Regulatory implications of security token offerings : assessing incongruencies with existing EU Securities Legislation

Abstract

The popularity of ICOs as an innovative way to raise finance through entirely onlinemediated offerings of crypto-assets has raised interest in the possibility of using blockchain technology to offer crypto-assets which give investors rights akin to those granted by virtue of a traditional Initial Public Offering. Thus, the phrase Security Token Offerings was coined, representing the issuing of financial instruments as crypto-assets through a blockchain based platform. The term paper seeks to address the main issues which hinder the application of EU Securities legislation to crypto-assets which qualify as ‘transferable securities’ under MiFID. The research shall be limited to issues arising within the context of the Prospectus Regulation, the Transparency Directive, MiFIR and CSDR. Defining which crypto-assets qualify as transferable securities underlies the research since only crypto-assets which fall within the scope of this definition will be required to draft a prospectus, carry out specific disclosure and reporting requirements under the Prospectus Regulation and MiFIR, and entrust book-keeping of assets with a CSD. Additionally, the fact that certain crypto-assets qualify as transferable securities but do not exhibit the features of traditional bonds or shares creates a number of issues since these regulations often base certain minimum criteria or reporting duties depending on whether the unit qualifies as a bond or a debt. A number of noteworthy issues arise multiple times with respect to different legislations tackled. Firstly, the use of permissionless blockchains creates significant governance issues due to risks related to pseudonymity and other liability issues. The liability of new functionaries such as blockchain developers, smart contract coders and miners will also need to be addressed since there is currently a lacuna. The research also addresses issues related to the use of permissioned and permissionless blockchains in post-trading and their compliance with CSDR.