ECB Uncovers Philosopher’s Stone

Crypto-assets do not represent financial claims or proprietary rights, ECB says

Last month, the ECB Crypto-Assets Task Force released a paper entitled “Crypto-Assets: Implications for financial stability, monetary policy and payments and market infrastructures.” One of the goals of the paper is to put forward a common definition of the term ‘crypto-assets’ that can serve as a basis for the consistent analysis of this phenomenon.

A ‘crypto-asset’ is defined in the paper as denoting “any asset recorded in digital form that is not and does not represent either a financial claim on, or a financial liability of, any natural or legal person, and which does not embody a proprietary right against an entity.” 

The distinctive feature of crypto-assets,” the task force continues, “from which they derive their specific risk profile, is the lack of an underlying claim/liability. Units of a crypto-asset may be used as a means of exchange and are de-facto considered by their users as assets, in the sense of ‘something of value’, although they do not correspond to the liability of, and claim on, any party. As a consequence, crypto-assets are fundamentally different from various forms of financial claims and/or their digital representation using the technology and possibly the infrastructure that underpin crypto-assets.” 

Crypto-assets fall outside the scope of PSD2, EMD2 and MiFID II

Building on its analysis and definition of crypto-assets, the task force notes the following:

  • Crypto-assets are not electronic money within the meaning of EMD2.
  • Nor are crypto-assets scriptural money in the form of commercial bank money or central bank money.
  • Therefore, crypto-assets do not fall within the scope of PSD2.
  • Furthermore, crypto-assets in itself are not ‘financial instruments’ within the meaning of MiFID II.


Launch of research project

Distributed Ledger Law (DLL) today announces the launch of its legal research project “” DLL’s founder took up a position as PhD researcher at KU Leuven, Europe’s most innovative university according to Reuters, to engage in a multi-annual research project on the legal aspects of cryptosecurities.

Several jurisdictions have adopted or are currently adopting legislation to permit the issuance of cryptosecurities by private companies. However, the current securities law framework may not be equipped to provide an adequate answer to what cryptosecurities are and how they can be transferred in a valid and effective way. The main reason for this is that the current securities markets are centralised, intermediated, and built on the assumption of imperfect traceability of securities. By contrast, distributed ledger technology is designed to facilitate decentralisation, disintermediation and perfect traceability. The research project seeks to map and mitigate the legal risks that emerge from the clash of these paradigms.

This objective will be pursued by starting from three seemingly simple questions:

  1. To what extent do cryptosecurities differ from traditional securities?
  2. What legal gaps occur when the current legal framework governing the nature and transfer of traditional securities is applied to cryptosecurities?
  3. How can these gaps be bridged?

The project’s full working title is “The Nature and Transfer of Cryptosecurities: Mapping and Mitigating Legal Risk.” Progress updates will be shared here on Distributed Ledger Law.

Classifying Cryptosecurities


Distributed Ledger Law recently published an article in the Belgian legal journal Tijdschrift voor Rechtspersoon en Vennootschap – Revue pratique des sociétés (TRV-RPS).[1] The article discussed, among others, some of the legislative initiatives that were taken so far by jurisdictions in the US and Europe to enable the issuance of “cryptosecurities”: securities (such as shares or bonds) that are held, transferred and/or issued by means of distributed ledger technology.

One of the article’s takeaways is a proposed classification of cryptosecurities.

Classification matrix

Cryptosecurities exist in many variations, depending on the extent to which distributed ledger technology (DLT) is used, and the extent to which the cryptosecurities receive legal recognition.[2] A distinction can be made between (i) the recording (i.e., keeping the securities ledger up to date), (ii) the transfer and (iii) the issuance of cryptosecurities. In this matrix, we propose a descriptive classification of cryptosecurities based on these three elements.

Use of DLT and legal recognition are essential parameters of a cryptosecurity. It can therefore be useful to compare initiatives relating to cryptosecurities with one another on the basis of these parameters. This helps in quickly getting to the essence of an initiative, and facilitates the communication around the initiative. The classification matrix is intended to provide a framework for this.


Let’s apply the proposed classification to some real-world examples.

1. Example of a cryptosecurity of category A1: Borsa Italiana has launched an initiative to allow non-listed SME’s to keep track of their stock ledger by using a DLT platform.[3] The platform will only be used to keep track of the cap table, not to transfer shares. Hence, there is only a weak use of DLT (i.e., category A). The project will stay within the boundaries of the existing legal framework; there is no explicit legal recognition of the DLT principles used (i.e., category 1).

2. Example of a cryptosecurity of category B1: In December 2016, Inc., a North-American online retailer listed on Nasdaq, completed the first-ever issuance of cryptoshares.[4] The cryptoshares were issued in the form of book entry shares (for which no share certificates were issued) registered in the stock ledger of the issuer in the name of the shareholders.[5] The shares are exclusively traded on a multilateral trade facility that is operated by a subsidiary of Overstock. com Inc. Transactions in the cryptoshares are settled almost immediately (t+0). The platform comes with some quite radical transfer restrictions built in: the cryptoshares cannot be sold short nor pledged.

In summary, a transaction would unfold as follows.[6] First, the transaction is recorded in the internal ledger of the multilateral trade facility. The updated ledger is then automatically published on the internet (on an anonymised basis). Finally, a cryptographic hash of the updated ledger is registered on the Bitcoin blockchain. This cryptographic hash serves as a digital fingerprint that can be used to verify the accuracy of the internal ledger.

Taking this structure into account, the Overstock cryptoshares can be classified as category B1: there is a moderate use of DLT (category B), but no explicit legal recognition (category 1).

Category C3 cryptosecurities

Several jurisdictions (such as Delaware, France and Wyoming) have been industriously enacting legislation to enable the issuance of cryptosecurities by companies that are governed by their respective laws. If one follows the proposed classification matrix, this makes them the first “category 3 jurisdictions”. Undoubtedly, the first category C3 cryptosecurities will soon be issued.


[1] M. Van de Looverbosch, “Crypto-effecten: tussen droom en daad”, TRV-RPS, 2018(3), pp. 193-207.

[2] For a classification of cryptosecurities according to legal recognition, see Direction Générale du Trésor (France), “Consultation publique sur le projet de réformes législative et réglementaire”, 24 March 2017, pp. 4-5, For a discussion of degrees of integration of DLT with the current intermediated structure of listed securities, see P. Paech, “Securities, Intermediation and the Blockchain: An Inevitable Choice between Liquidity and Legal Certainty”, LSE Law, Society and Economy Working Paper 20/2015, 26-28. For a reflection on degrees of technological support, see K. Werbach, “Trust, But Verify: Why the Blockchain Needs the Law”, pp. 43-48,

[3] See

[4] Zie (bezocht 30 december 2017).

[5] This is remarkable, because in the US almost all shares of listed companies are registered in the stock ledger of the issuer in the name of Cede & Co., a nominee of Depository Trust Company.

[6] See the prospectus dated 9 December 2015, pp. 34-36, in particular p. 36, and the prospectus supplement dated 14 November 2016, pp. S-52 – S-57, both available via the EDGAR database of the US Securities and Exchange Commission, at

DEEP Securities

France beat other European countries to the draw. On 8 December 2017 an Order was given by the French President to allow non-listed securities to be issued on a blockchain. The Order is yet to be ratified by the French Parliament and will enter into force on 1 July 2018 at the latest. After Delaware, France thus becomes the second jurisdiction to enact legislation expressly allowing companies to issue cryptoshares. Other jurisdictions are expected soon to follow.

The French Order differs from the Delaware Bill in two main respects:

  1. Unlike the Delaware Bill, the French Order only allows for the issuance of non-listed securities on a blockchain.
  2. Unlike the Delaware Bill, the French Order is not limited to shares, but also permits the issuance of securities other than shares (such as bonds or units in collective investment undertakings).

The French Order also has at least two things in common with the Delaware Bill:

  1. Like the Delaware Bill, the French Order is limited to minimal additions to the existing legal framework. Words and phrases are surgically added to the French Monetary and Financial Code and the French Commercial Code.
  2. Like the Delaware Bill, the technical framework of the French Order is yet to be worked out. An implementing decree will need to be adopted in order to specify more detailed requirements of DLT-platforms used for issuing cryptosecurities.

The French Order expressly provides that cryptosecurities will be eligible to be pledged according to the same procedure as book-entry securities. The implementing decree will need to specify how that will work.

The French wouldn’t be the French if they wouldn’t have come up with a French translation of distributed ledger technology: “dispositif d’enregistrement électronique partagé”. Although its acronym is far catchier: “DEEP”.

Links: Order (French) | Report to the President (French)

FCA on regulation of ICOs

Yesterday, the UK’s Financial Conduct Authority (FCA) issued a consumer warning about the risks of Initial Coin Offerings, in which it also briefly touched upon the regulatory treatment of ICOs. Some highlights are discussed below.


Although stating the obvious, the FCA’s description of the risks of ICOs is a good reminder of why one should not tender one’s life savings in yet another $200M+ token sale:

  • Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
  • No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
  • Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
  • Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
  • Inadequate documentationInstead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
  • Early stage projectsTypically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

The FCA goes on to say that “a digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all.” (emphasis added)


On the question whether ICOs are regulated by the FCA, the FCA makes three caveats:

  1. Some ICOs may involve regulated investments.
  2. Firms involved in an ICO may be conducting regulated activities.
  3. ICOs may fall within the ambit of the prospectus regime.

In the FCA’s words:

Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.

Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.

Yours truly is not an English lawyer, so I gladly leave the analysis of what these caveats mean to my English colleagues. One of such English colleagues is Preston Byrne.  In his blog post, Byrne points out that “the key here is that the definition of what a security is, for the purposes of issuing prospectuses is defined in statute, is highly prescriptive, and at least on my reading does not create a broad, flexible, common law-style definition of what a “security” is like the Howey Test does in the US.

As a reminder, the US Securities and Exchange Commission (SEC) recently unleashed the Howey Test on the ICO of The DAO in its Report of Investigation on The DAO.

Although continental token sellers may for the time being find textual arguments in the existing regulatory framework to argue that they are not conducting regulated activities and are not subject to the requirement to draw up a prospectus (that is, until that framework changes to include ICOs…), it will be interesting to see how a US-style functional approach may influence EU financial regulators in assessing token sales. It also remains to be seen to what extent the set-up of the platform and in particular the utility value of the token in question might prevent the token seller from running afoul of securities legislation.

EU looking at blockchain to promote transparency in capital markets

The European Commission is working on the development of a DLT-based “European Financial Transparency Gateway”, said Commissioner Valdis Dombrovskis, in charge of Financial Stability, Financial Services and Capital Markets Union, in response to a question asked in the European Parliament earlier this week. The project aims to connect and make available data which listed companies must report to national databases.

Interesting to see how the same technology was once used by anarchists to hide from government and will soon be used by a supranational organisation in regulating its capital markets. A bitcoin clearly has two sides…

Trusted timestamping of schedules to a contract

In many European jurisdictions, it is common for landlords and tenants to inspect the property prior to the start of the tenancy in order to document the condition of the leased premises. This way, arguments at the end of the tenancy over whether or not any damage to the property was caused by the tenant can be avoided. Such pre-tenancy inspection is often supported by photographs of the leased premises, certainly so if the report of the pre-tenancy inspection is drawn up by a real estate expert. A paper copy of the report would then be attached to the tenancy agreement as a schedule.

In such cases, i.e., where digital documents are attached to a contract as a schedule, it would make sense to attach them to the contract in digital form, rather than in paper form. This way, loss of quality can be avoided, and the schedule will be easier to verify in case a dispute would arise. If, for instance, there would be a crack in one of the walls of the leased premises, digital photographs (which can be enlarged) will offer greater verifiability than paper copies of the photographs in determining whether or not such crack was there prior to the start of the tenancy.

If the photographs are attached to the contract in digital form, on a USB stick for instance, it is of course essential that they cannot be tampered with (e.g., ‘photoshopped’). Although such tampering would cause the landlord’s version and the tenant’s version of the photographs to differ from one another, it cannot reliably be determined which party has engaged in the tampering.

A convenient and secure solution to this problem would be to time-stamp the photographs using a blockchain. Many online service-providers offer trusted time-stamping services, either for a subscription fee, a one-time fee, or free of charge. One free variant with a user-friendly interface is OriginStamp. This website works as follows. First, OriginStamp hashes your file using the cryptographic hash function SHA256. The hash is immediately published on twitter. Next, it collects the hashes of all files received from all users over the course of a day and hashes these hashes together using SHA256 to form one single hash. The latter hash is then used to generate a Bitcoin address. Finally, once a day, the smallest possible amount of Bitcoin is sent to the Bitcoin address so generated. This way of working enables secure and reliable verification that an exact version of a particular file was submitted on a particular time and date. Any amendments to the file, however small, will be immediately detected, as the amended file will generate a hash that is different from the hash of the original document.

Turning back to our tenancy hypothesis, the landlord and the tenant could compress the photographs taken during the pre-tenancy inspection into a .zip-file and submit the .zip-file to OriginStamp.  The resulting hash could then be included in the execution version of the tenancy agreement. After execution of the contract, each of the parties receives a copy of the agreement, which includes the hash of the photographs taken, and a USB stick containing the photographs. If a dispute would arise afterwards, and one of the photographs serves to support a claim, it can be easily demonstrated that such photograph is the original and unaltered photograph.

Delaware paves the way for blockchain stock ledger

On 30 June 2017, the Delaware House of Representatives approved a bill amending the Delaware General Corporation Law to provide specific statutory authority for Delaware corporations to use a blockchain for the creation and maintenance of corporate records, including the corporation’s stock ledger.

Links: Synopsis | Bill

Financial Stability Board takes a closer look at DLT

In its report dated 27 June 2017, the Financial Stability Board (FSB) assesses possible financial stability implications from FinTech.  While emphasizing the benefits Distributed Ledger Technology can have for the financial system, the FSB identifies cross-jurisdictional compatibility of national legal frameworks and data privacy as some of the concerns that merit regulators’ attention.

Links: Full report | Executive summary