What are the implications of resale and exchange listing on the legal character of a token post-ICO?

The following article discusses session three in the IR Global Virtual Series on 'Fundraising via ICO: A Regulatory Perspective'

Poland – (RL) The Polish government introduced a new bill regarding the taxation of cryptocurrency incomes in August 2018, which will be subject to negotiations by the Council of Ministers and the Polish Parliament. The bill distinguishes between decentralised cryptocurrencies and centralised cryptocurrencies, aiming to simplify and clarify the procedure for reporting and paying taxes on revenues generated from crypto-related transactions. In accordance with the aforementioned act on Counteracting Money Laundering and Terrorism Financing, the draft law defines virtual currency as a ‘digital representation of value’ stating that cryptocurrency can serve as a medium of exchange and be accepted as means of payment; they can be stored and transferred electronically and used in e-commerce.

Pursuant to the bill, revenues from virtual currency transactions should be part of the taxable income of natural persons and entities, however, the exchange of cryptos will not be taxed. Cryptocurrency miners are also expected to pay taxes on their profits and the tax base for this taxation will depend on the nature of their business activities.

In the event of a miner being an independent entrepreneur, they will pay tax on the proceeds generated from the sale of mined cryptocurrency. Should the mine work on behalf of another person/entity, then the amount of their remuneration will be subject to taxation. All of these transactions should be reported on annual tax returns.

Poland currently has a progressive income tax scheme for individuals within two rates: 18 per cent for an annual income of up PLN 85,528 (approx. USD 22,686) and 32 per cent for any amount above this limit. For corporate entities, there is a linear tax rate of 19 per cent.

Malta – DM When issuing an ICO in or from Malta, Issuers need to establish from the initial stages whether, after issuance, they would like to admit to trading on an exchange the said token, or whether for example the token may later be converted to a financial instrument as this will have a bearing on how the token will be classified when carrying out the Financial Instrument Test to determine under which regulatory regime the issuance of the token will fall, and whether it can be admitted to trading.

In the case of utility tokens, the VFA Act provides that they may only be redeemed within the ecosystem of the DLT platform on which they were issued and are therefore not permit be listed on a DLT exchange. Exchanges regulated under the VFA Act (i.e. VFA exchanges) will only be able to list tokens that are classified as virtual financial assets following the carrying out the Financial Instrument Test. VFA exchanges are not permitted to admit for trading on their exchange any utility or security tokens. Only a trading platform that is licenced to admit for trading financial instruments under a different regulatory regime to that of VFA exchanges can list security tokens.

Brazil – (LJ) If someone wants to resell an ICO token in Brazil, it's not impossible, the only issue that you need to be aware of is not to create a parallel currency in Brazil.

This applies if you are issuing the ICO tokens and arranging for people to accept them and repurchase them at the same time. If you are promoting ICOs sold in Brazil as a parallel currency, this is a breach of banking regulations in Brazil. We have a lot of people who purchase and sell, of course, but no one is issuing here.

Concerning the exchange listing in Brazil, ICOs qualify as a credit that can be used to pay for services and utilities. As a credit right, it's possible to list, you just need to have a sponsor to help you achieve that.

If a company wants to issue an ICO and make a public market in Brazil, gathering local investors to invest and establish local trading, then it will be necessary to use agents, brokers and dealers to register the positions. Registration documentation will need to be provided and it will be a challenge for the ICO to meet with all those regulations.

France – (BC) The optional visa from the AMF, would make it necessary to provide information about the plan to introduce the token on an exchange, so there is no incompatibility.

The fact that the token is listed or not on an exchange, does not change the possibility of issuing an ICO. It's part of the global plan, so I don't have a particular comment on this.

The comments I would have is more the regulation of exchanges themselves and here obviously we would like to attract some French-based exchanges, which we don't have right now or at the early development stage. We are working on establishing a regulatory background that would be favourable for exchanges to develop in France. I have one question for Noreen though since I wanted to understand something she said. Noreen, did you say that if you have a utility token and it is listed on a token exchange, then that makes it a security token, just because it is listed on an exchange.

U.S. – (NW) It's possible, yes, if, when marketing the token, the issuer advertises that the token will be listed on an exchange with a secondary trading market for it, doing so creates the expectation of profit which is one of the key elements determining whether or not something is a security. In fact, one of the very first enforcement actions that the SEC brought in the ICO market, back in December of 2017, was against a company called Munchee, which was precisely for this reason.

Switzerland – (DB) The main difference between buying and selling commodities and securities lies in what is being sold to the purchaser – commodities can be sold under a futures contract, and, under such circumstances, are subject to a different regulator in some jurisdictions than security.

The Canton of Zug recently published a detailed leaflet with respect to how cryptos have to be declared on a tax return. It deals with how crypto assets are taxed as property, whether they attract income tax, how commercial trade is taxed, and how capital gain and loss in private wealth is taxed/deductible. Finally, it deals with how tokens with rights should be taxed.

Dutch Caribbean – (LS) Post-ICO, it is often the exchange’s duty to filter out clients that don’t comply with certain laws due to their residence. It’s important that the ICO is handled with the adequate KYC to avoid any problems for the foundation that issues the ICO.

Utility tokens will likely require continued careful monitoring while the crypto market is moving more and more towards the STO (security token offering) space which is good for investors that are looking for that additional regulation and security. That said, commodities and utilities are still very powerful when used legitimately in their own right.

Currently, the Central Bank of Curacao and Sint Maarten does not have any specific guidelines on ICO’s. However, an ICO token can have several legal implications depending on its nature and whether it qualifies as security. In this respect, legislation will have to be examined on a per case basis. Moving forward, the Dutch Caribbean Securities Exchange (DCSX) is the only authorised and licensed securities exchange in the Dutch Caribbean.

As a self-regulatory organisation, subject to direct supervision by the Central Bank of Curacao and Sint Maarten, the DCSX can facilitate the listing and trading on its exchange of stocks and bonds, mutual funds, ETFs and other fund types, as well as other instruments as approved by the DCSX. It is in this capacity that the DCSX is likely to be the leading authority in the Dutch Caribbean to accommodate ICOs in the near future.

Profits will vary depending on what is put onto the exchange. There are not a lot of security tokens out there and it would require looking at listing and trading fees like any natural exchange. It is likely to take some time to build something like this up even though jurisdictions like Gibraltar seem to be moving quickly into this space.

Slovakia – (AV) In Slovak legislation, neither trade with cryptocurrencies, or post-ICO tokens are subject to specific regulation.

In order to ensure that the token gives good returns and maintains a stable and healthy price after ICO, it is necessary to follow a few steps such as constant communication with the investors on current progress with the project, education of the investors about the project, and promotion of the project on the right channels in order to let it be visible among investors.

The legal regulation of cryptocurrencies in Slovakia is focused only on the manner of taxation of the income from its sale. The particular provisions of the income tax act are considered as the legal base of the taxation of the income from the sale of virtual currency. If the virtual currency is not included in the business assets of the entity, then the income from its sale is considered as other income, otherwise, it is considered as income from the financial property. For the purpose of valuation and bookkeeping, cryptocurrency meets the definition of short-term financial property other than money, which is the same as security.

Slovak lawgivers will wait for new EU rules, before implementing further laws, meanwhile, they will concentrate on the questions already addressed.

Spain – (JMD) The Comisión Nacional del Mercado de Valores (CNMV) has identified different channels for the resale of tokens post-ICO. Each channel has its own legal singularities and risks.

Firstly, there is direct commercialisation via the internet. It refers to acquisitions through platforms that operate on the internet, known as cashiers of cryptocurrencies. It can happen that the investor does not directly own the cryptocurrencies, but only the rights in front of the unsupervised platform or intermediary.

This can expose buyers to the insolvency risk of the intermediary and to the risk of non-compliance with basic principles of correct and diligent carrying custody and registration of assets. Additionally, the risk of money laundering should be taken into account.

There is also the option to purchase via CFDs (contracts for differences). Only professionals should consider this type of high-risk contract. On the other hand, the entity that offers these products must be authorised by the CNMV to provide investment services and comply with all the information obligations and other applicable rules of conduct.

It is also possible to gain exposure to ICO tokens through futures, options and other derivatives. It must be borne in mind that commercialisation of this type of product under public offer (article 35 of the text Consolidated of the Securities Market Law, TRLMV) by professionals between unskilled investors (retailers) could require a brochure approved by the CNMV or another European Union authority that has been the subject of a passport.

Alternatively, investment funds or other types of collective investment vehicles that invest in cryptocurrencies can be used. This type of vehicle or funds investment must be authorised or registered with the CNMV. Until now, there is no fund of these characteristics registered at the CNMV, and the funds that could legally, if authorised, invest in cryptocurrencies, cannot be traded among retail investors.

Exchange-traded products (ETPs) and exchange-traded notes (ETNs), with underlying exposure to tokens, also require the approval of a prospectus explanatory statement by supervisors also subject to the passport regime previously mentioned.

The European Union considers cryptocurrencies such as Bitcoin as a means of payment, therefore, VAT is applied to any purchase of goods or services, but VAT does not apply to the transmission of the currency. When cryptocurrencies are used as an investment through a broker and accrue gains or losses, this will have to be incorporated into income tax calculations and subsequent taxes paid.

Capital gains in Spain are taxed at 19 per cent up to EUR 6,000, 21 per cent above that up to EUR 50,000 and 23 per cent above EUR 50,000.


Noreen Weiss (NW) MacDonald Weiss PLLC – U.S. – New York www.irglobal.com/advisor/noreen-weiss

Lavinia Junqueira (LJ) Tudisco, Rodrigues & Junqueira – Brazil www.irglobal.com/advisor/lavinia-junqueira

Diego Benz (DB) Zwicky Windlin & Partner – Switzerland www.irglobal.com/advisor/diego-benz

Andrea Vasilova (AV) VASIL & Partners –Slovakia www.irglobal.com/advisor/andrea-vasilova

Luis Santine (LS) InfoCapital N.V – Dutch Caribbean www.irglobal.com/advisor/luis-santine-jr

José María Dutilh (JSM) LeQuid, Social Enterprise and Business Law Firm – Spain www.irglobal.com/advisor/jose-dutilh

Dunstan Magro (DM) WDM International – Malta www.irglobal.com/advisor/dunstan-magro

Dr. Robert Lewandowski (RL) DMP Derra, Meyer & Partners – Poland www.irglobal.com/advisor/robert-lewandowski

Benoît Couty (BC) Pichard & Associés – France www.irglobal.com/advisor/benoit-couty

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