The regulatory landscape for tokenised assets in Europe  

Cryptocurrencies and tokenised assets have been challenged by unclear and patchy regulation in the past seven years, with most major countries and regions unable to define the “token economy” and provide the necessary clarity for both institutional and enterprise participants and consumer adoption.     

Whilst it started to be an unregulated environment, especially for utility tokens, many countries had very positive forays into providing a legal framework and certainty amongst all tokenised asset classes over the past 2 to 3 years.    

Today we have several different initiatives in Europe, with a few innovative and nimble countries laying the groundwork, and the EU (such as Liechtenstein with the Blockchain Act) and with the MiCA framework providing a legal framework and harmonisation proposal to be adopted by all EU member states.   

In this article, we take a closer look and compare the individual draft proposals or legal frameworks and give a glimpse at what’s currently possible and what will be allowed to be done in the future.

Types and features of tokenised assets 

To start off, it’s important to summarise the individual tokenised assets and how they are being classified.   

On September 24, 2020, the European Commission (hereafter: ‘‘Commission’’) adopted a digital finance package to acknowledge digital transformation in finance. For crypto-assets, the Commission proposed a regulation on markets in crypto-assets (‘‘MiCA’’). The following tokens and terms have been defined: 

With a defined structure and vision of tokenised assets, we can move to the research of the question of “How do legislators from different countries see the concept and framework to regulate the digital asset markets?” 

FCA guidelines (United Kingdom) 

The UK government started really strong with blockchain assessments and a number of draft proposals, dating back to 2016 and highlighting the opportunities that digital ledger technology can provide to government organisations and further disintermediation of financial services and markets.   

Unfortunately, political turmoil, Brexit, and the Covid crisis have thrown the UK back for many years, and the initial and subsequent FCA innovation sandboxes for blockchain companies have not been successful.  

To date, the FCA has repeatedly stated that it does not regulate cryptocurrencies itself, as they are only regulated in the UK for money laundering purposes.  

In January 2020 UK implemented the 5th Anti-Money Laundering Directive, which extended anti-money laundering and counter-terrorist financing (AML/CTF) regulations to include exchanges of fiat currency for cryptocurrency.   

As of the 10th of January 2020, the Financial Conduct Authority (FCA) was made responsible for the regulation of cryptocurrency service providers (CSPs) for the purposes of AML/CTF. The CSPs which are regulated are those that provide exchange services or are custodian wallet providers. 

The AML/CTF measures focus primarily on transactions involving exchanges between cryptocurrencies as well as exchanges between cryptocurrencies and fiat currencies, exceeding the latest EU directives.  

TVTG (Principality of Liechtenstein) 

The Token and Trusted Technology Service Provider Act (TVTG) also commonly referred to as the Blockchain Act has been officially passed into law on 01.01.2020 in Liechtenstein.  

Liechtenstein’s blockchain act can be simply described as the first and only real legal and regulatory framework for distributed ledger technology and its token economy.   

Compared to other token jurisdictions, the Blockchain Act from Liechtenstein offers unique and comprehensive regulation around the token economy and is the first legal framework within the European Economic Area (EEA).  

The law regulates civil law issues in relation to the client, asset, and ownership protection, as well as 11 key regulated roles for service provider supervision.   

As an example, the “Token Container Model” introduced by Liechtenstein defines the token as a container where all instruments can be placed (i.e. security tokens, patents, music rights, etc.), and provides adequate legal context for both issuer and investor. 

In addition, for securities to be represented in a token, the legal concept of the book-entry system (Wertrecht) has now been accepted in Liechtenstein legislation, making use of full “dematerialisation” and further showcasing the innovative nature of the legal framework. 

To date, Liechtenstein is the only EU country that provides a comprehensive and safeguarded environment for any issuer or investor to deal with any type of tokenised asset. 

eWPG (Germany) 

A new law is updating Germany’s securities legislation and its securities supervision: the German Electronic Securities Act. The BaFin (Federal Financial Supervisory Authority) has recently issued the registration and compliance guidelines for token registry providers, and we are currently going through the application process.   

The eWpG now makes it possible to issue bearer bonds, mortgage bonds (Pfandbriefe), and certain fund units in purely electronic format. By establishing electronic securities, German lawmakers are now supporting the use of blockchain technology and tokenised assets.  

Under the eWpG, issuers have the right to decide whether they wish to issue securities in the form of a certificate or by electronic means. It also enables the introduction of crypto funds via a crypto register.  

Whilst it isn’t comprehensive and doesn’t include all asset classes, the eWPG will likely include further securities in the future, such as electronic shares, and paves the way for further disintermediation and dematerialisation of financial assets. 

MiCA (draft stage, Europe) 

The Markets in Crypto-assets (MiCA) Regulation, introduced in 2020, provides a legal framework for crypto-asset markets to develop within the EU. It defines the handling of asset-referenced tokens, e-money tokens, utility tokens, and significant tokens.  

MiCA will apply to any person providing crypto-asset services or issuing crypto assets. This also includes tokenised financial instruments. MiCA imposes investor disclosure requirements on issuers of all crypto-assets covered by the regulation.  

As well as the requirements on issuers, MiCA also sets out a framework for regulated “crypto-asset services,” modelled largely on the range of investment services under MiFID II.  

MiCA will be applicable across the European Union (EU) to all member states once it is adopted. It should be in place by 2024, and early negotiations suggest it will already be negotiated in June 2022 as France adopted a similar regulatory framework already. 

Comparison and our take on the regulatory landscape 

MiCA will certainly be a true game-changer in terms of harmonisation and adoption for European issuers, service providers, and investors. Whilst regulatory messaging, safeguarding, and guidance have been patchy and confusing in the past, countries have made huge advancements to create a legal framework for tokenised assets.   

In our opinion, this paves the way for mainstream adoption of the underlying technology and processes around issuance, servicing, custody, and trading for all cryptocurrency and tokenised assets.