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.