The Philippines classifies cryptoassets (such as bitcoin or Ether) as remittances. Japan views them as legal tender. Germany calls them “private money,” while Canada views them as funds or intangible property. The United States has confusingly called cryptoassets property, commodities, or potentially even tools for money laundering and terrorism, with some states c alling them monetary value subject to money transmitter laws. With cryptoassets’ wide range of functionalities and properties, the world is confused about how to classify them under existing frameworks.
A new proposal calls for the European Union (EU) to buck this trend of applying old law to the new technology, by asking for cryptoassets to be classified as their own legal category. The European Regulatory Initiative Report (the Report) proposes “treating tokens as a new asset class to properly address the multidimensional properties that this technology exhibits.” The Report is notable for its stark distinction between “cryptocurrencies” – cryptoassets like bitcoin or Litecoin that are primarily used for storing and transferring value – and “cryptotokens” – cryptoassets with a wider range of functions, including “intrinsic tokens” (representing rights to use a specific blockchain, such as Ethereum), “asset-backed” (representing ownership of real-world property, such as Digix’s gold backing), and “rights related” (representing real-world rights, such as ownership, voting, profit-sharing, or management control over a company, such as Blockchain Capital). Should the EU adopt this perspective, it would be the first governmental body to formally do so.
Specifically, the Report offers three recommendations for new laws regulating cryptoassets. First, it asks that such a law clearly state that cryptoassets be “treated as a separate asset class without automatically triggering regulations” like existing securities laws, anti-money laundering requirements, or European Value Added Taxes. Second, it asks for this law to be enforced across the entire European Union, attempting to avoid a patchwork of conflicting laws like that in the US, which critics claim has scared many blockchain startups away from American soil. Third, it asks for independent treatment of each type of cryptoasset, so that regulation of, for example, rights related tokens designed to protect shareholders does not necessarily affect investment in asset-backed tokens, which do not need such protections.
The Report also suggests that the EU consider updating record-keeping requirements similar to Delaware’s proposed corporate law amendments by maintaining records using blockchain technology instead of through the currently used human-error-prone system, such as those used for shareholder registration or land ownership registries. This idea could allow Delawarean and European companies to conduct business in the other jurisdiction more easily than what is currently available, allowing entrepreneurs to conduct business internationally without having to sometimes re-incorporate overseas purely for legal reasons.
The Report’s supporter base indicates an emerging consensus around the distinction between the different types of cryptoassets and the belief that cryptoassets warrant treatment independent of existing legal frameworks. European law heavy-hitters Wardynski Partners and Lacore Rechtsanwälte and European blockchain company Neufund were the main contributors to the Report, with help from some of the crypto-industry’s biggest players, including Kraken, Ledger Labs, and Golem.
Recent events indicate a general frustration growing among attorneys and entrepreneurs in the space with the inability of legal institutions to clarify existing “gray areas.” The Report reflects this sentiment, but manages to articulate clear demands to regulators of how the industry would like the law to evolve. Time will tell whether governments will heed the call, but for now we are left to ponder the basic question: “what is a ‘cryptoasset’?”