An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory framework
Swedish law does not contain any comprehensive regulation governing virtual currencies and virtual currencies are largely unregulated under Swedish law. However, in their capacity of constituting instruments of payment and, potentially, transferable securities (as further elaborated in Sections II and III), some aspects regarding virtual currencies and various activities relating to them are subject to regulation pursuant to more general legal frameworks. There is also, to a limited extent, specific regulation regarding certain activities relating to virtual currencies that subjects custodian wallet providers and virtual currency exchanges to regulatory registration requirements and requirements to comply with the Swedish Anti-Money Laundering Act (the AML Act) (see Section IV).
The legal status of virtual currencies is, in some aspects, relatively clear. However, in other aspects, it is subject to a high degree of uncertainty, as well as controversy, as to whether virtual currencies fall within the scope of various regulated types of property. As a starting point and a basis for the discussion of the issue of legally classifying and categorising virtual currencies – which is an issue that has bearing on the applicable obligations of persons conducting various types of activities involving virtual currencies – it is possible under Swedish law for intangibles to have the legal status of property without any explicit statute granting such status to a specific category of intangibles.2 While there is no express statute governing the legal status of virtual currencies under Swedish law, it is sufficient that a virtual currency is recognised as an object under customary practice, as well as by the parties to a legal relationship involving such virtual currency, for it to constitute property. Consequently, it is legally possible to own virtual currencies under Swedish law, and virtual currencies are afforded the same general protection as other types of property under the legal concept of ownership.
The more detailed classification of virtual currencies as financial instruments (more specifically transferable securities) or instruments of payment, or both, is discussed further below.
In recent years, following the increasing popularity of virtual currencies, and in particular consumers' interest in investing and trading in them, both national and international regulatory authorities, including the Swedish Financial Supervisory Authority (SFSA), have issued statements of warning relating to virtual currencies and initial coin offerings (ICOs), noting the lack of applicable regulation in many material aspects. The increasing significance of virtual currencies in the eyes of both the European Union and the Swedish regulator is demonstrated not least by the recent amendments to Swedish AML legislation, bringing providers of certain services related to virtual currencies into the scope of the AML Act.
Securities and investment lawsi Classification as a financial instrument
It has not been explicitly settled whether virtual currencies may qualify as financial instruments under Swedish law. The key to making this determination is whether virtual currencies constitute transferable securities, as defined in the Swedish Securities Market Act, which implements the Markets in Financial Instruments Directive (MiFID) and MiFID II.3 The European Securities Markets Authority (ESMA) has stated that virtual currencies may, depending on how an offering of coins or tokens is structured, constitute transferable securities.4 In response to a survey undertaken by ESMA in the summer of 2018 regarding the qualification of virtual currencies as financial instruments in the European Union, the SFSA expressed the view that dematerialised instruments can qualify as securities if the instruments can be registered in a manner that has the same legal effect, specifically in regards to rights in rem, as possession and presentation of a physical certificate, such as a coupon bond or a bearer bond. Registration based solely on contractual grounds is not sufficient to meet this requirement. The SFSA concluded that it cannot generally be ascertained whether virtual currencies can qualify as securities, attributing this to the lack of precedent on how an acquirer of virtual currencies can obtain rights in rem under Swedish law. In addition to noting this uncertainty, the SFSA expressed the view that an instrument must entail rights to its holder or obligations to its issuer, or both, which are legally enforceable. Consequently, whether this requirement is met in relation to any particular virtual currency or ICO must be assessed in each individual case.
A question of a more general nature, which has significant implications for the issue of whether virtual currencies qualify as financial instruments, is the extent, if any, to which national deviations in the interpretation of what constitutes transferable securities are legally permissible under MiFID II. European capital markets law has undergone a shift in character from generally setting forth minimum harmonisation rules, with greater possibilities of national discrepancies and margins of appreciation, to an increased use of directly applicable regulations and full harmonisation directives, leaving no room for national discrepancies. The structure of the legal framework, with the definitions found at the beginning of MiFID II playing an essential role in the application of other legal acts within capital markets law, further questions the room for national deviations in this regard. As the definitions (e.g., of financial instruments and transferable securities) found in MiFID II are used to determine the scope of applicability of several other legal acts, some of which take the form of directly applicable regulations (e.g., the Market Abuse Regulation5 and the Prospectus Regulation6), allowing national deviations from the definitions may have a considerable impact on the European capital markets regulatory framework in its entirety. As one of the purposes of MiFID II is to harmonise the legal framework of the European Union, and considering the important role that the definitions play for other legal acts, the position most consistent with the EU regulator's intentions concerning the interpretation and implementation of the definitions would be to consider the room for national deviations from the definitions in MiFID II to be extremely limited. Further, allowing deviations would open up the possibility of EU Member States interpreting the definitions to treat essential investor protection law, such as the prospectus rules, as not applicable to make themselves more attractive to new industries, such as the virtual currency industry. This could open up a race to the bottom in terms of investor protection, which is directly contrary to the purposes of European capital markets law. The foregoing supports the view that, when assessing whether virtual currencies may constitute transferable securities, national legislation must be interpreted in such a way that it does not deviate from the definition under EU law. Having noted this, however, it is an undisputable fact that there are varying positions among national regulators with respect to the interpretation of the definitions in MiFID II. In fact, these more or less considerable differences are recognised by ESMA in its survey regarding legal qualification of virtual currencies.
As regards whether virtual currencies constitute financial instruments, mainly by being transferable securities, tokens or coins created and marketed through an ICO and subsequently traded in some form of secondary market appear to be the most relevant units of analysis. The rights associated with a token may vary with every issuance, so this chapter is written using the classification of tokens as currency tokens, utility tokens and investment tokens.7
Currency tokens such as Bitcoin and Ethereum are intended to be used as a general means of payment and function in a similar manner to regular currencies. These virtual currencies are unlikely to constitute transferable securities as they generally do not constitute securities. The ownership and possession or the equivalent registration on the blockchain of currency tokens usually does not give any rights towards the issuer or any other physical or legal person, which is a prerequisite of such tokens being considered as securities. In particular, such registration is not legally recognised under Swedish law as granting rights in rem, and is based solely on contractual grounds. As a consequence, currency tokens generally fall outside the scope of the definition of securities. In cases where they are classified as securities owing to them granting such rights, and are negotiable on the capital market, they may still fall outside the scope of the definition of transferable securities under MiFID II on the basis of being regarded as instruments of payment.
Utility tokens function mainly as either a means of payment in a specific setting with no use as a general means of payment (e.g., paying for services or goods from a specific vendor) or as granting access to a service or product through ownership of such tokens. The product or service does not always exist at the time of the ICO. In general, these tokens do not constitute transferable securities in the sense of the definition under MiFID II; they appear not to fit into the purposes and intentions of MiFID II and other capital markets law. In essence, utility tokens function more as a means of purchase of a product or a service, with an added element of uncertainty regarding whether a product or service will be able to be delivered owing to it not being available at the time of the purchase of the tokens. The various problems that may arise in the context of such issuances are mainly dealt with through legislation other than capital markets law, for instance consumer protection law. However, if tokens are being marketed with the expectation of being able to be sold for a profit as the project that the tokens finance develops, there is an increased possibility of the tokens being classified as transferable securities, provided that they are securities and meet the requirements of transferability and being negotiable on the capital market. Further, if the tokens give rights to financial benefits, such as dividends or put options with a financial gain in the event that the underlying project of the issuance is successful, the tokens are likely to be considered transferable securities.
Investment tokens are tokens whose main purpose is being an investment, and generally give financial rights and in some cases participation rights analogous to shares in a company. Investment tokens are likely to be considered transferable securities, provided that they are securities and meet the requirements of transferability and being negotiable on the capital market.
The classification of tokens is not absolute, which means that some tokens may have attributes from different classes. An analysis of the rights of tokens must be done on a case-by-case basis to determine whether they constitute transferable securities.
In conclusion, the legal qualification of virtual currencies as financial instruments under Swedish law is uncertain. The limited available guidance indicates that virtual currencies would generally be expected to fall outside the qualification as financial instruments. However, this ultimately depends on the structuring of and the rights associated with the virtual currency. In the case of ICOs, if coins or tokens have an investment component, for instance a right to dividends or payouts depending on the success of the issuer, they may be deemed transferable securities, provided that they meet the requirements of transferability and are negotiable on the capital market according to MiFID II. Additionally, derivative instruments related to virtual currencies may constitute financial instruments, for example where they relate to price differences for virtual currencies.ii Prospectus obligations
If tokens are considered to be transferable securities, they may be subject to the Prospectus Regulation and Swedish law and regulations that implement the European prospectus regime. If transferable securities are offered to the public or are being listed on a regulated market, a prospectus must be prepared unless an exemption is applicable.8 It is customary as part of the ICO process to publish a white paper, which usually describes the project and related topics in brief. The content of these white papers does not, in general, meet the Swedish prospectus requirements.
The Prospectus Regulation entered fully into force on 21 July 2019. One of its main purposes is to reduce the administrative burden under the prospectus regime, especially for smaller companies. The Regulation is guided by the principle of proportionality, where the information required to be disclosed should be proportional to the size of the issuer and the burden the disclosure requirement places on it. As part of this, and to make it easier for smaller companies to raise capital throughout the European Union, a growth prospectus was introduced that is less burdensome and imposes fewer comprehensive requirements than a regular prospectus. Further, the threshold of capital to be raised before triggering the prospectus obligation has been increased, and there is also room for even higher national thresholds. However, Sweden has decided to maintain its threshold at €2.5 million, which was the applicable threshold during the previous prospectus regime.
The changes may have an effect on ICOs where tokens are considered to be transferable securities. First, ICOs by smaller organisations may fall under less burdensome prospectus requirements. Secondly, and on a more speculative note, the less burdensome prospectus rules may have an impact on the interpretation of whether ICOs fall within the Regulation at all, as the commonly presented argument – that it would be contrary to the intentions of the legislation to include virtual currency issuers in the prospectus regime owing to considerations regarding their size and the burden the current regime places on issuers – may no longer hold the same weight where there are less burdensome requirements specifically adapted to smaller issuers.
Banking and money transmissioni Banking activities
Transmitting transactions using virtual currencies does not constitute regulated banking activities pursuant to the Swedish Banking Act, as payments using virtual currencies are not made through a general payment system. Whether institutions transmitting transactions using virtual currencies could potentially fall within the scope of the banking legislation in the future if payment systems using virtual currencies have grown to such an extent that they constitute general payment systems has not been established definitively. It is, however, notable that the Swedish legislature has discussed whether institutions transmitting payments using e-money could be subject to the banking legislation if the extent of such payments grew in commonality to such an extent as to be considered to be made in a general payment system.9ii Payment services
Virtual currencies do not constitute funds as defined in the Swedish Payment Services Act implementing the Payment Services Directive (PSD) and PSD2.10 Accordingly, services provided relating to virtual currencies do not currently constitute payment services regulated under the Payment Services Act.iii Classification matters
Virtual currencies may constitute instruments of payment under Swedish law.11 Although the concept is relevant, as the classification of a virtual currency as an instrument of payment has certain legal repercussions, there is no legal definition of instruments of payment under Swedish law. However, the traditional view expressed in legal literature is that any instrument that is intended to be used to make payment, is not subject to transfer restrictions, and is of some value to the recipient may constitute an instrument of payment from a general law of obligations perspective.12 The SFSA has also issued a general statement adopting this view of virtual currencies, that is, that they constitute instruments of payment.13 However, the SFSA's statement cannot be interpreted as a statement that all virtual currencies meet the requirements to qualify as instruments of payment; it is submitted that the general definition of instruments of payment cannot be applied when determining which virtual currencies should be regarded as instruments of payment. Applying such a broad definition would, to be consistent in relation to instruments other than virtual currencies, have unreasonable consequences, as it governs the scope of entities subject to the anti-money laundering obligations described in Section IV. Therefore, a more nuanced assessment of individual virtual currencies should be made. Relevant factors in making the assessment may be similar to those used to identify whether a virtual currency is within the scope of MiFID II's definition of transferable securities: for example, whether the virtual currency is primarily intended to be used as a general means of payment, and the extent to which it is connected to a specific issuer (by way of rights to goods or services or by way of a possible increase in value, depending on the issuer's success). Currency tokens would be more likely to qualify as instruments of payment, owing to their intended purpose of functioning as such, while investment tokens and utility tokens would be less likely to qualify as instruments of payment. There is however, ultimately no guidance from the authorities or in Swedish legal literature that offers any indication as to how the assessment should be made.
Virtual currencies are not recognised as legal tender in the sense that there is any legal obligation to accept them as payment.14