Ethereum has been seeing a bullish trend in its adoption and applications ever since it was invented. Though the ETH coin isn’t the most valued of cryptocurrencies, Ethereum revolutionized the applications of blockchain technology by being the first open-source blockchain platform where developers could develop their decentralized applications (DApps) and introducing smart contracts.

However, despite its huge popularity, Ethereum’s full potential has been held down by being less scalable because it was developed to use the Proof-of-Work consensus mechanism just like its predecessor, Bitcoin. Though Ethereum’s program was slightly improved to make transactions faster compared to those of Bitcoin, Ethereum still lags behind some newer blockchain technologies like DASH, Ripple and the like, which use Proof-of-Stake consensus mechanism. Initially, Ethereum could only handle 15 transactions in 16 seconds.

Change of the consensus mechanism

Ethereum users are egaelry waiting for the mich anticipated ETH 2.0 update that is expected in the last quarter of 2020. However, things seem to be moving faster than expected after Ethereum’s founder tweeted about the success of the initial deployment of Ethereum’s layer 2 scaling strategy.

With the success of the initial deployment, what is remaining is only the refinement and complete deployment of the layer 2 scaling strategy.

What layer 2 scaling strategy means

After identifying that Ethereum blockchain has scalability issues, Vitalik Buterin identified strategies of improving the blockchain’s scalability. Those strategies included “sharding”, also referred to as the “layer 2 strategy” or HackMD or ETH2 shard chain simplification.

Initially, the Ethereum blockchain network was designed for every transaction to be processed by all the nodes before being declared successful. This ended up taking a huge amount of the networks activity that would be used for other things.

To free up the system, sharding will make it possible for transactions to go through without the need of being verified by all the nodes. Transactions involving token transfers will be done on the layer 2 protocol to free the rest of the system.

In the new strategy, the amount of shards is brought down to 64 from 1024 while the number of shards required per slot is increased to 64 from 16. Then for every beacon chain block, there shall be a published crosslink to allow for optimal workflow. Additionally, the EEs shall be simplified, smaller shard chain logic shall be needed and it will not be mandatory to pay transaction fees via decentralized exchanges.

 What the scalability overhaul means for users

Once the overhaul is complete, Ethereum users will enjoy transaction speeds of thousands of transactions per second. This will only make Ethereum better especially for DApp developers.

It will also be good news for Ethereum’s use cases which span across a wide range of fields ranging from supply chains, health, Initial Coin Offerings (ICOs), Initial Exchange Offering (IEOs), transportation, Structural health monitoring and finance among many more.

France became the first European Union country to craft bespoke regulations for digital asset/token offerings that are not based on past security laws. However, from the time the ICO regulations were enforced in 2019, the AMF has only approved and white-listed two Initial Coin Offerings (ICOs), with the WPO’s GreenToken ICO being the second.

France ICOs regulations

The French regulatory authority, the Autorite des Marches Financieres (AMF), started by conducting consultations on the risk, structure, volatility and applicability of coin offering in crowdfunding between mid-2017 and December 2017. This was after recognizing that digital coin offerings were becoming a global phenomenon and it did not want to be left behind as other countries around the world embarked on coming up with rules to regulate security tokens.

By fall 2018, a bill was tabled in parliament and it went on to be signed to law in early 2019, making France first EU country to have an ICO law in place.  The law which is referred to as the Pacte Law (or Loi Pacte), regulates defines digital tokens and lays out regulations for ICOs and intermediaries providing services related to crypto-assets.

Under the Pacte Law (or Loi Pacte), ICO issuers can legally raise funds by conducting an online ICO. Then after issuing the digital tokens, the tokens can be listed on a crypto exchange to be traded. The ICO issuers are given the liberty to choose to register for a VISA with the AMF to be ‘white-listed’ or to simply proceed with their ICO without the VISA but after submitting a document of disclosure to the AMF to enable token buyers to make an informed decision regarding the ICO.

However, the AMF emphasized that:

Although this approval is optional and ICOs without AMF approval will, therefore, continue to be legal, only those public offerings that have received the AMF approval may be marketed directly to the public in France.

It is also important to note that the new rules only apply for utility tokens. Digital securities are regulated under the old/existing securities regulations

The role of the AMF in the ICO regulations

Under the Pacte Law, the AMF:

  • Examines the disclosure document plus any advertising or promotional material that is circulated or published by the ICO issuer. The issuer should ensure that the disclosure document contains accurate, clear, non-misleading and detailed (outlining the risks that investors would face by purchasing the tokens) information.
  • Verifies that the ICO issuer has adopted enough procedures to protect and track the funds raised in the ICO.
  • Ensures that the issuer conducts themselves per the submitted disclosure document while complying with the regulations. If the issuer violates any of these, the AMF can compel the issuer to stop selling or offering the tokens, stop any advertising campaign and also remove its approval.
  • Verifies that the issuer is a legal entity registered under the French law in France. The AMF can only issue Visas to French-based issuers. Foreign corporations and entities seeking ICO market in the French market are free to do so but without the approval of the AMF.

Once the AMF approves an issuer to conduct an ICO, the issuer gets a VISA and is added to the whitelist of the approved ICOs.

However, it is important to note that the AMF approval is not advisability of the project behind the ICO. The AMF does not verify the technical and financial elements of the project. It also does not verify the computer programs behind the blockchain project. Therefore, it is up to the investor to research these before investing in the ICO.

The first ICO approved by the AMF

The AMF approved the first ICO in December 2019. The ICO was a company called French-ICO that has a platform for funding projects through cryptocurrencies. The ICO was scheduled to start in March 2020.

The AMF Visa that the French-ICO was issued with expires on June 1, 2020.

The ICO targets a minimum of €100,000 and a maximum of €1 million. Once the offering is finished the tokens will be tradable on Zebitex, which is a partner exchange to the French-ICO.

The second ICO approved by the AMF

On May 12, 2020, AMF approved the second ICO, which was for a firm called WPO.

WPO is a renewable energy company that services over 600 solar parks and wind firms across Europe and outside Europe.

In the ICO, WPO is offering its GreenToken (GTK) with a minimum target of €1.5 million and a maximum target of €10 million. According to the firm, one token will be going for €95 and the minimum amount that an investor can invest is €100.

The ICO is scheduled to start on September 8, 2020.

In the future, the GreenToken could be used to acquire goods and services from the GreenToken Network, which taps into the renewable energy industries serviced by WPO.

The tokens are expected to start trading on the SAVITAR exchange, which is a French crypto exchange.

In 2018, Telegram announced its intention to build Telegram Open Network (TON) blockchain and opted to use Initial Coin Offering (ICO) in raising capital for the project. Following this revelation, the social network company joined several other technology companies like Facebook, WhatsApp and Signal in aspirations of building blockchain networks and even issuing cryptocurrencies.

However, most of these blockchain projects have not gone down well especially with the Security Exchange Commission (SEC) in the US. Facebook, for example, has faced rigorous case battles aimed at its Libra cryptocurrency making hard for the company to go ahead with the project.

Telegram, on the other hand, decided to throw in the towel at the beginning of May 2020 after a long court battle with the Security Exchange Commission in the USA. Let us look at the sequence of events that led Telegram to abandon its blockchain project.

Telegram Open Network (TON)

TON, the designated blockchain network that Telegram is set to launch, is intended to offer decentralized cryptocurrency, called Gram, to the users of Telegram who have smartphones.

The cryptocurrency was largely viewed as a rival to the much-publicized Libra of Facebook. However, both cryptocurrencies (Libra and Gram) have faced significant scrutiny by the SEC, which has greatly hampered their development and issuance.

Telegram Pre-ICO in 2018

The messaging app established by the Russian tech expert, Pavel Durov, conducted a Pre-ICO early 2018 raising $1.7 billion from about 171 investors. However, the firm got into trouble after it emerged that about 39 of those investors were from the USA and the SEC had its reservations since the company had not registered the pre-sale.

After, the Pre-ICO, investors were very eager to cash in in the much-hyped ICO. However, the SEC stepped in and ordered Telegram to halt the post-ICO sale due to issues it raised with how its pre-ICO was conducted.

The legal battle

SEC launched a vicious legal battle against Gram ICO in October 2019, after ordering Telegram not to go ahead with its much anticipated Post-ICO.

The SEC accused Telegram of conducting an unregistered token sale to USA citizens. As a result, SEC pressured Telegram to disclose financial documents and answer a couple of questions to shed more light on the disposition of the investors’ funds it raised through the 2018 pre-ICO as required by its regulations.

In March 2020, a US judge dealt a blow to Telegram’s TON project by ruling that it cannot launch the blockchain network nor issue the Gram tokens before the case is settled. This led to a postponement of its April 30, 2020 deadline to launch TON.

However, it was also an early win for Telegram since the same judge barred the SEC from fully accessing Telegram ICO’s financial and banking details. Initially, Telegram’s lawyers had urged the court to throw out the case.

After, the court ruling in March, Telegram wrote to the court promising to issue the required information on the token distribution to investors and the funds collected from the investors to the SEC. Telegram was also to provide the SEC with all the communications, written agreements and amendments of the token sale agreements (including cancelling of the contracts).

All along the court battles were badly hurting the TON project after several postponements until the deadline for the activation of the refund clause in the Telegram’s purchase agreements was reached.

The refund for Gram investors

With the nearing April 30, TON launch deadline, and without any hope in sight for the launching of the blockchain network, investors had the rights to claim for refund as stipulated in Telegram’s purchase agreements refund clause.

According to the refund clause, investors could ask for a 72% refund.

The firm specifically urged the US investors who had invested with it to immediately agree the 72% refund so that they could pull out, claiming that there is an uncertain regulatory environment in the US.

To the investors from other parts of the world, Telegram offered a refund of 110% if they wait till April 30th, 2021.

“As a token of gratitude for your trust in TON, we are also offering you an alternative option to receive 110% of your original investment by April 30, 2021, which is 53% higher than the Termination Amount”

Telegram also announced that the company would allow investors who wait till 2021 to receive Gram or another cryptocurrency on the same term as to what was in the original Gram agreement.

“Purchasers who opted for the loan will have the further option to receive Grams or potentially another cryptocurrency on the same terms as those in their original Purchase Agreements.”

Throwing in the towel

Sadly, after all the drama with the SEC, and trying to retain investors with lucrative 110% returns if they held on till 2021, Telegram finally decided to abandon its TON project.

Early May 2020, Pavel Durov, the founder and CEO of Telegram, announced that telegram had stopped any further involvement with TON.

“Telegram’s active involvement with TON is over………You may see – or may have already seen – sites using my name or the Telegram brand or the ‘TON’ abbreviation to promote their projects. Don’t trust them with your money or data,” Pavel Durov wrote on his channel.

Being the 22nd richest country in the world and with the 7th largest economy in Asia, international investors including blockchain companies have lots of interest in Taiwan. With security tokens proving to be a go-to option for most blockchain companies, Taiwan’s Financial Supervisory Commission in July 2019 recognized the need to officially incorporate security token offering (STO) into the Securities and Exchange Act, which entails the regulatory framework for trading securities, by defining security tokens as securities.

According to the FSC, a security token is a cryptocurrency that is transferable and hold the following features:

  • The owners make capital contributions to the issuer
  • The owners invest in a common enterprise/project
  • The owners expect to receive profit depending on the efforts of the issuer or a third party.

The new Security Token Offering regulations

In January 2020, the FSC proposed deregulating STOs with an equivalent of up to NT$30 million. These STOs are characterized as “Exempt STO” in Paragraph 1 of Article 22 of the SEA. According to the article, these STOs are exempted from the obligation of reporting to the FSC.

Although the deregulation of STOs seemed to be a step in the right direction, the exemption comes with a tight set of restrictions. Additionally, the NT$30 million limit is relatively low, meaning that most of the STOs will not be exempted since most of them have targets above NT$30million.

However, the main objective behind the new regulations is to ensure that STOs in Taiwan are issued by regulated issuers and issued to professional Taiwan investors.

Issuer’s Qualifications

For a company or startup to issue security tokens in Taiwan, it has to be a company listed by shares, meaning it is incorporated per Taiwan’s Company Law.

For an STO to qualify for the exemption, the STOs must be conducted to on the same trading platform with the cumulative placements not exceeding the NT$30 million. The issuer must also ensure that the raised funds are denominated in the New Taiwan Dollar (NT$).

Additionally, the issuer should show the relevant issuance documents in an application to a security firm like the prospectus and security token application.

The prospectus, in particular, should include:

  • The Company Profile and Risks.
  • The Operation Overview.
  • The Operating Plan and Execution.
  • The Financial Overview.
  • An Expert’s Opinion on the Information Technology used in the issuance of the security token
  • Financial (non-certifying CPAs or securities underwriter) Expert’s Opinion about how reasonable the issuance price is.
  • Attorney’s opinion on whether the issuance of the security token complies with the set regulations and if the fundraising project adheres to the set legal rules.
  • Any other documents that should be disclosed and supplemented as per the securities firm notification.

The security firm that the issuers choose to use should have a securities dealer license.

Investors’ regulations

STO investors should be professional investors that qualify as per the criteria under paragraph 3 of Article 3 of the Offshore Structured Products regulations.

For the Exempt STO, the amount that a professional investor can subscribe should not exceed the limit of NT$300000.

Key Takeaways

For an STO to qualify for the “Exempt STO” it should target raising NT$30 million, which is equivalent to $1003764 USD. This is relatively low and means that most of the security token offerings will most likely not fall under the Exempt STO category. The Exempt STO category is however good for the small startups looking to raise a small capital.

Secondly, only professional investors as per the Offshore Structured Products regulations can participate in an STO. Also, the maximum amount that an investor can cash in cannot exceed NT$300,000 on a single STO.

Thirdly, STO funding is limited to the New Taiwan Dollar (NT$). This makes it increasingly difficult for foreign investors. Also, issuers cannot raise funds in other cryptocurrencies or USD as is the norm with most STOs.

Fourthly, an STO can only raise funds through one platform. Therefore, one STO cannot use different platforms to issue security tokens. Also, there is a limit to the number of STOs that can be accepted by each trading platform. This reduces market participation of STO issuers and operators of the trading platform.

Fifthly and lastly, there are many business restrictions and strict qualifications for security token trading platform operators.

After conducting a successful IEO of its stablecoin, JST, on Poloniex on 5th May, the TRON-based stablecoin lending platform succeeded in getting the JST coin listed on MXC Exchange only two days after. The JUST (JST) IEO sold out in just 4 minutes 26 seconds according to TRON’s CEO, Justin Sun.

JST token sale price was $0.00202 during the IEO. Upon its listing on MXC Exchange, its price spiked to $0.04, which was 18.8 times its token sale price, breaking the record of IEOs Return of Investment (RoI) in such a short time. This also thrust the JUST project into the league of the best performing IEO funded projects.

Let’s take a look at what this MXC Exchange means to investors. If an investor had purchased 1000 tokens, it probably cost him/her $2.02. If the investor decided to register on the MXC Exchange and trade the stable coin, he/she would sell it at $40 making a profit of $37.98 in just two days.

Although JST price then lowered from $0.04 in the following minutes, the stablecoin is currently trading at $0.0088, which is 3.36 times the price at which the coin was sold at.

Ideally, if an investor decided to trade in the purchased JST tokens, he would make substantial profits.

The TRON-based stablecoin lending platform, JUST

JUST is a decentralized lending platform that is built on the TRON blockchain. Users in JUST can stake TRX, the TRON cryptocurrency, to generate the JST stablecoin that can be used to pay for a number of things.

The platform uses a decentralized finance (DeFi) lending and governance protocol.

Poloniex’s Tron-powered IEO launching platform

Interestingly, the CEO of TRON, Justin Sun also holds a substantial share at Poloniex Exchange. Sun was among a number of Asian investors who bought Poloniex towards the end of 2019.

By volume, Poloniex is considered the 15th largest cryptocurrency platform. It launched its IEO launching platform, the Poloniex’s LaunchBase, which carries a lot of resemblance to Binance Launchpad.

Projects looking forward to conducting IEOs on Poloniex’s LaunchBase will issue tokens in exchange of TRON’s TRX token. In exchange, the project behind the IEOs will receive professional advice and guidance.

By launching its IEO launching platform, Poloniex joins the growing list of crypto exchanges providing blockchain startups with a lifeline by providing a platform for them to conduct IEOs.

JST was the first IEO to be conducted on Poloniex’s LaunchBase, barely a month after the platform was launched, proving that the platform is up to the task.

Singapore is recognized as a pacesetter in blockchain and cryptocurrency due to its unfailingly supportive regulatory environment. Over the last few years, Singapore has seen a tremendous rise in the number of blockchain projects that have been registered within its borders.

To keep up with the evolving world of digital tokens, the Inland Revenue Authority of Singapore (IRAS) published a guide on the e-Tax that details how digital token transactions including ICOs, IEOS and STOs shall be taxed. These came a few months after Singapore released its new regulations for enterprises offering payment services.

The guide focuses on the taxation of three types of digital tokens. These include security tokens, utility tokens and payment tokens (tokens used as payment options). The guide also elaborates on the taxation of other tokens that are distributed through unconventional means like hard forks and airdrops.

Payment tokens

According to the e-Tax guide, all transactions done using payment tokens shall be considered to be in the form of barter trade. Therefore, the recipients of the tokens shall be taxed depending on the value of the underlying goods or services.

Nonetheless, purchasing a payment token is not taxable. However, the returns from the disposal of the token are taxable if the process involved is a trading activity.

Payment tokens miners shall also be taxed if the mining intends to make profits.

Payment tokens distributed via hard forks and airdrops are not taxable if they are freely given out.

Utility tokens

According to the e-Tax guide, utility token transactions are not taxable since they are mainly acquired to enable the users to acquire future services within a specific blockchain network.

Security tokens

According to the e-Tax guide, security tokens are regarded as a form of equity or debt since they give owners an implied degree of control or equity to a certain asset or project. As such, the taxation of the returns gotten from security tokens depends on the type of the return. The types in consideration here are interests and dividends.

ICOs and STOs taxation

According to the IRAS, the proceeds of Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) shall be taxed depending on the functions and rights of the used token.

If the issued token is a utility token, the sale shall be considered to be in the form of revenue and is therefore taxable. This is because the utility token is an obligation for the issuer to provide a service or good in the future that shall be bought or paid for using this token.

On the other hand, the issuance of security tokens shall not be taxed since the proceeds parallel the proceeds obtained from issuance of equities or debts, which is normally capital in nature. However, as mentioned above, withholding tax obligation and the general income tax shall apply to the interest and dividends paid to the owners of the token.

Tokens set aside for founders in ICOs and STOs

In most cases, startups set aside some tokens for the founders. In this case, if the tokens are used to pay or compensate the founders, they are regarded as revenue and the founder that receives them shall be taxed. However, if the tokens are not issued as a form of payment, they are regarded as a capital asset of the founder.

What a taxpayer dealing with digital tokens in Singapore should do

IRAS instructs taxpayers in Singapore that deal with digital tokens to keep proper records of the digital token transactions so that it can be simple to file the returns.

The records should have the following:

  • Transaction date.
  • The number of tokens sold or received.
  • Value of the digital token at the time of transaction.
  • The used exchange rate.
  • Purpose of the transaction.
  • Details of the customers/suppliers in case it was a buy or sell transaction.
  • Details of the ICO or STO.
  • Invoices or Receipts of the expenses incurred within the business.

As the novel coronavirus ravages the world, killing thousands, almost everything tangible including paper cash has been classified as a medium of conducting the COVI-19. Physical money isn’t safe anymore. You cannot know who touched it; did they have the virus!

And as a result, governments have resulted in the use of electronic payment methods with countries like Kenya upping its use of mobile money transfers. Other countries like South Korea had temporarily removed cash from circulating while China had recalled its paper cash for sanitization using ultraviolet rays.

However, mobile money and some of the other electronic payment methods that are currently in use are dimmed to be slow and could not possibly be efficiently used to deliver government stimulus to households or businesses.

Besides, most of the traditional electronic money transfer methods like mobile money, PayPal, Neteller, and the like are still centralized and depend on traditional banking systems.

As the majority of the world’s population currently works from home, the world could be preparing for the next phase of a technological boom, and blockchain technology could be it.

Central Bank digital currencies

At the beginning of April this year, the Bank of International Settlements (BIS) researchers suggested that the current pandemic would accelerate the adoption of digital currencies and fuel the debate of central banks issuing digital currencies.

And as a matter of fact, several central banks have started looking at the possibility of issuing digital currencies to reduce the use of paper cash which they are being forced to recall back for cleaning or destroying.

China became the first country to announce that it is going to launch a central bank digital currency, with the four largest commercial banks there starting a test of the digital currency this month. The city of Suzhou even suggested it is going to give some of the digital Yuans to government employees in the coming month for use for transport.

In the US, the House democrats suggested a digital dollar in a draft bill for the recently signed stimuli package. According to the members of the congress, the digital dollar would be rolled out by the central bank and distribute money directly to businesses and households. In this way, the process of distributing the stimuli package would be faster and more efficient.

In Europe, the German government is proposing the use of Euro-tokens that could be used in providing consumption vouchers that are based on blockchain. France also launched the atrial phase for testing the integration of the digital euro in settlement procedures.

Cashless economy

Currently, the cashless economy does not necessarily mean a blockchain or cryptocurrency-based economy. Companies like Visa and Mastercard have long been in the market and they have helped promote the cashless economy for a while. Nevertheless, these companies are centralized, and cross border transactions are still expensive and time-consuming thus the need for better infrastructure and blockchain is the best shot at filling the gap.

Though governments have viewed cryptocurrencies as rivals to their centralized financial systems, it is just a matter of time before we witness a complete adoption of digital currencies in government institutions starting with the central banks.

The adoption of digital currencies will mean that government institutions like central banks will have to use blockchain technology to launch digital currencies.

Germany’s ‘reversible ICO’ breathes life into the ICOs

After going through trying times, ICOs are poised to regain their glory after German regulators approved incorporating investor protections to the ICOs in a project they are terming as reversible Initial coin offerings (rICOs). This will certainly be a game-changer in the Fintech crowdfunding landscape since ICOs hold the record of being the cheapest among the currently available funding mechanisms.

ICOs’ dwindling popularity among blockchain and fintech developers and investors was due to the lack of an elaborate regulatory framework for the ICOs across the world. And the new ‘reversible ICO’ seeks to bring order to the way ICOs are regulated especially by protecting investors.

According to the German regulators, the approved reversible ICO’ shall allow investors to buy tokens gradually and be in a position to remove their support and funding at any time if they feel like doing so.

Reversible ICO developers

The rICO was developed by Fabian Vogelsteller, who was actively involved in the development of the ERC-20 Ethereum standard.

Fabian first floated rCIO idea in 2018 at Devcon. It has since taken about one year to bring the idea into reality.

How the reversible ICO will function

The main objective of rICO is to add a layer of investor protection to the largely unregulated ICOs. In so doing, it will give investors an upper hand and also shield them from scammers.

Reversible ICOs shall be carried out in two phases rather than the way they were ICOs were formally issued in one go. In the first phase, investors will first reserve the tokens they desire to purchase. Then in the second phase, they can buy the reserved tokens gradually over time. By doing this, investors will have time to watch over the project issuing the ICO.

Additionally, if the investor sees any reason not to continue supporting the project by buying the reserved tokens, they can release the reserved tokens and also have their ETH refunded. That way scammers will have no chance of getting away with investors’ money.

The two phases make it possible for investors to understand the project as they invest to avoid losing the opportunity as they try to figure out if a project is legit or not.

The reversible ICO holds close resemblance to Vitalik Buterin’s proposal to have ICOs that resemble the DAO. According to Buterin, the DAO like ICOs would permit DAO participants to vote on milestones while still funding the project behind the ICO.

It is needless to point out the other numerous proposals on ICOs that were floated in trying to combat the issue of ICO regulation.

The rICO has some advantages over Buterin’s proposal in that rICO is simple and it is fast compared to the DAO like ICOs that would experience stumpy voting participation by the DAOs.

The future of ‘reversible ICOs’

Germany is one of the largest economies in Europe and its regulatory authority Bafin has made great strides in the field of tokenized assets compared to countries like the USA.

Germany was actually among the first countries to approve the use of Security Token Offerings back in 2019.

Although it is not yet clear if investors in the other parts of Europe or the world would be eager to approve the rICO fundraising mechanism, rICOs represent a great step towards regulating ICOs.

The first use case for reversible ICO (rICO)

The first blockchain project that shall use rICO to raise funds shall be LUKSO, which is a sister to Ethereum when it comes to making mainstream decentralized applications

The LUKSO rICO is scheduled for some time next month if all things go as planned.

With blockchain security tokens garnering interest throughout the world, Autorité des Marchés Financiers (AMF), the French regulator has seen an opportunity that the rest of the European nations should not miss. The AMF recommends that the European nations should create a European digital lab or sandbox that should enable the nations to ease the legal regulations governing security tokens.

Security tokens are known to be the most regulated digital products in the cryptocurrency and blockchain industry. The reason being that the security tokens fall under securities, although they are digital tokens. Therefore, they are subject to the regulations that govern both the cryptocurrencies or digital assets and those that govern securities.

Other countries like China have also suggested allowing security token offerings under a sandbox mechanism.

AMF’s legal review on security tokens

The French regulator recognizes that security tokens have gained a lot of interest across the world. Both incumbents and blockchain ecosystems seem to gracefully embrace security tokens. The IMF looks at tokenization as an accepted step towards the automation of most financial/trade processes.

The French regulator explored two legal facets in its report on security tokens. The first facet deals with the issue and sale of the security tokens. The second deals with the inclusion of security tokens in investment funds.

Normally, there are no regulatory impediments when it comes to including security tokens as investment funds, either in France or any other European nation. The only thing that asset managers that deal with security tokens should do is to apply for a license with the AMF.

The main issue lies with the issue and sale of the security tokens, especially through Security Token Offerings (STOs). For the case of centralized Distributed Ledger Technology (DLT) platforms there are no challenges since the involved parties can comply with the already set licensing requirements.

However, when it comes to decentralized blockchain projects it is quite challenging for the token issuers and sellers since it is difficult to identify a manager. Concerning this, the AMF suggested an outlined a proposal where parties can list buy and sell orders without requiring the endorsement under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID 2 Directive), which has been in effect since November 2007 among European Union nations.

AMF’s suggestion on the issue and sale of security tokens

Currently, the legislation of a security token issue and sale requires a central securities depository.

AMF suggests that the creation of a sandbox or digital lab would allow regulators in the various counties in the European Union to wave certain regulatory requirements. However, it suggests that this should be done as a trade-off.

According to the AMF’s suggestion, the applicant can only be given a waiver or exemption if they are compliant with key regulatory ethics giving the regulators a higher oversight role.

Earlier on, the AMF had released a working document that sought to inspire the European Commission to create a European digital lab that can deal with the financial services around security tokens.

The French regulator is set to release several other papers in support of its security token research in the coming days or months. Most importantly, the regulator recommends that the use of intermediaries in an age where blockchain technology is available is outdated. The AMF would, therefore, like to see the use of more technologically oriented approaches which gives public adoption of blockchain technology a green light.

A few months ago, Polymath one of the most reputable security token offering platforms decided to move its Polymesh Blockchain platform from Ethereum to Parity Substrate, a platform that was developed by Parity Applied Sciences that is owned by Gavin Wooden, who was Ethereum’s co-founder.

This came just a few months after introducing Polymesh, which is a security token specific blockchain. Polymesh was initially built on Ethereum and Polymath had also gone ahead and built an SDK (a suite of developer tools for security token issuers and white-labellers) that want to issue security tokens on Ethereum.

Reason for migrating

The main reason for the fallout is the fact that Ethereum uses proof-of-work (PoW) consensus mechanism, which does not go well with security tokens, though it plans to upgrade to proof-of-stake (PoS).

Adam Dossa, the head of Polymath’s blockchain, had earlier stated in a telephone interview that though Ethereum has some great attributes, the world of regulated security tokens is quite different from that of Ethereum. Dossa was quick to identify that PoW posses a serious problem known as block reorgs where blocks of data containing transaction information can be rolled again to annul a disputed transaction.

Dossa also touched on the way Ethereum settles transactions, saying that since it uses mining to settle its transactions and miners can operate from any location in the world, establishments dealing with securities could be scrutinized by authorities if the charges paid to the miners are traced to a nation that is already sanctioned.

What did the migration mean?

By changing the platform on which its products are built on, Polymath decided to embark on a journey to migrate its ST20 security token development standard, which was initially constructed through Ethereum’s ERC-1400 token standard, to Parity Substrate. Besides, Polymath also had to migrate its token, the POLY (which is an ERC-20 token) from Ethereum to Parity Substrate.

Adam Dossa, however, stated via an email that they shall maintain a bridge for the POLY token for at least one year.

On their part, Parity agreed to develop a sure business-logic option on the base layer of Ploymesh. It shall also construct decent runtime and contract communication modules.

Why Substrate?

The head of Polymath’s blockchain stated that other candidates had been considered before settling on Substrate. One of the Candidates was Hyperledger Cloth among others.

However, Dossa described Parity Substrate as a “modular, versatile framework”. He also pointed out that it is simple to construct good contracts from the bottom up on Substrate, which is a great thing for Polymesh.

Parity Substrate has offered solutions to a number of consensus mechanisms in the past, some of which are even customized. Also, transactions performed via Substrate are final and cannot be undone.