On the 07th May 2018 the island of Anguilla in the British West Indies enacted the Anguilla Utility Token Offering Act (Act No. 4/2018) (“AUTO Act”). The AUTO Act represents the world’s first detailed legislation specifically dealing with the public offering of utility tokens. The Act, along with the regulations issued thereunder, sets out a detailed process under which an issuer of utility tokens can be registered as a regulated issuer of an initial coin/token offering (“ICO”). The AUTO Act represents the first step in the build-out of a complete and fully integrated blockchain ecosystem in Anguilla.
The Anguilla Approach – Phase 1
In 2017 approximately US$5.6b was raised in ICOs worldwide. In the first quarter of 2018, approximately US$6.3b was raised in ICOs worldwide.
Whilst the technology underwriting the blockchain ecosystem is undoubtedly complicated, the mechanism of an ICO is relatively straightforward. In broad terms, persons interested in raising funds to develop a blockchain project or “platform” would issue a blockchain based “token” to a wide cross section of the public in return for cryptocurrency representing a certain value. The cryptocurrency received would be used to fund the development of the platform and, ultimately, the tokens would then be used on or in that platform. Upon completion of the platform, the token holders would engage in the use of the platform through their tokens. The popularity of the completed platform would create a demand for the relevant token, leading to a price increase of such token, which in turn would allow token holders to sell a portion of their tokens to new users of the platform, for a profit and as a reward for their early confidence in the platform. Ultimately the price of the token would reach an equilibrium anchored by the ongoing popularity/unpopularity of the platform.
The simplicity of the process led to the ICO becoming a wildly popular mechanism through which innovative ideas could, at least in theory, be funded, developed and distributed to the public.
As the ICO ‘boom’ progressed, international regulatory agencies expressed some concern that such activity may fall within their regulatory ambit. In particular the regulators of “securities” became concerned that certain ICO activity may fall within their regulatory perimeter. The overarching perception of such regulators was that if a particular token could be categorized as a “security” then the issuance of such a token to the public would fall to be regulated as a public “securities offering”. By contrast, if the particular token did not fall to be categorized as a “security”, it fell outside the regulatory perimeter and consequently the relevant ICO could be conducted unregulated. Since blockchain tokens represented a new concept, each national regulator was required to consider its own existing securities laws and reach its own determination as to whether or not a particular token fell within their unique definition of a “security”.
The result was that by mid to late 2017 there existed considerable uncertainty amongst prospective issuers of tokens as to whether an ICO of their token would constitute a “security offering” in a particular country. Concomitantly, there existed the perception amongst issuers that if their token did not fall within the definition of a “security” then an ICO of such a token would be wholly unregulated. Notwithstanding this market uncertainty, national regulators were circumspect about issuing any definitive statements or guidance as to what would be considered a “security” by their respective agencies, presumably out of concern of construing the category too widely or too narrowly. The aggregate result was the unsatisfactory situation whereby issuers could not know in advance whether or not their ICO had to be conducted in compliance with specific securities laws and, somewhat contradictorily, many ICOs were conducted on their internal assumption that the relevant tokens were not “securities”, and consequently the ICO would be wholly unregulated.
During this period, the terms “security token” and “utility token” became more widespread, as a means of distinguishing tokens that were likely to fall within the perimeter of securities regulators (security tokens) and tokens that were likely to fall outside such perimeter (utility tokens) and would therefore be unregulated.
Against this background, the blockchain industry in Anguilla identified the difficulties being faced by legitimate ICO candidates and proposed to construct a legal framework within which ICOs could be conducted in and from within Anguilla.
In considering the issue, it appeared axiomatic that ICOs based on a utility token paradigm possessed unique features, to the extent that such ICOs generally :
a. involved crowd based micro financing;
b. encouraged wide distribution of tokens to create the network effect;
c. relied on engagement of token holders with the platform;
d. often allowed for the participation and collaboration of token holders in developing and testing the platform; and
e. rewarded subscribers in the form of increased value of the tokens, based on the network effect engagement of such subscribers.
Whilst these features served to distinguish such ICOs from the commonly perceived notion of a securities offering, it appeared imprudent that the only available alternative would be that such ICOs would be wholly unregulated.
Accordingly, it was proposed that while utility token offerings could sensibly be excluded from securities regulations, the regulatory paradigm should be considered afresh and regulations be drafted to allow a safe and orderly offering of utility tokens.
The resultant AUTO Act was drafted to:
(a) Provide a clear means of determining whether a token would be considered a non-security token i.e. a utility token; and
(b) Provide a regulatory framework within which an initial offering of utility tokens could be conducted, including provisions requiring :
i. Identification of the initiating persons of the ICO;
ii. Sufficient information to be provided to prospective subscribers to allow them to make an informed decision;
iii. Statutory remedies for subscribers in the case of misleading information;
iv. Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) information with respect to subscribers collected on a tier-based system;
v. Escrow provisions to safeguard subscription funds pending the successful completion of the ICO; and
vi. Updated information relating to the development of the platform to be accessible by subscribers, following the ICO and until the point of release of the platform
The term “utility token” was specifically defined to allow participants a clear understanding as to whether a proposed token offering fell within or without the regulatory framework of the AUTO Act, as follows:
(a) does not, directly or indirectly, provide the holder(s) thereof, individually or collectively ith other holder(s), any of the following contractual or legal rights—
(i) ownership or equity interest in the issuer or in any person or pool of assets,
(ii) entitlement to a share of profits, losses, assets or liabilities of the issuer or any other person or pool of assets (other than, in the event of liquidation or dissolution of the issuer, to receive a portion of (but not in excess of) the original subscription price paid for the utility token in the initial utility token offering (“Limited Return Rights”)),
(iii) legal status as a creditor (other than with respect to utility token features, or with respect to Limited Return Rights), or
(iv) entitlement to receive distributions of profits, revenues, assets or other distributions from the issuer or any other person or pool of assets other than with respect to Limited Return Rights; and
(b) has or will have in the future, upon launch of the issuer’s utility token platform, one or more utility token features;
“utility token features” means the contractual right for a holder thereof to utilise a token to—
(a) have access to, become a member of, or become a user of a utility token platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer,
(b) use as the sole or preferred (by economic discount, preferred access, preferred use or otherwise) purchase, lease or rental price for the products and/or services provided or proposed to be provided by or in the utility token platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer, or
(c) use as a means of voting on matters relating to the governance, management or operation of the utility token platform developed and managed, or proposed in the issuer’s white paper to be developed and managed, by the issuer;”
Since the enactment of the AUTO Act in May 2018, the Anguilla Financial Services Commission has issued clear regulations governing the procedure for registration of a utility token offering and has provided useful guidance notes to enable a seamless navigation of such procedure.
The Current State of the International Regulatory Environment
Since early 2018, there has been increased engagement by the international regulatory community to provide some guidance to the blockchain industry. While such guidance is certainly welcome, there still appears to remain a significant degree of uncertainty as to the regulatory perimeter that obtains in certain jurisdictions. The situation is not greatly improved by the fact that there appears to be little consensus between various countries as to what constitutes a “securities token”. By way of example:
- The US appears to take a broad approach to the classification of securities tokens. In the Matter of MUNCHEE INC Administrative Proceeding File No. 3-18304 (11 Dec 2017), the SEC appears to have taken a liberal interpretation of the “Howey Test” in considering whether an ICO is a “securities offering” by proffering the following criteria: (1) whether the tokens are immediately usable (though not conclusive) (2) the buyer’s expectation as to whether the tokens will rise in value (3) whether an expected rise in value will be derived from the efforts of others (4) whether there will be a secondary market for the tokens (5) how the ICO offering is advertised, and (6) how the proceeds of the ICO will be used.
- The UK by contrast has taken a more defined approach in interpreting the relevant securities laws. “The tests [the SEC] applies are different [from the FCA]. It applies them on the basis of case law, which is more like asking, ‘does it look and feel like an investment, because you are investing for some form of speculative return?’, whereas the definitions of a ‘financial instrument’ are laid down in legislation here. It is different, but if it is a financial instrument that looks like a form of security, or if there is a form of security [...] it will be regulated. [...] For utilities, where it is not conferring rights to future returns but there might be a future reward of some description, it is outside the perimeter.” David Geale, Director of Policy FCA in House of Commons Treasury Committee (Crypto Assets) 22nd Report of Session 2017– 2019 (19 Sep 2018) at paragraph 83
○ More recently, the Financial Conduct Authority explained that“(w)hile we are aware that exchange tokens can be acquired andheld for the purpose of speculation rather than exchange, as token-holders may anticipate that the value of these tokens will increasein the future on cryptoasset markets, we do not view this as beingsufficient for exchange tokens to constitute Specified Investments.The analogy would be an individual holding different fiat currency ora commodity, both of which are unregulated, in the hope of a gain.”UK Guidance on Cryptoassets (23 Jan 2019) at paragraph 3.36 - The Swiss approach appears to lie somewhere between the US and UK approach by
recognizing categories of tokens – payment tokens, utility tokens and asset tokens –
but providing that “(i)f a utility token additionally or only has an investment
purpose at the point of issue, FINMA (The Swiss Financial Market Supervisory Authority) will treat such tokens as securities (i.e. in the
same way as asset tokens).” FINMA Guidelines for Enquiries Regarding the
Regulatory Framework for Initial Coin Offerings (ICOs) 16 February 2018 at
paragraph 3.2.2.
Whilst these guidance statements do assist in communicating the regulatory positions of the various jurisdictions, it does appear that there remains an absence of definitive parameters in the international regulatory environment. Concomitantly, it remains the case that if a particular token falls outside the regulatory perimeter then, at least with respect to securities laws, an ICO of such tokens would be wholly unregulated.
The Current State of the Anguilla Regulatory Environment
Consistent with the creation of a new regulatory paradigm for utility token offerings, the
relevant stakeholders in Anguilla are committed to a systemic approach to the regulation of
blockchain initiatives, based on (a) identifying the relevant blockchain initiative (b)
considering the specific issues which may arise with regard to such initiatives, based on an
analysis of the data available for such initiatives and (c) where necessary, creating a bespoke
framework for regulation the specific initiative.
To this end, on the 24th January 2019, a Digital Ledger Technology Advisory Committee
was established in Anguilla consisting of select private and public sector persons actively
working in the blockchain industry. The statutory functions of the Committee include
advising the Financial Services Commission on matters relating to blockchain technology
and to make recommendations to the Commission on any matter relating to blockchain
technology. It is anticipated that the Committee will identify specific initiatives in the
blockchain industry that require new regulatory frameworks, and assist in the creation of
unique regulatory frameworks to allow such initiatives to be conducted in a safe and
vibrant environment.
The Anguilla Approach – Phase 2
In much the same way that the AUTO Act was created to address a specific blockchain
initiative, in the form of utility token offerings, the area of utility token exchanges has been
identified as an area that requires regulatory clarity and innovation.
As matters currently stand, the definition of a token as a utility token or exchange token,
also impacts any exchange that allows for the trading of such tokens. If the token is
considered a security token, then any exchange upon which such token is traded would fall
to be regulated as a “securities exchange”. As with the case of ICOs, the absence of clear
definitions of what constitutes a security token presents significant difficulties in token
exchanges assessing whether or not they fall to be regulated as “securities exchanges” in any particular country.
Concomitantly, in the circumstances where none of the tokens traded on a particular
exchange may be classified as security token, such exchange would logically fall wholly
outside the regulatory perimeter.
Accordingly, there would appear to currently be a number of prominent exchanges that are
operating within an unclear regulatory regime. Such a situation presents an unwelcome
and unquantifiable risk for operators of the exchanges, as well as account holders at such
exchanges, who may be inadvertently embroiled in any regulatory disputes concerning the
exchanges.
As activity on an exchange would appear to be the logical progression for subscribers of a
utility token offering, the blockchain industry in Anguilla has determined that the creation
of a regulatory framework for utility token exchanges would be a logical progression from
the AUTO Act. Accordingly, the Anguilla Utility Token Exchange Act has been prepared
and is currently in the process of consultation with the Financial Services Commission and
the Government of Anguilla, with the intention of enacting such legislation in the near
future.
The proposed Anguilla Utility Token Exchange Act utilizes the same definition of “utility
tokens” as used in the AUTO Act and allows for the listing of tokens issued under the
AUTO Act, as well as previously established utility tokens.
It is anticipated that once this legislation is enacted, established exchanges would be
permitted to obtain licensure in Anguilla and be able to operate within a clear regulatory
framework.
The Anguilla Approach – Next Phases
It is the intention of the stakeholders in Anguilla to continue to assiduously monitor the
international blockchain industry to identify and analyze specific issues, and to create
practical and prudent regulatory solutions to allow for the continued development of the
new industry while protecting the public from the worst excesses of same. Ultimately, by
linking these disparate parts of the blockchain industry, it is intended that a new
blockchain ecosystem can be evolved through this novel approach.
18th February 2019
Ravi A. Bahadursingh
LL.B, LL.M, L.E.C, T.E.P.
Barrister (Gray’s Inn)
Chancery Lane Chambers
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