ICO and DAO tokens under the EU financial regulatory framework - part 1


Ken Becher

Sep 14, 2021

Virtual currencies are typically issued through the so-called "initial coin offering" (ICO) or as part of decentralized autonomous entities, which must be evaluated from the perspective of securities act rather than payment law.

The issuance of virtual currency is mainly used as a means of investment, not as a means of payment. After summarizing the core principles of the framework of EU MiFID (Markets in Financial Instruments Directive), this paper analyzes whether this framework can be applied to virtual currency. As for whether traditional payment virtual currencies (such as Bitcoin) may have investment purposes—it can be concluded that they themselves can not be regarded as financial instruments. However, derivative instruments can use these virtual currencies as the fundamental value to constitute financial instruments under MiFID. For some new types of virtual currencies which are mainly used as a means of investment, if they are transferable and can transfer their rights to the issuer, then they can be regarded as transferable securities in the sense of the MiFID framework. German legislators have added financial instruments that can be applied to virtual currency which are not found in EU directives. Although this obviously deviates from EU law, it does put forward a current method to extend the scope of application of this legal framework.

So far, most of the EU regulatory agencies have adopted a wait-and-see attitude, while there have been also some agencies taking some proactive regulatory actions already. First of all, almost all EU market regulators have issued warnings to potential investors of ICO, introducing them to relevant risks and potential deficiencies in EU financial law regarding consumer protection. Some regulatory agencies have further established the "sandbox regulation."


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