Part 5/5 – Hybrid Forms: A token may have features of security token, currency token and/or utility token. These hybrid forms require a case by case assessment of applicable regulation.
part 1 outlines general principles of Tokenization
part 2 assesses the features of Security Token
part 3 assesses the features of Currency Token
part 4 assesses the features of Utility Token
more on Blockchain/DLT applications on our Blockchain In-Focus page.
Hybrid forms are not a fourth category
Besides the pure forms of the mentioned tokens, there are also hybrid forms in practice [i]. If and to what extent a token can still be considered part of its respective category and at what point a different treatment must be carried out, has to be examined on a case-by-case basis by means of the criteria presented. Hybrid forms are therefore not a fourth token category, but are only supposed to serve as an indication for the required legal isolation of the application areas of different legal regulations. Yet, the mere circumstance that a utility token is purchased by a purchaser with profit expectations does not make it a hybrid utility investment token[ii]; the right transferred via the token is decisive in this respect.
The analysis of the different token categories has shown that there are tokens in different forms. Based on the aforementioned results, consequences can be drawn for the individual participants (Crypto exchanges, wallets, issuers, purchasers)[iii]. The questions remaining after this presentation, in particular, are: Which activities (issuing, deposit, trade) require permission in which form? When does the Money Laundering Act apply[iv]? Which are the obligations to provide information? Which regulations concerning consumer protection are to be observed? Do the laws regarding general terms and conditions apply?
It can be concluded that the classic terms and categories are still valid in the seemingly unregulated area of the blockchain usage. There is no need for a legislative act in order to provide a regulatory and legally appropriate framework for tokens.
Should there be a legislative regulation in the future, it can be assumed that it will actively change the current legal quality of tokens and that it will represent a legal special regulation, which will probably lead to new distinction problems regarding the current system already shaped by various doctrines and the European regulations. This will not be possible without transitory regulations.
Due to the international perspective on tokens, there is reason to doubt that a national solo action (as in Malta, for instance[v]) is reasonable. However, in defiance of the legal clarity, it is desirable that BaFin issues a clarification on the differentiation between the rights regarding Capital Market Law and consumer protection laws on the blockchain in order to provide an increased level of legal security for the participants, which goes beyond the advisory letter and an article in its publication series.
* The authors thank Timo Förster for his support.
* This article was originally published in German language in Zeitschrift für das gesamte Kreditwesen 2018 (21-23), p. 1117-1121, p. 1222-1226.
[i] Some 99% of utility tokens/security tokens serve as a means of payment within their network and are therefore also currency tokens. Cf. Blockchain Bundesverband, Regulation of tokens, loc. cit., p. 11.
[ii] Cf. also on the hybridity of utility tokens Hacker/Thomale, loc. cit., p. 13 and 33 et seq.; Klöhn/Parhofer/Resas, JBB 2018, 89, 102.
[iii] See also Vice President Dombrovski, European Commission (EC), SPEECH/18/1242.
[iv] The amendments defining the concept of virtual currency to be implemented by Directive (EU) 2018/843 concerning the revision of the Directive on Money Laundering, are interesting here.
[v] See Virtual Financial Assets Bill (Bill No. 44 of the 13th term).