advanced in Europe and it raises important issues and legal challenges that we will continue to debate in the future.
#tokens #bianconiandrea #blockchain #crypto #thinkblocktank #tokenization #switzerland #liechtenstein
Lastly it happened: a German company has won the race to issue a fully regulated security token, at least in Europe. Despite others having claimed to have "tokenized" something in the past, this Bitbond issue is a radical shift in the STO narrative so far.
Indeed Bitbond - a Berlin based crowdfunding company - has released a prospectus approved by German regulator BaFin to raise funds by issuing a security token bond on the Stellar blockchain, without a depositary bank, without certificates or coupons and intermediaries. Differently from what happens with traditional bonds, no commission/premium/agio will be charged to subscribers. Also the size of this STO is considerable, with an ambitious hard-cap of €100M.
This is a big step forward, this is finally the game changer that I have been waiting for in the last 12 months.
If anything, my bet would have been on a smaller and more flexible jurisdiction to be able to finalize this first (such as Switzerland for instance). The German move is therefore important for the industry. It sends a clear signal that Germany is now leading the STO race and is ready to take your business. At least among conservative German medium sized company owners - who in my experience are very much keen in "keeping base safe at home" - this basically means "hey guys, why take your business elsewhere? Take no risks and look no further, you can now conveniently raise funds through STOs at home".
And with the uncertainties of Brexit - which may penalize London´s financial hub in the short term - the Germans might even be able to attract potential STOs from other EU countries. In the end the financial infrastructure in Frankfurt is top notch, Berlin is a top tech and crypto hub with plenty of very experienced crypto consultants and legal advisors and the market for potential STO candidates among German SMEs is simply the biggest in Europe. So it´s all there for the German STO market to prosper and grow.
Now, as promised here, I have thoroughly gone through Bitbond´s prospectus and I also exchanged e-mails with the company´s General Counsel - Henning Franken - to clarify some points. The following is my analysis of Bitbond´s STO bond issue.
1. Bitbond´s Business background
Bitbond´s platform brokers loans between investors and small business owners. Through its fully owned subsidiary Bitbond Finance GmbH, they aim to raise capital to directly finance small business owners through the Bitbond platform.
2. Bitbond´s - Security Token Offering (STO)
In order to raise capital Bitbond Finance will issue a security token bond with a hard cap of €100M. The currency of issue is the Euro, although investors can also pay the principal amount in crypto.
The company will issue BB1 tokens having nominal value of €1 and representing a debt instrument (Bond) paying an annual interest of 4%, payable in quarterly instalments. In addition, it will pay a variable interest amount equivalent to 60% of the profits realized by Bitbond GmbH in its business activities (if any). The BB1 tokens will be issued on the Stellar blockchain. The duration of the bond is 10 years.
For obvious practical reasons, the contractual assignment of token rights or their pledge - otherwise possible with standard securities under civil contract law - are negated in this case (art. 7.2.8 limited prohibition of assignment). This is because the transfer of rights to the token must be allowed only if done through the Stellar blockchain, which enables the sale and transfer of the full ownership of the token and not ancillary rights. Therefore the investor acknowledges with the prospectus to substantially refrain from pledging or otherwise assign the rights to the tokens outside of the Stellar blockchain. This is necessary to avoid a conflict between what would be legally possible under civil contract law and what is practically feasible with the blockchain.
3. Comparing the token-Bond vs a traditional bond
First of all the issuance direct costs are a fraction of those with a comparable traditional bond. The biggest direct cost is for marketing and sales at around € 400.000, then € 120.000 for legal and prospectus and € 80.000 for software development. A mere 0,6% direct costs if the bond is fully subscribed, excluding all indirect costs such as commissions for tips, referrals and rewards for affiliates.
3.2 No Intermediaries
Then there are no financial intermediaries to deal with, and no commission/premium/agio will be paid by the subscribers. The issuance is direct to the investor and the BB1 tokens will be allocated via Smart Contract directly to the Stellar wallet of the investor.
3.3 Potential for Liquidity
The liquidity is still an issue to be verified since there is no real market for trading such tokenized bonds. So it remains to be seen both how much of the €100M will be subscribed and then how liquid the BB1 tokens will be and which market will be chosen by the issuer for trading them.
Anyway, the potential advantages are there and liquidity will gradually improve with the growth of the sector and the involvement of traditional financial players. I have no doubt that financial operators, while being "disintermediated" on the token-bond issuance phase, will carve themselves an active and profitable role in trading those tokens and thereby will bring liquidity to the markets (market-makers will come). Besides, traditional financial instruments such as commercial papers or small corporate bonds are also highly illiquid. Here we have at least the potential to create a global blockchain based market where those securities can be traded. It will all come, with time.
Another advantage is the programmability of the tokens via Smart Contracts. In this particular case a script is programmed that executes automatically all the steps relating to the payments of interests and redemptions, as well as the calculation of the exchange rate and of the amounts due and the allocations to the wallets. The script however is activated manually by the issuer, so in the end it is semi-automated.
The risks are properly set out in the prospectus. I wish however to dig in more deeply and examine more attentively some of the risks. Leaving aside the clear risks which are common to any business and to any investment in financial instruments, I´d like to focus on those risks which are more opaque and intrinsic to the business of crypto lending.
4.1 ERP Loans and exchange rate risks
When Bitbond lends crypto to small businesses via its platform it enters into so called ERP Loans (Exchange Rate Pegged loans). Simply put, if the borrower borrows €1.000 this sum is transferred to him in crypto which the borrower then converts again into fiat. When it will have to pay it back it will pay back always € 1.000 at the crypto-fiat exchange rate of that moment. This clearly protects Bitbond from crypto volatility. On the other side the borrower is exposed to crypto-fiat exchange rate fluctuations for the time it takes to receive the crypto-loan and exchange it into fiat funds. According to the company´s General Counsel Henning Franken this takes usually only a few minutes. Since 2018 however the company claims to have improved its business model and now, instead of using cryptocurrencies, it uses a stable-coin - the EUR Token - to transfer funds to borrowers as explained in para 4.2 below.
4.2 EURT risk
To do so Bitbond
has partnered with platforms (such as Tempo) to covert fiat into a digital stable-coin backed up with Euros 1:1 which is called EURT (Euro
Token). According to Henning Franken - Bitbond´s General Counsel -
"Tempo emits so called "Euro-Tokens" on the Stellar blockchain. So they do not use Stellar-Lumens (XLM) but only make use of the underlying ledger provided
Compared to the model described above (4.1) the exposure is even further reduced since every fiat Euro transferred to Tempo gets exchanged to one Euro-Token which keeps its value of 1 Euro at any time of the transaction. This way there is even between transfer to the borrower and exchange no exposure to fluctuation anymore. Furthermore the transactions are faster, less cost intensive and more secure.
Bitbond has introduced the latter model to all German and most of its European customers and will continue to do so in 2019 and further.
Bitbond Finance GmbH (the emitter of BB1) will probably invest the BB1 funds mostly in German and EEA-loans because the majority of our existing customer base is located there".
By the way - on that same issue - it is worth noting that JP Morgan has recently announced that it will start issuing its own stable JP Coin pegged to the US$. It will be used initially for internal operations but the way forward here is clear. When large financial institutions get involved, then any third party risk related to the issuer of the pegged-coin (such as this third party solvency) can be at least mitigated and properly rated, even more so if the counterparty of your fiat-pegged-coin is JP Morgan or Goldman Sachs instead of any small start-up. This is certainly important to allow the investment of institutional moneys.
4.3. Repayment of principal (Redemption at maturity) and interest payments
All the interest
payments, as well as the redemption of the BB1 tokens at maturity, will be made exclusively in XLM. This means that the euro sum due will be converted at the moment of payment into the
corresponding quantity of XLM which will be transferred to the wallet of the investor. The investor therefore bears the same exchange rate risk described under 4.1 above until XLM are again
converted into fiat.
An alternative mechanism to the repayment in XLM of principal and interest is not indicated by Bitbond. Also it is not clear why EURT will not be used in this case to repay interest and principal. My point is that XLM is not exactly the US$. What if in a few years it does not exist anymore? At least a general purpose clause to establish an alternative payment mechanism in fiat currencies or a fiat-pegged-coin could have been inserted.
There is another risk to consider though which is not so apparent. XLM market capitalization at the date of writing is a mere 1,6bn US$ equivalent, not exactly in the league with BTC (67bn US$). Therefore price manipulations cannot be excluded. If the XLM price is artificially inflated ahead of key payment or redemption dates, less XLM will be paid out to the investor who bears the exchange rate risk until XLM are converted into fiat.
In addition, the investor cannot be guaranteed adequate XLM liquidity and its convertibility into BTC/ETH or fiat. In other words the investor carries an "exit" risk with such cryptocurrency. This is important.
4.4 Coding errors and lack of dispute resolution mechanism
Another issue is the lack of a dispute resolution mechanism. Due to the still experimental nature of tokenizations and the technical risks that comes with it - think about a bug in the code or a mistaken token or payment transfer which is irreversible on the blockchain - I would have appreciated an arbitration procedure to allow investors to quickly settle those issues.
Fair to say that Bitbond duly acknowledges those risks in art. 2.2.14 and thoroughly explains the way the semi-automated payments are executed, but it fails to indicate the solution in case of failure. German law regulates the BB1 issue with the non-exclusive jurisdiction of the Berlin Court.
Strangely enough, what is the biggest achievement for the securities token industry so far, has gone almost unnoticed by the largest international crypto media. Some have reported the news but no real comments. Though the news have clearly made the headlines among the specialized German media, this is by no means a local achievement. It is a global success for the industry.
Therefore I have asked a prominent German crypto expert, to share with me his views.
Oliver Krause - my colleague at Untitled-INC - comments: "it is clearly a milestone that has been achieved here, although I see substantial potential for improvement of STOs from the investors perspective. I expect more maturity coming to the space as soon as STOs will gain traction. We look forward to contribute with a number of projects we are currently working on. Andrea Bianconi´s analysis [i.e. this article] also shows that there is a clear need for investment advisory expertise as most retail investors will not be able to correctly assess the complex risk reward profile of these investments. Overall I have no doubt that STOs will gain traction as an alternative asset class over time"
Notwithstanding Bitbond´s milestone achievement, it remains to be seen how this digital bond will be subscribed. My feeling is that the BB1 token bond will be very likely successful among crypto investors who may want to switch and hedge risky crypto positions and convert BTC/ETH or other cryptos into this bond. Crypto whales, miners and those who have accumulated fortunes in 2017 can easily oversubscribe this Bitbond.
Because this is really the first time that such a digital bond will be open to fiat investors it is difficult to predict how it will go. Objectively though - in a world of zero or negative rates, where even real estate yields less than 2% (in Germany at least), a 4% fixed yield plus a variable amount - is undoubtedly a valuable proposition for any investor.
Finally, regarding the involvement of institutional investors, I feel that until a market for hedging fiat-crypto exchange-rate risks is not developed - with liquid enough options and futures contracts - and a stable-coin backed up by a major financial institution is created (see the JP Coin), it will be hard to see institutional money flowing in.
But Rome was not built in a day and we are getting there much faster than it seems.
Legal Disclaimer: This paper is for general guidance only and it does not constitute legal advice. As such, it should not be used as a substitute for consultation with lawyers on specific issues. All information in this paper is provided "as is", with no guarantee of completeness, accuracy, timeliness or warranty of any kind, express or implied.Disclosures: I do not have any interest in the company Bitbond or in the offer which is the subject of this article, I did not know any of Bitbond´s people before writing this article and I have not been paid or otherwise hired by Bitbond for any services and I have not been promised any economical rewards or benefits for writing this piece, which is a totally independent piece of information about their offer.Disclosures: I do not have any interest in the company Bitbond or in the offer which is the subject of this article, I did not know any of Bitbond´s people before writing this article and I have not been paid or otherwise hired by Bitbond for any services and I have not been promised any economical rewards or benefits for writing this piece, which is a totally independent piece of information about their offer.
#tokens #bianconiandrea #blockchain #crypto #thinkblocktank #tokenization #sto #stable-coin
The beginning of the year has brought some important regulatory news for crypto from the US, the UK and the EU.
In the crypto-friendly and dynamic US State of Wyoming, 2 new legislative bills have been filed in January. The first one aims at classifying digital assets as "intangible personal property" within the applicable Uniform Commercial Code as well as introducing an opt-in framework for banks to provide custodial services for digital asset property.
The second one proposes to allow Wyoming corporations to issue "certificate tokens" and substantially recognizes "certificate tokens" as equivalent to normal stock certificates. Of course these are not enacted legislations and we will see how the process evolves before those bills can become law.
In Europe, the English FCA has issued a consultation paper on its proposed Guidance on crypto assets which I have recently commented here.
After the Italian Senate proposed to recognize the legal enforceability of both Smart Contracts and DLTs time-stamping, Luxembourg follows with the proposal to legalize the use of blockchains and DLTs for the holding and transfer of financial instruments. The Law proposal n. 7363 aims to introduce a new Article 18bis to specifically recognize the circulation of financial instruments via DLTs. This is the same procedure which was adopted in 2013 when the very same Law of 2001 was amended to take into account the circulation of dematerialized shares which were then given lawful recognition.
Luxembourg´s initiative seems to go a step ahead of the above mentioned recognition of the effects of DLTs time stamping by the Italian Senate.
However, both legislative moves do not seem to deal comprehensively with the issue: on the one side, Luxembourg recognizes the transfer of financial instruments using DLTs but does not expressly gives legal validity to the data embedded in DLT´s (time-stamping). Italy, on the other side, recognizes the legal validity of DLTs time stamping but does not expressly acknowledges the circulation of financial instruments via DLTs. Both seem to fall short of the objective. This is more material to analyze legal comparative aspects at ThinkBlockTank.
GERMANY - STO
On the tokenization of assets, the German Bafin has approved the first Prospectus for the issuance of a security token by German based Bitbond GmbH. The token represents a debt instrument paying an annual interest of 4%, plus a variable interest amount equivalent to 60% of the profits realized by Bitbond GmbH in its business activities. Two important points are worth noting: a) the token holder is paid back principal and interest in Stellar Lumens (XLM) thereby always bears the exchange-rate risk with Euro or other accepted Crypto such as BTC or ETH; b) Bitbond Finance will buy back the token at the original price of €1 at maturity after 10 years. In the meantime, with the German colleagues at ThinkBlockTank, we have looked into this Prospectus and here is my opinion on this interesting topic.
The EBA report is aligned with the ESMA report but specifically analyses crypto-assets in the light of the Payment Services and Electronic Money Directives (PSD2 and EMD2). The results can be summarized as follows:
(i) A crypto-asset qualifies as "electronic money" only if it:
- is electronically stored;
- has monetary value;
- represents a claim on the issuer;
- is issued on receipt of funds;
- is issued for the purpose of making payment transactions;
- is accepted by persons other than the issuer.
In all such cases, authorisation as an electronic money institution is required to carry out activities involving e-money, unless a limited network exemption applies in accordance with Article 9 of that Directive.
(ii) PSD2 will then apply only to crypto-assets that qualify as e-money as clarified above under (i).
(iii) Regarding the secondary market services - i.e. crypto-asset trading platforms and custodian wallet providers - the EBA voices again its concern about money laundering risks and risks to the consumers.
(iv) Finally, the EBA shares ESMA´s conclusions about the EU Commission´s need to create a regulatory level playing field across the EU.
The ESMA report is based on a survey carried out by 28 European NCAs (National Competent Authorities) on 6 different ICOs completed in 2017-2018, which tokens have differing characteristics that ranged from investment-type, utility-type, to hybrids and payment-type. Pure payment-type tokens were not included in the sample set on purpose, as they are unlikely to qualify as financial instrument.
The results of this survey can be summarized as follows:
(i) The crypto-assets sector remains modest in size and ESMA does not believe that it currently raises financial stability issues. However, ESMA is concerned about the risks it poses to investor protection and market integrity.
(ii) The outcome of the survey highlighted a NCA majority view that some crypto-assets, e.g. those with profit rights attached, may qualify as transferable securities or other types of MiFID financial instruments.
(iii) However, because of differences in the implementation of MiFID at national level, the definitions of what is considered a "financial instrument" differ among member states. This leads to confusion and jurisdiction arbitrage by the players.
(iv) if the "financial instrument" test is positive then the whole set of EU financial rules will apply such as MiFID II, the new Prospectus Regulation, MAR etc.
(v) if instead the "financial instrument" test is negative then such set of rules do not apply. In this case however ESMA advises that all operators shall be subject to AML regulations.
(vi) ESMA is concerned that the strategy of certain member states to regulate individually crypto-assets does not provide for a level playing field across the EU and therefore proposes that the EU commission steps in to coordinate an EU-wide approach.
Interestingly, if one bothers to look into the Annex of the NCA survey, the discrepancy in what constitutes for NCAs a financial instrument and then a security under different EU jurisdictions appears pretty clear. Take in fact the CRPT (Crypterium) token for instance: for 15 NCAs it is a security, for 10 it is not and 3 do not even know the answer.
No doubt that some consistency is needed at EU level.
#tokens #bianconiandrea #blockchain #crypto #thinkblocktank #EUCommission #regulation #wyoming #smartcontracts
Italy never stops to amaze me. It is what we Italians call "genio e sregolatezza" - genius and insanity. It is a country which has produced talents and excellence since the Roman times in many areas and still does. Italian artists, products, style and technology are known, appreciated, sought after and often imitated worldwide. It is a country full of talents which could still lead in the world in many ways, but it is chronically plagued by internal conflicts, self-interest and lack of leadership. This makes it very hard for Italian businesses to compete internationally and many young Italian talents are compelled to leave "il bel paese" to look for better opportunities abroad. We know this all too well.
With Blockchain technology it was not different. For years, when the rest of the world was already salivating at the opportunities that blockchains could offer, this was hardly a hot topic in Italy.
Then - mainly in the last 18 months - it seems that Italy has suddenly woken up to the opportunities that DLTs can bring in the future.
Surprisingly, also the politicians have been fast in taking some steps in the direction of technology adoption. Last September the Ministry of Economic Development selected a group of 30 Italian experts who have volunteered (strictly unpaid) to contribute shaping the future blockchain policies of the new government.
Then - this January - came the Italian stroke of genius. The Senate has proposed to introduce an important modification to an existing Legislative Decree which was aimed at cutting down administrative red-tape. The proposal is to recognize the legal enforceability of both Smart Contracts and DLTs time-stamping.
This legislative amendment may well make Italy the first country in the EU and - as far as I am aware worldwide - to practically equate a Smart Contract to a written contract, thereby recognizing Smart Contracts digital format as being equal to the written format (Art. 8bis § 2). Under §3 then, DLTs time-stamping will be recognized under Art. 41 of EU Regulation 910/2014 (Legal effects of electronic time-stamps).
It is not clear whether the effects of that are to simply qualify DLT time-stamping as legally enforceable in legal proceedings or to extend them the features of "qualified time stamps" under Art 42 of the same EU Regulation. Meaning that DLTs would have the capability of binding together time, date and data because they are "signed using an advanced electronic signature or sealed with an advanced electronic seal of the qualified trust service provider, or by some equivalent method".
I would personally advocate the latter interpretation - because of the tech features of DLTs - which would practically mean that the whole block of data, time and date will be bound together in a legally enforceable certification (and not only the date). But we have to wait and see which position the Commission will take on that.
If the legislative amendment is passed, the AGID (Italian Digital Agency) will have to set the technical specifications for the application of the law.
It remains to be seen if "the stroke of genius" becomes a law in the short time. This is however a remarkable step in the right direction.
#untitled-inc #bianconiandrea #blockchain #crypto #thinkblocktank #smartcontract #timestamp #dlt
In the UK, the FCA has recently issued a consultation paper on its proposed Guidance on crypto-assets which is open to stakeholders to provide their feedback by April 2019. The objective of the Guidance is to determine the regulatory perimeter within which existing UK laws or implemented EU Directives (such as the MiFID, MAR or Prospectus Directive) will apply to crypto-assets based on the standard categorization of exchange, security and utility tokens.
The Guidance indicates when crypto-assets may be considered "specified investments" under local UK law or "financial instruments" under MiFID II or e-money under Payment Services and Electronic Money Regulations.
The key points of this Guidance can be summarized as follows:
1. Exchange Tokens: exchange tokens (i.e crypto-currencies such as Bitcoin) remain outside the perimeter of the regulation. This means that the transferring, buying and selling of these tokens, including the commercial operation of crypto-asset exchanges for exchange tokens, are activities not currently regulated by the FCA. But by the end of 2019 the 5th AML EU Directive will be implemented also in the UK and therefore AML obligations will apply to such activities.
2. Security Tokens: the definition of "security tokens" is to include tokens that meet the definition of a "Specified Investment" under UK law, and possibly also a "Financial Instrument" under MiFID II. For example, these tokens have characteristics which mean they are the same as or akin to traditional instruments like shares, debentures or units in a collective investment scheme.
The FCA does also some useful practical evaluations and reports interesting case studies from their Sandbox experience. For instance:
(a) tokens are equivalent to shares if negotiable on capital markets, but listing on a market is not necessary. It is sufficient that they are transferable. This is the standard MiFID definition. However even if a token is not strictly speaking a financial instrument under MiFID - because it may have restrictions to its transferability - it still may be considered like a "Specified Investment" under UK Law.
(b) if voting rights are attached to a token, they must be directed towards the control of the company. For example, a token that provides its holder with the simple right to vote on future ICOs the firm will invest in, would likely not be considered a security as the voting rights don’t confer control-like decisions on the future of the company.
(c) a token representing a Warrant - a right to subscribe in the future - will be considered a security when it grants the right to subscribe to tokens which, when issued, are themselves considered like securities.
(d) a token conferring rights to tokenized securities is itself likely a security.
(e) a token issued to collect capital from investors - which is then pooled, invested and then yields token holders either interests or a profit participation - is likely either considered as a debenture or a participation in an investment scheme and therefore a security.
3. Utility Tokens: more importantly, the FCA brings much needed clarity on the most controversial of tokens types, that of utility tokens. The FCA seems to take a residual approach to identify utility tokens. Basically - if the token is neither a security nor e-money - then it may well be a utility token and thereby will fall out of the perimeter. Much like exchange tokens, utility tokens can be traded on the secondary markets and be used also for speculative investment purposes. This fact alone does not necessarily mean these tokens are securities.
4. E-Money: Payment Services Regulations apply only to funds which are defined as "banknotes and coins, scriptural money and e-money", therefore not to crypto-assets.
The standard e-money definition derived from the E-Money Directive applies here to crypto-assets, in the sense that they are to be considered as e-money only if:
- electronically stored;
- with monetary value;
- representing a claim on the issuer;
- issued on receipt of funds;
- issued for the purpose of making payment transactions;
- accepted by persons other than the issuer.
Moreover the PSRs cover each side of the remittance, but do not cover the use of crypto-assets as the vehicle for remittance. Say a remittance service receives fiat from payer to be sent to payee in another currency. Consequently it converts fiat into a crypto-asset for the purpose of facilitating the transfer internally and finally delivers the sum to payee in another fiat currency. No party had any exposure to crypto-assets here. This is also out of the perimeter.
5. Conclusions: The Guidelines are a long awaited step in the right direction by the FCA. Particularly when bringing more clarity on the issue of utility tokens or definitely putting exchange tokens outside the perimeter.
On comparative legal issues though, the German expert colleague Nina Siedler - fellow Board Member and Chairman of the Think Block Tank - points towards the differences in token categories between the FCA and the German supervisory authority BaFin. While the trisection of token categories is the same, the three categories vary in detail. The FCA defines exchange tokens as tokens “not issued or backed by any central authority and […] intended and designed to be used as a means of exchange”. In contrast, the element of having a decentralised issuer seems of no relevance to BaFin, which classifies this category of tokens as “payment tokens” and defining these as "units of account" which are a "financial instrument" according to German national law (while FCA considers those tokens to be outside their perimeter and expressly stating that they are not units of account). Further deviations arise according to national law for the security token category. This highlights once again the need for an EU wide harmonised token categorisation to create a functional European single market for tokens.
#tokens #bianconiandrea #blockchain #crypto #thinkblocktank