Important: This article is a historical post from 2018 on the CNMV’s criteria for the issuance of ICOs, tokens, and cryptoassets, based on press releases published in February and September 2018. Since then, the regulatory framework governing cryptoassets, cryptoasset services, and token offerings has evolved significantly, particularly due to the adoption of the MiCA Regulation and subsequent supervisory guidelines.
The CNMV, in conjunction with the Bank of Spain, issued a statement dated February 8, 2018, which had already been referenced in previous publications, in which it warned that numerous efforts were underway to raise funds from investors to finance projects through so-called initial coin offerings ( ICOs )—a term that echoes that used in initial public offerings (IPOs).
The aforementioned communication was based on the premise that the term “ICO” could refer to different concepts related to the issuance of cryptocurrencies or the issuance of various types of rights known as tokens.
New CNMV Criteria for ICO Issuance
In the context of the 2018 publications and press releases, ICOs raised significant concerns from a regulatory perspective, especially when the fundraising was directed at investors and the assets offered had characteristics similar to those of financial instruments or negotiable securities.
The CNMV and the Bank of Spain warned that these processes could pose significant risks to investors, both due to the novelty of the technology and the lack of registration, authorization, or verification by regulatory agencies in Spain for the offerings analyzed up to that point.
Cryptocurrency Issuance and Token Issuance
The communication distinguished, within the general concept of an ICO, between two possible scenarios:
- Issuance of cryptocurrencies.
- Issuance of various types of rights known as “tokens.”
These assets were offered for sale in exchange for cryptocurrencies, such as bitcoins or ethers, or for fiat currency, such as euros. The uses and characteristics of the tokens could vary, and it is common to distinguish between two broad categories: security tokens and utility tokens.
Security tokens and utility tokens
Security tokens were described as those that, as a general rule, could grant a stake in the future earnings or in the increase in value of the issuing entity or a business.
Utility tokens, on the other hand, were presented as tokens that granted the right to access a service or receive a product, notwithstanding the fact that, at the time of the offering, reference was made to expectations of appreciation, liquidity, or the possibility of trading on specific markets.
This distinction was particularly relevant because, depending on the specific characteristics of the token, it was possible to question whether or not the issuance was subject to securities market regulations.
Initial Warning from the CNMV
The CNMV noted that, as of the date of the February 2018 press release, no cryptocurrency issuance or ICO had been registered, authorized, or verified by any regulatory body in Spain.
This warning highlighted the need for extreme caution in investment transactions involving cryptoassets, especially when investors might interpret the existence of a public offering or marketing materials as implying some form of official oversight.
CNMV Press Release dated September 20, 2018
On September 20, 2018, the CNMV issued a new statement in which it initially warned that instruments would not qualify as negotiable securities in cases where a correlation could not reasonably be established between the instrument’s expected appreciation or return and the performance of the underlying business or project.
In addition to that initial clarification, the CNMV examined three main issues:
- The necessity and scope of intervention by entities authorized to provide investment services.
- The system for representing tokens and the implications of trading them on trading platforms.
- The Need for an Informational Brochure.
Regulation of Entities Authorized to Provide Investment Services
With regard to the involvement of an authorized entity, the CNMV referred to Article 35.3 of the Securities Market Law and to the criteria published in its Fintech Q&As regarding the minimum level of involvement required of an authorized entity to provide investment services.
The authorized entity was required to conduct general oversight of the process and validate the information to be provided to investors, which had to be clear, impartial, and not misleading; it had to address the characteristics and risks of the securities issued and describe the issuer’s legal and economic-financial situation of the issuer in sufficient detail to enable an informed investment decision.
Furthermore, it was deemed appropriate that the authorized entity not validate the information to be provided to investors if it did not include prominent warnings regarding the novel nature of the registry technology and the fact that the instruments were not held in custody by an entity authorized to provide investment services.
The CNMV also noted that, in principle, the involvement of an authorized entity was not necessary for the placement of securities when the transaction was merely occasional for the issuer, since the requirement for professional or regular activity set forth in securities market regulations required that the activity be carried out on a professional or regular basis.
Similarly, in principle, the involvement of an authorized entity to hold the securities in custody would not be necessary either, since the requirement that such activity be carried out on a professional or regular basis also applies.
Token Representation and Trading on Platforms
Another issue analyzed by the CNMV was the system for representing tokens and the implications of trading them on platforms.
Article 6.1 of the Securities Market Act allowed for the interpretation that certain securities did not necessarily have to be represented by book entries or certificates, given the use of the term “may.” Therefore, the possibility of registering rights that could be considered negotiable securities using DLT or blockchain technology could not be ruled out.
Tokens traded on non-Spanish markets
If the tokens were traded on non-Spanish markets, Article 6.2 of the Securities Market Act applied only to Spanish trading venues. Therefore, if the tokens were traded on a foreign market, the CNMV would not have the authority to require that they be represented by book-entry records.
In that case, it would be the law and the competent authority of the country in which the market where the tokens are to be traded is located that would determine the extent to which a specific form of representation of the securities is required and, if applicable, whether the register must be maintained by a central securities depository.
Trading on Spanish Regulated Markets
Conversely, it did not appear possible to trade the tokens on regulated markets, multilateral trading facilities, or organized trading systems in Spain if the requirements for book-entry representation and record-keeping by a central securities depository were not met.
This restriction was in response to the requirements of Spanish securities market regulations applicable to trading venues and the representation of negotiable securities.
Unregulated platforms or exchanges in Spain
The CNMV also noted that it did not appear possible to create a domestic market on an unregulated platform, nor for tokens to be traded on a platform or exchange located in Spain when those tokens were considered negotiable securities.
In such cases, platforms should hold the necessary authorizations to carry out their activities, including those required to operate as a trading venue—such as a regulated market, a multilateral trading facility, or an organized trading facility—or as an investment services firm or credit institution operating as a systematic internalizer.
The trading venue should be managed by an investment services firm or a market operator, and should be subject to market regulations and the oversight of the CNMV.
Need for an informational brochure
Regarding the requirement for a prospectus, the CNMV noted that many of the proposed transactions could fall under Article 35.2 of the Securities Market Law, which pertains to cases in which there is no obligation to publish a prospectus.
The CNMV advised issuers that, even in cases where the publication of a prospectus was not mandatory, they should adhere to the criteria regarding the involvement of an authorized entity and the provision of clear, impartial, and non-misleading information to investors.
It also noted that preparing a prospectus for an ICO could pose challenges due to the lack of a harmonized model at the European level, which could lead to conflicts with other European authorities regarding the passporting of the prospectus approved by the CNMV.
However, when a prospectus is required due to the nature of the transaction, the CNMV indicated that it would make the necessary efforts to adapt it and would take into account the principle of proportionality—especially in the case of smaller transactions—in order to reduce the complexity and length of the document as much as possible.
Lawyers Specializing in Cryptocurrencies and ICOs
IN DIEM Abogados’ practice area specializing in cryptocurrencies, Bitcoin, and ICOs has extensive experience and expertise in new technologies and cryptoassets.
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This advisory service also covers matters related to anti-money laundering, virtual currencies, and the Tax Agency.
Legal Advice on ICOs, Tokens, and Cryptoassets
IN DIEM Abogados provides legal advice on matters related to cryptocurrencies, token issuance, ICOs, transactions involving cryptoassets, financial regulation, anti-money laundering, taxation of virtual currencies, regulatory compliance, and disputes arising from investments in digital assets.
Legal advice may be important for analyzing the nature of the token, assessing regulatory risks, reviewing investor-facing documentation, examining disclosure requirements, determining the potential involvement of authorized entities, and designing a legal strategy tailored to the specific transaction.
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