Category: Cryptocurrency Law


Cryptocurrencies and Money Transmitter Laws

Arrow both ways
Wherefore Bitcoin?

Evaluating the rules behind whether you, as a Bitcoin buyer or seller, are functioning as a money transmitter under state law can be baffling.  Cryptocurrencies and money transmitter laws coexist in mostly uncharted waters here at the dawn of 2020.  The following is a note examining both both the broad concepts and the specific provisions of money transmitter statutes as they pertain to cryptocurrencies (particularly Bitcoin) in New York, New Jersey, California, Florida and Wyoming.

Each of the United States has its own regulatory regime when it comes to money services businesses, particularly money transmitters.  While money transmission at the federal level is almost exclusively concerned with money laundering, the state laws’ greater complexity is derived in part from additional concerns on the part of state lawmakers, such as consumer protection.  For this reason, as I will describe below, there are a host of net worth, bonding and reporting requirements that make state law money transmission licensing and ongoing compliance daunting.

It is helpful to group the states conceptually into three different categories in order to evaluate how they treat cryptocurrencies.  The first group consists of the “silent” states, that is, those that have not specifically regulated or incorporated the unique characteristics of cryptocurrency into their statutory schemes.  That a state is “silent” could be considered “good” from one perspective if its silence means that that particular state was not inclined to regulate cryptocurrency (the minority view), but might be considered to be “bad” if the absence of regulation means uncertainty and the risk of being accused of operating an unlicensed money transmission business, which in most states is a criminal offense.  This latter point of view is, unfortunately, how I view the majority of the states we consider herein.

Apart from the silent states we have the “regulated” states, that is, those states that in one form or another have spoken definitively about how cryptocurrency fits into, or is excluded from, their existing money transmitter laws.  Among the regulated states we have two types, those in which regulation has, from most objective perspectives, advanced the ability to do business with cryptocurrency in that state (Wyoming), and those whose regulatory scheme has added next-to-impenetrable barriers for smaller firms looking to comply in good faith with state law (New York).  The third, somewhat more opaque category consists of states that have issued some form of guidance, in the form of pronouncements by public bodies, court cases, and the like, but have not adopted a single, uniform approach to regulating (or not regulating) cryptocurrency.  This latter category could be grouped with the “silent” states mentioned above, from the standpoint that these half measures, while perhaps a start, have introduced further uncertainly into the state regulatory landscape.

These laws are forever changing and evolving, and the difficult and stifling state of state laws is the source of much scholarly compliant.  It is absolutely worth knowing the contours of state money transmitter law, too, in order to cherry pick favorable jurisdictions that are likely to improve first.  Further, there are encouraging developments, particularly in Wyoming, with that state’s creation of a new type of federally chartered financial institution that may pave the way for more open banking relationships and more sane compliance regimes.

As we look through each state’s laws, despite the differences in the specifics of compliance there are nevertheless a number of unifying concepts that makes understanding easier.  Aside from being an interesting philosophical question in the cryptocurrency community, what constitutes “money” under state law is fundamental to understanding the states’ money transmitter statutes.  A central consideration is whether the state considers “money” as only including only that which is backed by a sovereign authority, or whether the statutory definition is more broadly concerned with value.  California, for example, does not include virtual currencies within its definition of what is “money”:  “’Money’ means a medium of exchange that is authorized or adopted by the United States or a foreign government.”  The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.   Wyoming, in contrast, does not define “money” per se, but rather includes “money or monetary value” within the scope of its definition of “money transmission”.

Next are the common regulatory characteristics.  Based on my research, in no state is acquiring a money transmitter license a matter of right, but rather a matter of “privilege”, which must be applied for.  In other words, each state ultimately exercises discretion in whether or not to grant the license, even one follows the application procedures perfectly.  Second, there is a sometimes-substantial application fee.  Third are net worth requirements (that is, applicants must show a minimum net worth in order to qualify to apply, ostensibly to protect consumers from thinly capitalized businesses more likely to disappear with their money).  Fourth are ongoing reporting obligations to the state, sometimes requiring submitting reports to the state as frequently as quarterly.  Fifth are ongoing “examinations”, which, at a minimum, may be conducted at the discretion of the state, and which the examined party is expected to pay for (!)  Sixth are the penalty provisions, which in some states makes unlicensed money transmission a criminal offense.  Some states have what we might term “add-on” provisions, such as the requirement to maintain anti-money laundering programs as part of state compliance, as is the case in Florida.

For each of our selected states, therefore, we follow the following order of analysis: (1) how does the state define “virtual currency” (the term most often used at the state level), “money” and “money transmission”, and does cryptocurrency fall within those definitions?; (2) if cryptocurrency is considered money, what types of activities constitute “money transmission”, requiring a money transmitter license?

New York State
New York

New York

As many are aware, in an effort to regulate cryptocurrency related businesses the Superintendent of The New York State Banking Department created the “BitLicense” by regulation.  These regulations pertain to “virtual currency business activity” taking place within the state.  The BitLicense regime exists on top of and in addition to New York’s money transmitter law.

We consider the BitLicense provisions first.  The definitions section provides the following relevant definitions:

(g) New York means the State of New York;

(h) New York resident means any person that resides, is located, has a place of business, or is conducting business in New York;

(p) virtual currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value.  Virtual currency shall be broadly construed to include digital units of exchange that: have a centralized repository or administrator; are decentralized and have no centralized repository or administrator; or may be created or obtained by computing or manufacturing effort. Virtual currency shall not be construed to include any of the following:

  • digital units that:

(i) are used solely within online gaming platforms;

(ii) have no market or application outside of those gaming platforms;

(iii) cannot be converted into, or redeemed for, fiat currency or virtual currency; and

(iv) may or may not be redeemable for real-world goods, services, discounts, or purchases;

(2) digital units that can be redeemed for goods, services, discounts, or purchases as part of a customer affinity or rewards program with the issuer and/or other designated merchants or can be redeemed for digital units in another customer affinity or rewards program, but cannot be converted into, or redeemed for, fiat currency or virtual currency; or

(3) digital units used as part of prepaid cards;

(q) virtual currency business activity means the conduct of any one of the following types of activities involving New York or a New York resident:

(1) receiving virtual currency for transmission or transmitting virtual currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of virtual currency;

(2) storing, holding, or maintaining custody or control of virtual currency on behalf of others;

(3) buying and selling virtual currency as a customer business;

(4) performing exchange services as a customer business; or

(5) controlling, administering, or issuing a virtual currency.

23 CRR-NY 200.3(a) then provides us with the fundamental requirement that:  “No person shall, without a license obtained from the superintendent as provided in this Part, engage in any virtual currency business activity…”

From the statutory language above we can conclude the following:  (1) Bitcoin is almost certainly a “virtual currency”; (2) a wide range of activities qualify as a “virtual currency business activity … involving New York or a New York resident”, most specifically, “transmitting virtual currency”, “storing, holding, or maintaining custody or control on behalf of others”, and “buying and selling virtual currency as a customer business.”  This may be the case notwithstanding that the Bitcoin one receives is mostly from sources outside of New York, if the remission of fiat currency is to a New York resident.

The BitLicense application and compliance processes are onerous.  The application fee is $5,000.00.  The capital requirements are determined by the Superintendent and set in an arbitrary amount “sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to each licensee.”  Such amount could range from tens to hundreds of thousands of dollars.  The checklist for the documents and information to be submitted with the application runs ten pages and includes everything from credit reports of the company principals to flow-charts and diagrams of one’s exact business processes.  The applicant must have a number of existing processes already established, including anti-fraud, anti-money laundering, cyber security, privacy and information security policies.  The applicant must post a bond and agree to a host of supervisory and oversight provisions on the part of the state, including seeking government approval of any change of control of the company and submitting to an examination by the Department “not less than once every two years”.  Quarterly and annual financial statements are required.

Even if the BitLicense requirement did not apply, we must consider next what types of business activities would fall within the scope of New York’s Money Transmission Statute.  Curiously, New York’s money transmitter statute defines neither “money” nor “money transmission” in the definitions section of the Transmitters of Money part of the New York Banking Code, although “money transmission” is defined elsewhere:  “(a)  The term money transmission shall include all instruments sold or issued including travelers checks, money orders, checks, drafts, orders, wire or electronic transfers, facsimile transfers and shipments by courier for the transmission or payment of money.”

This definition neither expressly includes nor excludes virtual currency, however, that may be a moot point as it pertains to any part of a business that handles fiat currency.  So, for example, the remission of fiat funds to a Bitcoin seller, whether directly or indirectly, could constitute (or is) a wire, or an “electronic transfer” within the meaning of the money transmission statute, giving rise to the need to get a Money Transmitter’s License in New York.

New Jersey
New Jersey

New Jersey

New Jersey falls within the bounds of a mostly “silent” state when it comes to whether cryptocurrency trading falls within its money transmitter statutes.  As set forth in the definitions section of its money transmitter statute:

“Money” means a medium of exchange authorized or adopted by the United States or a

foreign government as a part of its currency and that is customarily used and accepted as a

medium of exchange in the country of issuance.

“Money transmitter” means a person who engages in this State in the business of:

(1) the sale or issuance of payment instruments for a fee, commission or other benefit;

(2) the receipt of money for transmission or transmitting money within the United States or to locations abroad by any and all means, including but not limited to payment instrument, wire,facsimile, electronic transfer, or otherwise for a fee, commission or other benefit; or

(3) the receipt of money for obligors for the purpose of paying obligors’ bills, invoices or

accounts for a fee, commission or other benefit paid by the obligor.

Section C.17:15C-4 sets forth the requirement that money transmitters need to be licensed:

  1. a. No person, other than a person exempt from the provisions of this act pursuant to

section 3, shall engage in the business of money transmission without a license as provided in

this act.

In New Jersey (like many states), “money” is restricted to media of exchange that are created, authorized and adopted by sovereign powers.  In these states cryptocurrencies are arguably not “money” and therefore could be argued to fall outside of those statutes regulating money transmitters.

California Map


Despite being a global hub for technology companies, California is perhaps behind the times when it comes to adopting a crypto-friendly legislative scheme.  As with the other states we start with what defines “money” and/or “money transmission”.  The California Code pertaining to Money Transmitters is found at the 2018 California Financial Code, Division 1.2, Sec. 2000 et seq.:

(k) “In California” or “in this state” means physically located in California, or with, to, or from persons located in California.

(o) “Monetary value” means a medium of exchange, whether or not redeemable in money.

(p) “Money” means a medium of exchange that is authorized or adopted by the United States or a foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.

(q) “Money transmission” means any of the following:

(1) Selling or issuing payment instruments.

(2) Selling or issuing stored value.

(3) Receiving money for transmission.

(u) “Receiving money for transmission” or “money received for transmission” means receiving money or monetary value in the United States for transmission within or outside the United States by electronic or other means. The term does not include sale or issuance of payment instruments and stored value.

California provides that:

  • A person shall not engage in the business of money transmission in this state, or advertise, solicit, or hold itself out as providing money transmission in this state, unless the person is licensed or exempt from licensure under this chapter or is an agent of a person licensed or exempt from licensure under this chapter.

Under this statutory scheme it is likely that the receipt and transmission of either Bitcoin OR fiat money could fall within the money transmitter statute.  Here, “monetary value” includes any “medium of exchange” (including, it would appear, Bitcoin), and “money received for transmission” includes “monetary value”.  Further, the definition of “in this state” precludes unlicensed money transmission, or the advertising thereof, even if one does not have a physical or permanent presence in California.

Florida map


Florida falls within the category of states that, while technically “silent”, may include cryptocurrency not within the definition of a “currency”, but rather in the context of whether “receiving … monetary value … for the purpose of transmitting the same” within the definition of money transmission.  The significance of this is that receiving either fiat or Bitcoin for the purpose of transmitting it in Florida probably falls within the money transmitter statue, requiring a license.

As set forth in the Florida Statutes:

560.103 Definitions.—As used in this chapter, the term:

(11) “Currency” means the coin and paper money of the United States or of any other country which is designated as legal tender and which circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes United States silver certificates, United States notes, and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.

(17) “Foreign currency exchanger” means a person who exchanges, for compensation, currency of the United States or a foreign government to currency of another government.

(21) “Monetary value” means a medium of exchange, whether or not redeemable in currency.

(22) “Money services business” means any person located in or doing business in this state, from this state, or into this state from locations outside this state or country who acts as a payment instrument seller, foreign currency exchanger, check casher, or money transmitter.

(23) “Money transmitter” means a corporation, limited liability company, limited liability partnership, or foreign entity qualified to do business in this state which receives currency, monetary value, or payment instruments for the purpose of transmitting the same by any means, including transmission by wire, facsimile, electronic transfer, courier, the Internet, or through bill payment services or other businesses that facilitate such transfer within this country, or to or from this country.

(emphasis supplied).

Florida Statutes Sec. 560.204(1) provides that “[u]nless exempted, a person may not engage in, or in any manner advertise that they engage in, the selling or issuing of payment instruments or in the activity of a money transmitter, for compensation, without first obtaining a license under this part.”

Wyoming flag


Wyoming stands out as the single most cryptocurrency-friendly state in the US.  A package of recent legislation reflects a climate of forward-thinking legislators that listened to experts in the field in creating these new laws.  The following statutory provisions govern money transmission in Wyoming:

(xii) “Monetary value” means a medium of exchange whether or not redeemable in money;

(xiii) “Money transmission” means to engage in business to sell or issue payment instruments, stored value or receive money or monetary value for transmission to a location within or outside the United States by any and all means, including but not limited to wire, facsimile or electronic transfer;

(xxii) “Virtual currency” means any type of digital representation of value that:

(A) Is used as a medium of exchange, unit of account or store of value; and

(B) Is not recognized as legal tender by the United States government.

40-22-103. License required.

  • … no person shall engage in the business of money transmission without a license. The division shall regulate money transmitters and carry out the provisions of this act.
  • A person is engaged in the business of money transmission if the person advertises, offers or provides services to Wyoming residents, for personal, family or household use, through any medium including, but not limited to, internet or other electronic means.

40-22-104. Exemptions.

(a)          This act shall not apply to:

(vi) Buying, selling, issuing, or taking custody of payment instruments or stored value in the form of virtual currency or receiving virtual currency for transmission to a location within or outside the United States by any means;

Under this statutory scheme two things are clear:  (1) the general rule is that the transmission of “money or monetary value” still requires a money transmitters’ license, however (2) the receipt and transmission of virtual currency is expressly excluded from the entire money transmitter statute.  To the extent that one receives and then subsequently transfers Bitcoin, one may do so freely in Wyoming without a license.

The package of legislation as a whole is indeed encouraging from a “business climate” standpoint.  In addition to the above provision (among others that, for example, make clear that one can have property rights in one’s digital currency under UCC law), a provision that creates a new type of Special Purpose Depository Institutions intended to handle crypto-related business and assets should be very interesting in the upcoming years.  These institutions are intended to bridge the gap between the traditional financial system (including connection to the federal reserve) and the crypto world.  Further, Wyoming has created a regulatory “sandbox” not unlike what Switzerland and Canada have done to avoid quashing FinTech developments and new ideas.

(c) 2020 Good Attorneys At Law, PA – All rights reserved


Where to go to ICO – Two ideas

The world is your oyster, as they say, when it comes to choosing where to incorporate your business(es) for an ICO.  That said, cryptocurrency regulation is new to many jurisdictions, who are looking for ways to define and manage what cryptocurrencies are.

What makes a “good” jurisdiction in which to conduct a cryptocurrency business or issue tokens?

There are several characteristics that separate “good” from “bad” jurisdictions in which to conduct an ICO or run a cryptocurrency business.  First, there is, as of today, there are still no truly “mature” regulatory environments in which to run your business. Without exception, the governments in the following jurisdictions are still in the process of evaluating crypto-currencies on multiple levels. The attention that is currently being paid to these businesses means that the days of zero-regulation, self-governed ICOs that escape regulatory attention entirely are, if not over, certainly limited. This has advantages and disadvantages. The advantage being that a more certain regulatory environment means less future risk of a jurisdiction creating and/or enforcing a law retroactively that could undo what you have done in terms of raising capital, forming your business, and issuing your tokens. The disadvantage is that as a practical matter, “legitimizing” cryptocurrencies means, in most cases, more paperwork, more expense, and more restrictions. That is the essence of regulation, however “light” it may be relative to traditional, heavy-handed regulations in the areas of securities laws, banking laws and tax laws.

Second, there are a few themes or values that came up consistently, and are likely to be the “must haves” in your ICO / cryptocurrency enterprise. The values that crop up consistently include anti-money laundering, anti terrorist-financing and investor protection (in that order, in my opinion). The first theme falls with the Bank Secrecy Act, among other legislation, that sets forth the framework for Know Your Customer / Anti-Money Laundering procedures. The second invokes the respective securities laws of each country in which you do business. Sure, this adds “drag” in the form of having to verify the identity of your investors (unlike prior ICOs in which an Ethereum address was enough), but that is the price to pay for keeping the good guys and chasing away the bad ones.

Third, there are several characteristics of the country you want to look for. First and foremost is to ask what history the jurisdiction has with cryptocurrency, and what is their level of sophistication? The regulatory culture is critical. Does the country fundamentally have a positive or a negative view of cryptocurrencies and blockchain-oriented businesses? Obviously it is only worth considering jurisdictions that have a sophisticated understanding of these products, enough to know when and how to lay off businesses without compromising the “core” values described above. Other important characteristics include those that do not deal directly with cryptocurrency but that relate to the business environment as a whole such as: what is the business language of the country? What type of legal system does it have? How easily can you avail yourself of the legal system (either offensively or defensively)? What is your access to banking relationships and how strong is the banking sector? What are the jurisdiction’s tax laws and policies?

Shades of Regulation

You should view regulation of cryptocurrency companies on a spectrum. On one end your company is fully regulated, mostly under existing securities and banking law, in whichever country you intend to do business. At this extreme, not surprisingly, are the greatest regulatory costs and burdens, including the need for extensive pre and post-ICO disclosures, “lock up” periods for the tokens and the like. At the other extreme one operates in a “permissionless” environment, that is, you conduct your offering however you like, including very limited public disclosures, no KYC/AML procedures and so forth. ICOs that took place prior to and during 2017 largely followed this second model, accepting anonymous investors and providing little public information other than the team’s wish list. As 2017 went on, however, more and more ICOs have begun to adopt elements of the first model. This appears that this is the current trend.

One popular, though commonly misunderstood, manner in which to operate your blockchain company is through regulatory “sandboxes”. Countries such as the United Kingdom, Singapore and Canada have established programs within which some blockchain companies are allowed to operate without having to fully comply with the full battery of (mostly securities) regulations.  A “sandbox” does not refer to an all-play, no regulation environment.  Rather, it requires compliance with a streamlined set of rules, and in some cases comes with restrictions on what the company can and cannot do.

With this framework in mind I turn to an analysis of the top two jurisdictions which, in my opinion, merit your further consideration as a place in which to incorporate and/or issue tokens:

Switzerland flagSwitzerland and ICOs

Switzerland needs no introduction as a world financial capital. It has some of the most developed educational, financial and technological systems in the world, and has through public statements adopted a very welcoming attitude towards cryptocurrency related business. The town of Zug is affectionately referred to as “Crypto Valley” for its concentration of innovative Fintech companies that have set up operations there. The Crypto Valley Association (CVA) was formed on January 17, 2018, for the express purpose of attracting blockchain companies to Switzerland.

For the reasons discussed below Switzerland is the second most popular jurisdiction for conducting ICOs (nine, as of February 1, 2018, including Ethereum). Switzerland began discussing ICOs, blockchain and innovative financial companies years ago, before many countries even had a firm understanding of the basics of the industry. A February 11, 2016 publication by the Federal Department of Finance (FDF), for example, set forth a “three pillar” approach to regulation of FinTech companies. Tier 1 addresses “crowdfunding” style campaigns, not unlike the JOBS Act crowdfunding regime in the United States. The second pillar is referred to as the “Innovation Area”, which features a regulatory sandbox approach. The third pillar contemplates a full Fintech license, though with lower regulatory requirements than conventional banks.

The Swiss followed up on this initial guidance with FINMA Guidance 04/2017 (actually dated 29 September 2017)(the “Guidance”) that specifically addressed the parts of Swiss law that could potentially apply to ICOs, or “Token Generating Events”. The tone of the publication is positive and supportive of developing and implementing blockchain solutions in the Swiss financial center.  The Guidance does not describe what is a “payment instrument”, the types of obligations that an ICO operator would have, or what constitutes “external management” of ICO assets. It does not define what is a “security” either, although the definition of “securities” has been better explored in multiple jurisdictions. The point to take away from this initial guidance is that it is likely that at least one of the existing legal regimes applies to any given Token Generating Event / ICO.

The Swiss continued their leadership with their “Guidelines for Enquiries Regarding the Regulatory Framework For Initial Coin Offerings (ICOs)” of February 16, 2018 (the “Guidelines”). These Guidelines refined the above-referenced Guidance by categorizing different types of tokens and by further explaining what regulatory regimes apply to which types of tokens. Included in the Guidelines is the questionnaire that FINMA requires of “market participants” who are interested in doing business in Switzerland. The Guidelines do not apply to existing ICOs (which are considered only retrospectively by enforcement bodies), or for those simply requesting information.

The heart of the Guidelines is in Section 3, Principles applied when assessing specific enquiries. Section 3.1 provides that tokens will be viewed according to an “underlying economic function” test, that is, what is the substance of the economic relationships that the token creates, and how does that token fit existing Swiss law. These are the three primary types of tokens and their fundamental characteristics:

  • Payment Tokens – Tokens intended to be used, now or in the future, as (1) a “means of payment” for acquiring goods or services, or (2) as a means of money or value transfer (compare Bitcoin)
  • Utility Tokens – Those which are intended to provide access digitally to an existing application or service by means of a blockchain-based interface (Compare STEEM).
  • Asset Tokens – Tokens that “represent assets such as a debt or equity claim on the issuer”, such as a share in future earnings or capital flows. Asset tokens are “analogous to equities, bonds or derivatives”, and include tokens that enable physical assets to be traded on the blockchain.

The Guidance points out that the categories are not mutually exclusive, and that “hybrid” tokens display more than one set of the above characteristics. In these cases the regulatory requirements for the hybrid tokens are cumulative.

The timing of the ICO versus the development of the network is crucial in how the token is characterized. Tokens that relate to blockchains or networks that are already fully developed at the point of fund-raising are generally categorized according to the categories set forth above, depending on their underlying economic function. Claims (such as SAFTs) and tokens that relate to networks to be developed in the future – known in the Guidance as a “Pre-Financing”- may be treated differently than what the underlying economic function may eventually be. Claims to future tokens in the form of SAFT, for example, are treated as “securities” even if the eventual underlying economic function of the token to be released later is utility.  In summary, forming an ICO company in Switzerland offers a level of predictability as to how you might expect your token to be treated that is not found in other jurisdictions.

Gibraltar flag

Gibraltar and ICOs

Gibraltar is a British Overseas Territory and headland on Spain’s south coast. First settled by the Moors in the Middle Ages and later ruled by Spain, the outpost was later ceded to the British in 1713. It is currently considered a British Overseas Territory, rather than an independent nation, but is nevertheless a member of the EU. While only 2.6 square miles in area it is home to close to 30,000 people. Under its 2006 Constitution Gibraltar governs its own affairs, though some powers, such as defense and foreign relations, remain the responsibility of the British government. Today, Gibraltar’s economy is dominated by four main sectors: financial services, online gambling, shipping, and tourism. Its official languages include English and Spanish. It’s corporate tax rate is a favorable 10%.

In 1967, Gibraltar enacted the Companies (Taxation and Concessions) Ordinance (now an Act), which provided for special tax treatment for international business. This was one of the factors leading to the growth of professional services such as private banking and captive insurance management. Gibraltar has several attractive attributes as a financial center, including a common law legal system and access to the EU single market in financial services, although following Brexit there is some uncertainty as to whether this access will continue. The Financial Services Commission (FSC) which was established by an ordinance in 1989 (now an Act) that took effect in 1991, regulates the finance sector.

The Gibraltar DLT License

True to its history in attracting innovating finance companies, Gibraltar has issued partial regulations governing blockchain companies, or “distributed ledger technology” (DLT) companies. The Gibraltar Financial Services Commission has issued numerous statements and conducted interviews in which it has described its approach to DLT, and ICO, regulation. This it to be done in two phases, the first of which is complete in the form of the Financial Services (Distributed Ledger Technology) Regulation LN.2017/204. The second part of the legislation will address ICOs specifically.

“One of the key aspects of the token regulations is that we will be introducing the concept of regulating authorized sponsors who will be responsible for assuring compliance with disclosure and financial crime rules,” said Sian Jones, a senior advisor to the GFSC, according to Reuters. It is not entirely clear who such “authorized sponsors” would be, but in general the Commission’s public statements have reflected a flexible, market-oriented approach.

Gibraltar has since come out with proposals for how DLT and, specifically, token issuers will be regulated. The document, “Token Regulation”, dated March 9, 2018 describes the present regulatory environment, how the Government of Gibraltar views tokens in general, and what new activities will constitute “controlled activities” subject to formal regulations yet to be released. This White Paper advances Gibraltar considerably along the spectrum of regulatory maturity discussed above.

The White Paper begins by characterizing tokens and token issuers in terms somewhat different than other jurisdictions. It points out that at present “raising finance by means of an ICO is unregulated in Gibraltar”. Notably this isn’t cast as a negative thing, rather, the White Paper notes that, according to HM Government of Gibraltar (HMGog) and the Gibraltar Financial Services Commission (GFSC), Gibraltar is expected to “remain … an attractive jurisdiction from which to conduct ICOs”. This is an interesting and critical point in that the government appears to, at least on the surface, approve of ICOs that already occurred from Gibraltar and that will occur even with regulation coming down the pike. This is important because it reduces the risk of retroactive application of punitive provisions (for example, in the case of  Switzerland’s look-back approach), and suggests that companies wishing to do ICOs while the new legislation is pending will not necessarily be violating any laws.

The White Paper nevertheless cites prior guidance in setting forth general principles which are likely to apply going forward. This prior guidance sets forth general warnings about the speculative and risky nature of most blockchain projects. The White Paper also cites the provision in the prior guidance that distinguishes between security tokens (“with an equity interest or right to distributions of … profits or in the event of winding up”) and utility tokens that serve an unregulated functional use, “such as prepayment for access to a product of service that is to be developed using funds raised in the ICO”. The White Paper lists lack of regulation and the difficulties in defining exactly what are securities as “defining the problem”.

Gibraltar has a unique take on tokens as securities that is narrower than in other jurisdictions. In fact, the White Paper notes that “most often, tokens do not qualify as securities under Gibraltar or EU legislation”. Rather, tokens constitute “the advance sale of products that entitle holders to access future networks or consume future services”. As such, rather than conferring fixed rights to income or assets (which would most often be securities), the White Paper states that most tokens are “commercial products … not caught by existing securities regulation in Gibraltar.” The White Paper likens tokens to commodities.

The White Paper’s fundamental purpose is to propose regulation in these, previously unregulated areas with the goal of protecting consumers, Gibraltar’s reputation and the safe use of tokens as a means of crowd financing. The White Paper calls for regulation as to:

  • The promotion, sale and distribution of tokens;
  • Operating secondary market platforms trading in tokens; and
  • Providing investment and ancillary services relating to tokens.

It proposes that the GFSC will regulate:

  • Authorized sponsors of public token offerings;
  • Secondary token market operators; and
  • Token investment and ancillary service providers.

Notable is what the White Paper states the government should not regulate:

  • Technology;
  • Tokens, smart contracts or their functioning;
  • Individual public token offerings; or
  • Persons involved in the promotion, sale and distribution of tokens.

Consistent with other jurisdictions, the White Paper also proposes to make the proceeds received from token offerings subject to Gibraltar’s anti-money laundering (AML) and countering financing of terrorism (CFT) legislation, and to designate GFSC as their relevant supervisory authority for AML/CFT purposes. As in other jurisdictions the white paper provides that regulation is cumulative, and that the regulated activities described above may also apply to firms or individuals covered by the DLT Regulation.

The White Paper breaks down the expected legislation into “limbs”. The first “limb” is “intended to regulate [the] primary market promotion, sale and distribution of tokens” that are neither securities (which are regulated under existing securities laws) nor “outright gifts or donations”, conducted in or from Gibraltar. Notably, this first limb specifically excludes virtual currencies. The government makes this distinction based on the “underlying economic function” of the token. The White Paper also applies a type of “situs”, or location test, providing that the first limb of the regulations apply to activities that are conducted from Gibraltar, intended to come to the attention or be accessed by any person in Gibraltar, conduced by overseas subsidiaries of Gibraltar-registered legal persons, or conducted by overseas agents or proxies acting on behalf of Gibraltar-registered legal persons, or on behalf of natural persons ordinarily resident in Gibraltar.

While short on specifics, the White Paper calls for robust disclosure of information on the part of ICO organizers. The proposed regulations, it provides, should provide “adequate, accurate and balanced disclosure of information [that is designed to] enable anyone considering purchasing tokens in the primary market to make an informed decision”. What is specific is the provision that brings the proceeds of ICOs (the currencies collected in exchange for tokens) within Gibraltar’s AML regime, specifically the AML and CFT (counter terrorism financing) provisions of the Proceeds of Crimes Act 2015 (POCA). The White Paper directs that these changes be made by separate regulation under the POCA legislation.

An interesting characteristic of the Gibraltar White Paper and the regulations it calls for is its “Authorized Sponsor” (AS) provisions. In short, an Authorized Sponsor is a person who is in essence the official representative of the ICO. This person will be responsible for the organizer’s compliance with the regulations, and must be “appointed in repsect of every public token offering promoted, sold or distributed in or from Gibraltar. The organizer is the one to appoint the AS. The Authorized Sponsor must have “mind and management” (likely, some sort of permanent office) in Gibraltar, and is permitted to provide additional services to the offering other than serving as the representative, such as serving as a custodian of the proceeds or authorizing their release according to the sale conditions.

Each AS must have “Codes of Practice” as to each offering they supervise. These Codes of Practice are intended to assure the organizer’s compliance with the forthcoming regulations, and to establish “best practices” as to an ICO. The White Paper is short on details as to precisely what these Codes of Practice should contain, but is explicit that the GFSC will be flexible as to the format of these Codes provided they reflect “appropriate, relevant knowledge and experience” as to the letter and spirit of the White Paper, and later, the proposed regulations. Notably, Sponsors are free to apply different Codes to different types of tokens and offerings, and may set out such matters as the method for applying and distributing sales proceeds.

The Code of Practice must be incorporated into some sort of agreement between each AS and their sponsorship clients. The Code is part of the organizer’s license application. The GFSC will be maintaining a public register of Authorized Sponsors and their respective past and present codes of practice. As such, the following will be public information as to each ICO:

  • The client(s) for whom they act;
  • The token(s) included in the offering;
  • The code of practice applicable to the offering; and
  • Any interest they, and connected persons, have in the tokens offered

As such, Gibraltar law has a public disclosure element that is missing from other jurisdictions, although it is not yet clear to what extent disclosing information about the Authorized Sponsor will require material information about the ICO organizer’s business model or plans.

Importantly, and contrary to other language in the White Paper concerning unregulated ICOs, the White Paper calls for the regulations to create a “new controlled activity and offence”, the controlled activity being the Authorized Sponsor requirement, the offense being the “promoting, selling or distributing tokens” without complying with:

1. The requirement for an authorized sponsor;
2. The requirement for a current entry on the public register;
3. Specified disclosure obligations;
4. Relevant provisions of POCA, where applicable.

This is potentially problematic in that the White Paper puts all ICO organizers on notice that they require a representative whose duties are not fully specified, public disclosure of Codes of Practice yet to be defined, and “disclosures” of information in an unspecified format, the content of which has yet to be determined. Only the anti money-laundering provision (the reference to compliance with POCA) is somewhat easier to comply with in the present, as Know Your Customer and related legislation has been in existence for some time, the compliance regimes for which are available as examples. Unlike, for example, the Code of Conduct provision, which specifies that Authorized Sponsors may exercise discretion in how they propose to comply with the regulations, this latter provision specifies that “promoting, selling or distributing” tokens without these pieces in place is an offense, potentially subjecting the organizer to civil or perhaps even criminal penalties. It is hard to imagine this not having some chilling effect on those looking to issue tokens in the near term, before the regulations are in place.

On the other hand, Gibraltar should not be too quickly written off as too risky simply because there is some delay in getting final regulations. Notwithstanding the single reference to the offense of conducting an unregulated ICO, the fact that Gibraltar is moving at all towards providing clear regulatory guidance itself differentiates it from many other countries that having nothing on the table except enforcement actions, most notably the United States. The overall tone towards DLT and ICOs is, too, unmistakably positive in tone. Further, you may have many parts of the business that are still maturing, and, as such, you may have flexibility in your timetable within which to issue your tokens. Put simply, Gibraltar may be worth the wait.

While uncertainty reigns, at least the White Paper establishes a time table within which (supposedly) the regulations are to be forthcoming. Draft regulations for the promotion, distribution and sale of tokens is supposed to occur in May of 2018, which is not far off from the date this memorandum was written. The limited regulation amending POCA is expected in March, 2018.

– (c) 2018 Ari Good, Good Attorneys At Law