Research Law

Digital Assets, an Evolving Market

, by Claudio Todesco
How can you regulate a token that may or may not be a financial asset, but could become one?

The answer to a simple question could decide the fate of Initial Coin Offerings (ICOs), the innovative form of raising funds from individual investors by selling digital assets, the so-called coins or tokens. The question is: are ICOs financial products? Filippo Annunziata (Department of Legal Studies) is working on a paper focused on their definition and regulation.

"Tokens are usually – and simplistically – divided into security (or financial) tokens and utility tokens. The former are digital assets that come with a right, which is similar to the right of an investor who expects to receive a risk-related remuneration. Utility tokens come with the right to receive goods or services. According to legislators and scholars alike, only the former are financial products. In hybrid cases, the trend is to check which component is predominant". Annunziata says this is a narrow idea because it neglects the size of the secondary market. In other words, what happens to tokens after an ICO?

"Once a token is exchanged on a trading platform, for instance on a Multilateral Trading Facility, it can qualify as a financial asset regardless of whether it was issued as a security or as a utility token". Secondary markets are struggling to take off because of technical issues inherent to the design of a blockchain platform as fast and efficient as a trading platform. However, this technological constraint will sooner or later be removed. In the meantime, the lack of a secondary market is holding back the primary market.

"It is worth making another point clear, that is the relationship between ICOs and cryptocurrencies", Annunziata says. "They are structurally different and should not be confused. In ICOs there is a company that issues digital assets that come with a right. In the case of cryptocurrencies like Bitcoin there is not a single issuer". The two may interlace, nonetheless. An ICO can be paid for with a cryptocurrency and a token could turn into an exchange currency over time.

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