The Austrian Financial Market Authority (Finanzmarktaufsicht – FMA) has updated its FinTech-Navigator to include specific information on how initial coin offerings (ICOs) are to be treated under Austrian law.
Whereas the FMA has generally confirmed that ICOs are unregulated under Austrian law, the Fin-Tech Navigator now includes a broad overview of potential regulatory and capital markets requirements that may apply in connection with an ICO.
Most of the potential requirements come as no surprise and are largely in line with the opinions expressed in Austrian legal writing, including our own Legal Insight of 30 September 2017.
The following article summarises the key findings from the FinTech-Navigator and contains selected remarks on the FMA's view.
Banking licence requirements
- Issuing coins and accepting fiat currency (eg euro) in exchange for the coins instead of other crypto currencies like Bitcoin or Ether may be treated as a licensable deposit business under the Austrian Banking Act (BWG) provided that the moneys paid/exchanged for the coins are repayable.
- If the terms of the ICO provide for the coins to be accepted as a payment instrument, this could – depending on the exact terms and structuring of the ICO – be treated as the licensable banking business of issuing payment instruments. Comment: It is still unclear (and remains to be clarified) how the FMA will treat typical "utility tokens" (ie tokens that grant the holder the right to obtain goods or services from the issuer or certain related parties). Would such utility tokens already be treated as payment instruments?
- Persons who engage in capital market transactions structured via coins (eg securities are issued in the form of coins) may be treated as providing the licensable third-party securities underwriting business. Comment: Depending on how strictly the FMA exercises its supervisory powers, this view of the FMA could potentially impact the business model of crowdfunding platform providers. In particular, the FMA will need to clarify that this view will not adversely affect platform providers' rights under the Austrian Alternative Financing Act (AltFG).
- If securities are held for third parties – irrespective of the technical basis of such safekeeping (arguably: including holding such securities for others via blockchain technology) – this may be treated as a custody business. Comment: Depending on how ICOs are structured, this may potentially impact the business model of wallet providers. If coins are purposely structured as securities (eg to make use of the Single European Passport under the Prospectus Directive), the FMA's strict approach could result in electronic wallet providers being subject to banking licensing requirements.
Financial instruments under MiFID II
- Coins may be qualified as financial instruments under the MiFID / MiFID II implementation and the Austrian Securities Supervision Act (Wertpapieraufsichtsgesetz – WAG) provided they are structured similar to common securities like debt or equity instruments. Indications are that the coins bear voting or similar rights, convey profit participation, are tradeable, bear interest rights or the repayment of the purchase / issue price upon maturity.
- If coins are structured similarly to derivative instruments (eg elements / rights / entitlements of the coins are linked to other cryptocurrencies or other tokens), such coins may be qualified as financial instruments irrespective of whether they would meet the requirements to be qualified as securities. Comment: The FMA is still not following the rather strict view of the German supervisory authority BaFin. BaFin had stated earlier in 2017 that it considers cryptocurrencies to generally qualify as financial instruments because they are seen as "units of account" which meet the definition of financial instruments under German law. Nonetheless, if the coins are structured as financial instruments, this may have severe consequences for an ICO: (i) prospectus requirements could apply (see below for further details) and (ii) subsequent trading of the coins could result in licensing requirements under the BWG (for the regulated banking business of trading in financial instruments) or the WAG (eg for investment advice in relation to the coins, accepting orders for such coins, etc).
Prospectus requirements under the Austrian Capital Market Act
- If coins or tokens are structured in a manner comparable to (i) securities or (ii) investments under the Austrian Capital Market Act (KMG), prospectus requirements will apply. Coins may be qualified as investments if certain criteria are met, eg they convey ownership or participation rights, claims for dividends or repayment of principal. Comment: As mentioned above, if coins are intended to be offered internationally (in the EEA area), it may even be favourable to structure the coins as securities. Only in this case would the issuer be able to make use of the Single European Passport under the Prospectus Directive. However, adverse consequences – such as coins being treated as financial instruments – need to be considered (see also above).
Alternative Investment Funds (AIF)
- Persons issuing coins or tokens may be subject to licensing requirements as alternative investment fund managers provided that (i) the revenues of the ICO are invested according to a fixed strategy and (ii) the proceeds of such investments are paid to the token / coin holders.
E-money and payment services
- The FMA has also confirmed that depending on how tokens and coins are structured, this may be trigger licensing requirements under the Austrian E‑Money Act or Austrian Payment Services Act (ZaDiG). Comment: Treatment of "utility tokens" (see above) still to be clarified. E.g.: To which extent will utility token issuers be able to rely on limited network exemption?
Anti-money laundering (AML)
- If the ICO is qualified as a regulated activity, according to the FMA the AML obligations of the Austrian Financial Market Money Laundering Act (FM-GwG) will apply.
- Even if the ICO is structured so as to avoid any licensing requirements, AML obligations may apply by virtue of the Austrian Trade Code (GewO).
Comment: So far, trade authorities have not issued any guidance as to which types of ICOs may trigger the need to obtain a trade licence.