28 April 2021
On 10th October this year Liechtenstein’s Financial Market Authority (FMA) issued a warning stating that a Swiss-based crypto platform is not an exchange licensed by them and therefore not authorized to provide financial services subject to licensing in and from Lichtenstein, which was contrary to what was stated on the platform’s website.
The company in question promptly replied that functioning as an exchange for utility and payment tokens only does not require licensing by the FMA. They pointed out that their platform does not provide any services related to security tokens including listing and trading.
This event tells us two things: Firstly, regulators are becoming increasingly attentive to crypto landscape, which is a welcome and much needed engagement to serious market participants. And secondly, that the distinction between security and utility tokens is still a very sensitive issue to regulators who will demand a compliant and secure environment adapted to these sort of tokens before investors can start discovering them in a safe manner.
Let us briefly remember the origin of token differentiations. In 2016, when the number of Initial Coin Offerings (ICO) started to increase, anything went. In 2017 regulators, most prominently the US Securities and Exchange Commission (SEC), reacted by pointing out that tokens targeting returns should be classified as securities and therefore subject to strict regulation similar to that required for Initial Public Offerings (IPO) of stocks.
This led many ICO companies to rework their business models in such a manner that what they offered could be classified as a utility tokens. This meant that the token provided the holder with access to features within the ecosystem created by the project. In other words: utility tokens are not purchased with the explicit purpose of gaining a return.
In 2019, after the great crypto price slump of 2018, security tokens will finally find their place in the crypto landscapes in a way that will democratize access to the promising blockchain projects of the future and provide a compliant environment. An environment that will be able to support the classification licensed exchange, while offering services related to security tokens.
As the above case reminds us, the process of embedding security tokens and Security Token Offerings (STO) in a regulatory framework requires legal expertise that must adapt not only to different standards of various jurisdictions, but also stay in contact with regulators and anticipate changes as the march toward a more universal regulation continues.
Joining together the safety and security of the traditional finance with the potential of the new digital assets is not an easy task and patient but firm progress should take priority over the uncertain benefits that may be enjoyed by the position of the first mover.
There are benefits to being a first mover in any industry. And as the Tether example demonstrates in crypto, this positions might even bring some resilience to scandals and reputation damage. But a leading position cannot last without a firm foundation of compliance and regulations in the long run. And it is the long run that prudent and professional investors consider when it comes to an emerging industry.