Cryptocurrencies in Luxembourg are not treated as legal tender, whereas cryptocurrency exchanges are legal, although they are required to be registered with the CSSF and obtain the payment institution’s license for trading activities. As of today, there is no specific cryptocurrency legislation in place. The financial regulator has issued two warnings in 14 March 2018, alerting public on the volatility of cryptocurrencies and instability of investing ICOs.
According to financial regulator, these risks risk stem from the lack of specific investor protection regulation and from the the fact that transactions are not counter-guaranteed by a government or a central bank. This being said, the county’s approach towards blockchain technology is utterly positive and progressive.
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What is Tokenization?
Security tokenization is the process of materializing the ownership in a security through the issuance of a “token” registered on a distributed ledger technology (DLT) infrastructure. Therefore, a tokenized security can be equity, a bond, or an investment fund. It could also represent a securitized fraction of a real asset (e.g. a piece of art).
The DLT infrastructure used to issue the tokens can, depending on the legislation and the choice of the issuer, either be the “primary register” for the security or a representation in the form of tokens primarily issued on a different infrastructure outside of the blockchain.
For the purpose of this Ebook, we will refer to these tokens as ‘security tokens’ and we will detail how they work in the following section. Most players in this emerging industry refrain from calling these ‘digital securities’, as the term is too vague, and in fact, securities have been traded digitally for years.
Our world is full of these securities, but many are currently difficult to physically transfer or subdivide, so buyers and sellers instead trade paper or unsecured digital files that represent some or all of the asset.
These systems are cumbersome, difficult to transfer and can be hard to track. The underlying assets can also lack transferability: For example, if the underlying asset is a piece of property, transferring the ownership of that asset requires for it to be sold. Through tokenization, the rights of these assets can be shared almost instantaneously thanks to peer-to-peer trading. This is one advancement of many when applying blockchain technology in financial markets, other use cases are explained later in this Ebook.
What Exactly is a Security Token?
2018 has been the inaugural year of Security Token Offerings (STOs) and many think that by 2030 tokenized securities will be the primary method of issuance.
To understand security tokens, it’s fundamental to understand securities. With securities, it’s mandatory to respect the relevant laws and regulation for every jurisdiction the assets are issued in, and in every jurisdiction the securities will be distributed. As you might expect, the exact same process is needed when issuing security tokens on a blockchain.
Utility Tokens vs Security Tokens
To precisely define security tokens, let’s define something they are not, utility tokens. An ICO is a way to raise funds for a distributed network. A company, or a foundation, issues tokens that can be used by contributors to redeem a service the entity is offering. For example, if the issuer of the token is a company launching a decentralized car sharing platform, each kilometer of travel could be represented with a token. The tokens are a way to exchange value between participants of the network by representing a unit of service. As such, they are called utility tokens.
However, if the main purpose of the token is to generate an increase of monetary value for its holder, it is an investment and therefore will be considered a security in most jurisdictions.
Obviously, if the issuer needs to collect funds in order to finance a company in the form of debt or equity, or if an asset manager wants to issue an investment fund, the token representing these financial instruments won’t be utility tokens, they are representations of securities and are therefore called security tokens. The key difference here is that utility tokens represent a right to use a predefined good or service. Security tokens represent a right to future financial flows resulting from the main activity of the issuer of the token. Here are some other key differences between the two:
Luxembourg embraces bitcoin by approving bitcoin exchange
Luxembourg has greenlighted Bitstamp as the first fully licensed bitcoin exchange in Europe. The company will open its headquarters in the Grand Duchy on July 1, 2016
(AP) Luxembourg has granted one of the longest-standing bitcoin exchanges a licence as a fully regulated payment institution.
Finance Minister Pierre Gramegna gave the stamp of approval to Bitstamp, a Europe-based bitcoin exchange, by signing the licence.
It means the Bitstamp will become the first fully licensed bitcoin exchange in Europe, going into effect on July 1, when their new headquarters in Luxembourg will be fully operational.
Bitstamp\’s license is passportable into the 28 EU member states providing all European customers with a robust, secure platform for bitcoin trading.
Bitstamp has simultaneously launched BTC/EUR trading to better serve the European markets, and is offering free trading in BTC/EUR for both new and existing customers for 30 days.
History of Furthering Innovation
Luxembourg\’s Minister of Finance Pierre Gramegna said: “Luxembourg has a long-standing history as an international leader in innovation. That Bitstamp has chosen Luxembourg as its European hub only strengthens that reputation. I believe this announcement marks a milestone for bitcoin and digital finance in Europe. Bitstamp is a most welcome addition to Luxembourg\’s fintech ecosystem.”
Bitstamp is the first and only nationally licensed bitcoin exchange. Established in 2011, Bitstamp is a marketplace allowing people from all around the world to securely buy and sell bitcoin. Bitstamp has raised a 10m USD Series Seed round from blockchain venture capital firm Pantera Capital.
Will Regulation Dictate the Location of the World’s Bitcoin Hub?
Jean-Louis Schiltz is a guest professor at the University of Luxembourg and legal advisor to several virtual currency companies (since his first involvement with bitcoin through MIT Media Lab). He is also a former Cabinet minister in Luxembourg. In this article, he examines whether it is possible for one place to emerge as the world’s bitcoin hub and whether regulation will have a hand in this.
Bitcoin and its regulation have been hot topics in and around the financial industry for some time now.
In the early days, the focus was (to repurpose a Shakespearian quote): to regulate or not to regulate?
Now, a small number of jurisdictions, such as the UK and New York, have moved to the next step: either they are in the course of determining what parts of bitcoin businesses should be regulated and how (as is the case in the UK), or they have recently adopted a regulatory framework specifically for virtual currencies (as is the case in New York).
Other jurisdictions decided quite some time ago to regulate large areas of bitcoin activity. One example of such a jurisdiction is Luxembourg.
Bitcoin regulation in Luxembourg
Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier (CSSF), has been at the forefront of the move towards regulating bitcoin, in that the CSSF announced – on Valentine’s Day 2014 – that professional bitcoin actors must be regulated.
Firstly, it stated that virtual currencies are considered money just like fiat currency and, secondly, it recalled that no financial activity can be carried out in Luxembourg without authorization from the financial regulator.
One key message from the CSSF to the bitcoin community – almost two full weeks before Mt Gox went bankrupt – was to warn them not to try to set up businesses in Luxembourg that would not pay attention to regulation.
Bitcoiners have since been on notice that they would not be allowed to develop their business in a Wild West environment in Luxembourg.
A recipe for success
Perhaps more importantly, by issuing its statement more than 15 months ago, the CSSF gave bitcoin companies the basic regulatory recipe for success.
In its statement, the CSSF outlined a number of basic principles that remain valid and might now even be considered mainstream principles for digital currencies in the light of the recent New York regulations.
This is particularly true with respect to the regulatory status of exchanges. Despite the fact that the term ‘exchange‘ cannot be found in the CSSF statement, the Luxembourg regulator describes possible categories of regulated activities such as issuing means of payments, provision of payment services and setting up markets or platforms.
Moreover, in the final sentence of its statement, the CSSF advises bitcoin actors to define their business purpose and activity in such a way that the regulator would be able to immediately determine what categories of regulated activities the entity would need to be licensed to conduct its business in an orderly fashion.
While perhaps slightly elliptic, this final bit of advice does not only constitute a clear pro-regulation statement, but also establishes that, depending on their activities, bitcoin actors might well become payment institutions, electronic money institutes, markets or multilateral trading facilities under the Markets in Financial Instruments Directive, or possibly even banks in a few months or years.
Applying existing rules
It is also interesting that, unlike New York, the CSSF did not put in place or invent one or more new categories of regulated entities, but rather applied existing EU rules to new types of businesses.
Further, its statement implies that risk mitigation, in general, and anti-money laundering concerns, in particular, are better addressed in a regulated environment than in a non-regulated one.
The same is true for consumer protection, even though we are never going to have a zero-risk world for bitcoin consumers. But, risk exists in the real world (as opposed to the virtual world) and in the old e-commerce world, too.
Remember, no one is obliged to do business, or get involved as a consumer, with virtual currencies, and that is a major difference between virtual currency and fiat currency.
While I have the impression that some jurisdictions seem to think they are in a race to become the one and only bitcoin hub, I do not believe there can, or will be, just one such hub.
For obvious regulatory reasons, hubs will first arise on both sides of the Atlantic and probably in Asia, too.
Those hubs may well arise in the places where key financial actors in Europe and in the US already conduct business. As for Europe, I predict that one or two hubs will emerge within the Eurozone and another will develop outside the Eurozone (perhaps even outside the European Union).
That said, and assuming more and more bitcoin and other virtual currency actors follow the payment rail route (that is concentrate on business-to-business activities aiming at facilitating payments, thus putting the correspondent banking system under attack), there could well be more than a few virtual currency hubs around the world in the very near future.
Digital currencies will then be everywhere. Whether it is going to be bitcoin or some other cryptocurrency that will be in the lead is a different question.