By Marina Fyrigou-Koulouri and Alexandra Levin Kramer
The subject of virtual currencies and token sales (“TS”) or token generating events (“TGE”) has garnered significant attention globally. As a response, regulators have started issuing reports trying to clarify the uncertain regulatory and legal environment.
On October 17, 2017, LabCFTC, a new initiative of the Commodity Futures Trading Commission (the “CFTC”) in promoting responsible financial technology (“FinTech”) innovation and fair competition, issued its first primer, “A CTFC Primer on Virtual Currencies,” as an educational tool with respect to FinTech.
According to the primer, “virtual currencies are commodities.” In fact, the CFTC already in 2015 had found that based on the Commodity Exchange Act’s (the “CEA”) broad definition of “commodity,” which includes inter alia “agricultural commodities … and all other goods and articles, … all services, rights, and interests,” “Bitcoin and other virtual currencies are properly defined as commodities.”
This implies that the CFTC has jurisdiction when a virtual currency is used in derivatives contracts. Additionally, it could exercise its authority over virtual currency transactions in cases of fraud or manipulation.
Additionally, the primer examines the issue of token sales and presents the DAO case, where the U.S. Securities and Exchange Commission (the “SEC”) determined that, under the federal securities laws, DAO tokens are “securities.” The CFTC states that, depending on the facts and circumstances, tokens can concurrently be commodities. Indeed, an instrument can be both a commodity and a security and, in such cases, specific provisions allocate jurisdiction between the CFTC and the SEC. The CFTC proclaims that, beyond the form, the triggering factor in applying the federal commodities laws and CFTC regulations is “the actual substance and purpose of an activity.”
Finally, LabCFTC discusses the various risks related to virtual currencies. “Virtual currencies are relatively unproven and may not perform as expected,” and operational, cybersecurity, speculative and fraud and manipulation risks should be carefully considered.
It should be noted that the primer disclaims that “[i]t is not intended to describe the official policy or position of the CFTC, or to limit the CFTC’s current or future positions or actions.”
The launch of Wyoming Blockchain Coalition, LLC, was announced on November 14, 2017, advocating the adoption of blockchain within the state. The group aims at educating Wyoming citizens about blockchain and intends to establish a friendly legal and regulatory environment for blockchain companies. According to Caitlin Long, advisory board member, “Wyoming has nearly a perfect combination of attributes to attract blockchain start-ups -- favorable LLC and corporate laws, privacy protections, zero corporate income or franchise taxes, strong academic support.”
The Wyoming Blockchain Coalition suggests that blockchain can be used to register LLCs on a blockchain, to certify Wyoming origin by tracking products on a blockchain, to reduce healthcare costs, to track government documents and ensure compliance with public records laws and improve transparency while a number of other industries such as financial and legal services, real estate, etc. would benefit as well.
The Monetary Authority of Singapore (the “MAS”) issued a report on August 1, 2017, clarifying its position on the offer of digital tokens, followed by the release of “A Guide To Digital Token Offerings” on November 14, 2017. 
Digital tokens that have the characteristics of capital market products under the Securities and Futures Act (the “SFA”) will be regulated by the MAS and the offer or issue of such tokens should comply with the applicable securities laws. Capital markets products include “any securities, future contracts and contracts of arrangements for purposes of leveraged foreign exchange trading.” While determining whether a digital token constitutes a type of capital markets product under the SFA, the MAS will investigate its “structure and characteristics…including the rights attached to [it].” If, for example, a digital token represents ownership interest in a corporation, it may constitute a share and therefore it should follow the existing provisions with respect to shares.
Additionally, digital tokens that constitute securities or units in a collective investment scheme (a “CIS”) under Part XII of the SFA must comply with the relevant regulatory framework like “traditional” securities or units in a CIS. This means that issues of such tokens should comply with the SFA requirements, like lodging and registering a prospectus with the MAS, unless they fall under the SFA’s Prospectus Requirements exception.
The MAS also investigates intermediaries facilitating offers or issues of digital tokens that fall under SFA. Primary platforms, where “one or more offerors of digital tokens may make primary offers or issues of digital tokens” must hold a “capital markets service license,” unless exempted; trading platforms that facilitate secondary trading of such tokens must “be approved or recognised by MAS as an approved exchange or recognised market operator respectively under the SFA.” Even financial advisors who provide advice regarding digital tokens as an investment should hold a financial adviser’s license.
Finally, the MAS highlights that anti-money laundering and counter-terrorist requirements may apply on such digital tokens as well as functional digital tokens that do not otherwise fall under the MAS’ regulatory authority.
On November 13, 2017, the European Securities and Markets Authority (the “ESMA”) issued two reports regarding TS, one directed to investors and a second to firms involved in token sales.
The ESMA alerts investors to the high risks of TS. TS are highly speculative and depending on their structure may fall outside of the scope of EU laws and regulations. This implies that, in such cases, “investors cannot benefit from the protection that these laws and regulations provide.” Falling in an unregulated space, TS can be used for “fraudulent or illicit activities” and “money laundering purposes.” Moreover, the ESMA notes that there is an inherent risk of failure as, the ESMA believes, most token sales are conducted by firms with no operational history. Inadequate information and flaws in the technology increase that risk even more. The price of the tokens is typically highly volatile and the lack of exit options may expose investors who might not be able to “redeem their coin or token for a prolonged period.”
The ESMA underscores that firms conducting TS would need to comply with the relevant legislation when conducting activities that are subject to regulation. Failure to do so will constitute a breach, with the applicable consequences.
Firms conducting sales of tokens, which qualify as financial instruments, will likely be considered as conducting regulated investment activities, and as such must comply with the applicable requirements. Relevant legislation includes: (1) The Prospectus Directive, which demands the provision of material, adequate information to investors; (2) The Markets in Financial Instruments Directive, which aims to secure “a high degree of harmonised protection for investors” in the single market; (3) The Alternative Investment Managers Directive, which sets the rules for the authorization of managers and the “capital, operational,…organizational,…and transparency requirements” for alternative investment funds, which would likely be applicable in a TS; and (4) The Fourth Anti-Money Laundering Directive, which provides for due diligence on customer and record-keeping in order to prohibit money laundering and terrorist financing.
The ESMA warns that further EU legislation, as well as national rules, may be applicable as well.
The timely issue of TS was addressed on November 7, 2017, by Sweden’s Financial Supervisory Authority (the “FSA”). The FSA relates TS, the crypto launch of tokens or other digital assets, to traditional financial activities. Indeed, both have the purpose of “rais[ing] funding from the public to develop a business idea for a completed business.”
The FSA’s statement describes the main concerns involved in TS. The FSA warns that: (1) TS do no ensure for the proprietor “any kind of right or claim against the publisher.” (“No Rights”); (2) Tokens or new digital assets are not required to be “matched by a true market value” neither evaluated by an “independent party.” (“No Market Valuation”); (3) Digital assets are not required to be bought back once distributed. (“No Guaranteed Access to Secondary Market”); (4) Anyone launching a TS is not required to provide “all essential information,” nor to provide it “to all investors at the same time.” (“No Information Requirements”); (5) The current expansion of TS may also attract fraudulent developers. (“Risk of Investment Fraud”).
New Zealand’s Financial Markets Authority (“FMA”) issued a similar report on October 25, 2017. The FMA focuses on facilitating “responsible innovation” and ensuring that “the regulatory regime remains relevant and agile.” The financial regulator advises entities aiming to launch a TS to consult the FMA about their legal obligations early in the development stage.
“The FMA’s views is that the specific characteristics and economic substance of a … [TS] determine if it’s a financial product – if it is regulated, and if so how.” Moreover, FMA sets out the legal requirements for providers of cryptocurrency services; they must “be a member of a dispute resolution scheme”, “be on the Financial Services Provides Register” and “comply with fair dealing provision in the Financial Markets Conduct Act.”
Finally, the FMA also warns investors about the risks associated with such investments as the industry is unregulated, the cryptocurrencies’ values are highly volatile and there are fears of scams.
Please contact Alexandra Levin Kramer, the Chair of CKR Law’s Blockchain Technology & Digital Currency practice group if you have any questions. She can be reached at firstname.lastname@example.org or +1 (212) 259-7300.
 Supra note 4.
 See also, https://www.ckrlaw.com/our-voices/2017/08/08/sec-investigates-the-dao-on-its-initial-coin-offering-on-blockchain/
 “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO.” SEC July 25, 2017, https://www.sec.gov/litigation/investreport/34-81207.pdf.
 Supra note 4.
 Supra note 10.
 Supra note 16.