Legal and Regulatory Compliance Challenges for Equity Token Secondary Market Operators in the European Union

Online First

Abstract

As equity tokenization using blockchain-based distributed ledgers and tokens is trying to gain traction in multiple jurisdictions, the need for compliant, reliable and scalable secondary markets has become urgent. Forming a vital component of the overall venture financing value chain exchanges and other secondary market trading facilities are necessary to provide adequate levels of liquidity, investor confidence and market access to make the tokenization value proposition viable. In contrast to cryptocurrencies and utility tokens used for Initial Coin Offering (ICO) fundraising equity tokens are classified legally in the European Union broadly as financial instruments and specifically as securities invoking extensive compliance requirements not only for the issuer of the equity token and/or primary market issuance platform, but in particular for secondary market operators. The objective of this article is to identify key legal and compliance challenges impacting operation of these secondary markets and their ability to support a viable tokenization value chain. While research questions are analyzed from a European Union-level perspective, specific examples from the jurisdictions of Luxembourg, Germany, Liechtenstein, Estonia and Poland are investigated in order to identify root causes of deficiencies and potential observations and recommendations for future European developments in this highly competitive and globalized industry. Quantitative overview of key relevant market players is also attempted with the objective of substantiation of qualitative observations and conclusions.


Keywords:
Tokenization; Blockchain; Cryptoassets; Exchanges; Securities; Trading

Pages:
1 – 27
References

[1] Autorité des Marchés Financiers. (2020) Review and analysis of the application of financial regulations to security tokens. Available from: https://www.amf-france.org/sites/institutionnel/files/private/2020-10/legal-analysis-security-tokens-amf-en.pdf [Accessed 3 January 2025]

[2] Bassana, F. and Rabittib, M. (2024) From smart legal contracts to contracts on blockchain: An empirical investigation. Computer Law & Security Review, 55

[3] Benetti, Z. and Piazza, F. (2024) Decentralised Finance: A categorisation of smart contracts. ESMA Working Papers, No. 3, ESMA50-43599798-9913

[4] Benson, V. et al. (2024) Harmonising cryptocurrency regulation in Europe: opportunities for preventing illicit transactions, European Journal of Law and Economics, 57. Available from: https://doi.org/10.1007/s10657-024-09797-w [Accessed 3 January 2025]

[5] Berwick, A. and Wilson, T. (2022) Special report - crypto giant Binance kept weak money-laundering checks even as it promised tougher compliance documents show, [online] Reuters, Available from: https://www.reuters.com/article/business/media- telecom/special- report- crypto- giant-binance- kept- weak- money- laundering- checks- even- as- it-idUSL8N2U065F/ [Accessed 3 January 2025]

[6] Bossi, P. (2020) Nomisma’s MiFID II License For A Blockchain-Based MTF, [online] GLC, Available from: https://globallegalchronicle.com/nomismas-mifid-ii-license-for-a-blockchain-based-mtf/ [Accessed 3 January 2025]

[7] Cipollone, P. (2024) Towards a digital capital markets union, In: Bundesbank Symposium on the Future of Payments, Frankfurt am Main, 7. October. Available from: https://www.ecb.europa.eu/press/key/date/2024/html/ecb.sp241007~cc903db51d.en.html [Accessed 3 January 2025]

[8] Coelho, D. Figueiredo, A. J. (2024) The relationship between MiCAR and MAR: a brief introduction, SSRN, Available from: http://dx.doi.org/10.2139/ssrn.4887363 [Accessed 3 January 2025]

[9] Commission Delegated Directive 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits. Official Journal of the European Union (C/2016/2031) 31 March

[10] Conlon, T. Corbet, S. and Hu, Y. (2022) The Collapse of FTX: The End of Cryptocurrency’s Age of Innocence. [pre-print] Submitted to: British Accounting Review. Available from: http://dx.doi.org/10.2139/ssrn.4283333
[Accessed 3 January 2025]

[11] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU. Official Journal of the European Union (PE/72/2017/REV/1) 19 June. Available from: http://data.europa.eu/eli/dir/2018/843/oj

[12] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. Official Journal of the European Union (OJ L 173, 12.6.2014) 12 June. Available from: http://data.europa.eu/eli/dir/2014/65/oj

[13] du Toit, D. (2024) Crypto Market Manipulation: Shedding Light on the Hidden Tactics, [online] Coinpaper, Available from: https://coinpaper.com/3631/crypto-market-manipulation-shedding-light-on-the-hidden-tactics [Accessed 3 January 2025]

[14] ESMA. (2022) Report on the DLT Pilot Regime On the Call for Evidence on the DLT Pilot Regime and compensatory measures on supervisory data, ESMA70-460-111

[15] ESMA. (2023) Technical Standards specifying certain requirements of Markets in Crypto Assets Regulation (MiCA) - second consultation paper, ESMA75-453128700-438, Available from: https://www.esma.europa.eu/sites/default/files/2023-10/ESMA75-453128700-438_MiCA_Consultation_Paper_2nd_package.pdf [Accessed 3 January 2025]

[16] ESMA. (2024) Final Report Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, ESMA75453128700-1323, 17 December. Available from: https://www.esma.europa.eu/sites/default/files/2024-12/ESMA75453128700-1323_Final_Report_Guidelines_on_the_conditions_and_criteria_for_the_qualification_of_CAs_as_FIs.pdf [Accessed 3 January 2025]

[17] ESMA. (2025) Report on the Functioning and Review of the DLT Pilot Regime - Pursuant to Article 14 of Regulation (EU) 2022/858, ESMA75-117376770-460, 25 June. Available from: https://www.esma.europa.eu/sites/default/files/2025-06/ESMA75-117376770-460_Report_on_the_functioning_and_review_of_the_DLTR_-_Art.14.pdf [Accessed 20 August 2025]

[18] Finck, M. (2019) Blockchain and the General Data Protection Regulation. Can distributed ledgers be squared with European data protection law?, Panel for the Future of Science and Technology, European Parliamentary Research Service, Scientific Foresight Unit (STOA) PE 634.445

[19] Garrido, J. M. (2023) Digital Tokens: A Legal Perspective. IMF Working Papers, 151

[20] Ibáñez, L.D. O’Hara, K. and Simperl, E. (2018) On Blockchains and the General Data Protection Regulation, EU Blockchain Forum and Observatory, 79

[21] Jiménez-Gómez, B. (2023) Distributed Ledger Technology in Financial Markets. The European Union Experiment, Cuadernos de Derecho Transnacional, 15 (2)

[22] Jünemann, M. Wirtz, J. (2024) Finanzaufsichtsbehörden erteilen erste Lizenz für ein blockchainbasiertes Handels- und Abwicklungssystem, [online] Bird & Bird, Available from: https://www.twobirds.com/de/insights/2024/germany/financial-regulators-issue-first-license-for-a-blockchain-based-trading-and-settlement-system [Accessed 3 January 2025]

[23] Kreppmeier, J. and Laschinger, R. (2023) Signaling in the Market for Security Tokens, Journal of Business Economics, 93. Available from: https://doi.org/10.1007/s11573-023-01175-3 [Accessed 3 January 2025]

[24] Kreppmeier, J. et al. (2023) Real estate security token offerings and the secondary market: Driven by crypto hype or fundamentals?, Journal of Banking and Finance, 154

[25] Lambert, T. et al. (2021) Security token offerings, Small Business Economics, 59. Available from: https://doi.org/10.1007/s11187- 021- 00539- 9 [Accessed 3 January 2025]

[26] Malta Financial Services Authority. (2021) MFSA Warning to the Public regarding Binance and Other Unlicensed VFA Service Providers, [press release] 14 July. Available from: https://www.mfsa.mt/news-item/mfsa-warning-to-the-public-regarding-binance-and-other-unlicensed-vfa-service-providers/ [Accessed 3 January 2025]

[27] Malta Stock Exchange. (2018) Malta Stock Exchange Signs MOU with Binance to Launch Security Tokens Trading Platform, [press release] 11 September. Available from: https://www.borzamalta.com.mt/news-and-articles/articles/mse-binance-mou [Accessed 3 January 2025]

[28] Marjosola, H. (2022) Security Tokens and the Future of EU Securities Law: Rethinking the Harmonisation Project, University of Helsinki Faculty of Law Legal Studies Research Paper Series, 70 (2021). Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3897849#

[29] Mucklejohn, L. (2025) EU regulator to intervene in row between market makers and German exchanges, [online] Financial News, Available from: https://www.fnlondon.com/articles/eu-regulator-to-intervene-in-row-between-market-makers-and-german-exchanges-5087c7af [Accessed: 20 June 2025]

[30] Nägele, T. (2020) Secondary Market for Security Tokens — The need for a new regulatory approach at the European Union level [online] Medium. Available from: https://tokencontainermodel.com/secondary- market- for-security-tokens-the-need-for-a-new-regulatory-approach-at-the-european-e922e4ca04 [Accessed 3 January 2025]

[31] Nassr, I. (2021) Understanding the tokenization of assets in financial markets, OECD Going Digital Toolkit Notes, 19. Available from: https://doi.org/10.1787/c033401a-en [Accessed 3 January 2025]

[32] Neufund. (2019) Launching retail offerings, developing the platform and more. What’s new at Neufund? [blog entry] 22 May. Medium. Available from: https://blog.neufund.org/launching-retail-offerings-developing-the-platform-and-more-whats-new-at-neufund-1599c851ef53 [Accessed 3 January 2025]

[33] News Desk. (2021) Nxchange securities token exchange acquires Bondex for tokenized shared issuance, [online] Available from: https://www.unlock-bc.com/news/2021-05-04/nxchange-securities-token-exchange-acquires-
bondex-for-tokenized-shared-issuance/ [Accessed 3 January 2025]

[34] OECD. (2020) The Tokenisation of Assets and Potential Implications for Financial Markets, OECD Blockchain Policy Series, 2020, Available from: www.oecd.org/finance/The- Tokenisation- of- Assets- and-Potential-Implications-for-Financial-Markets.htm [Accessed 3 January 2025]

[35] Rane, N. Choudhary, S. and Rane, J. (2023) Blockchain and Artificial Intelligence (AI) Integration for Revolutionizing Security and Transparency in Finance, SSRN Available from: http://dx.doi.org/10.2139/ssrn.4644253 [Accessed 3 January 2025]

[36] Raskin, M. and Yermack, D. (2016) Digital currencis, decentralized ledgers and the future of central banking, National Bureau of Economic Research Working Papers. Available from: https://www.nber.org/papers/w22238

[37] Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (GDPR). Official Journal of the European Union (OJ L 119) 4 May. Available from: http://data.europa.eu/eli/reg/2016/679/oj

[38] Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA), and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937. Official Journal of the European Union (PE/54/2022/REV/1) 9 June. Avialable from: Available from: http://data.europa.eu/eli/reg/2023/1114/oj

[39] Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (MAR). Official Journal of the European Union (OJ L 173) 12 June

[40] Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (CSDR) and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012. Official Journal of the European Union (OJ L 257) 28 August. Available from: http://data.europa.eu/eli/reg/2014/909/oj

[41] Regulation 2022/858 of the European Parliament and Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology (Pilot Regime) and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU. Official Journal of the European Union (PE/88/2021/REV/2) 2 June. Available from: http://data.europa.eu/eli/reg/2022/858/oj

[42] Schär, F. (2021) Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets, FRB of St. Louis Review, 103 (2). Available from: https://doi.org/10.20955/r.103.153-74 [Accessed 3 January 2025]

[43] Sonner, P. (2024) Decentralized Exchanges Risks Review. What is a DEX in Crypto? [online] Beinsure, Available from: https://beinsure.com/decentralized-exchanges-risks-review-what-is-a-dex-cryptoexchange/ [Accessed 3 January 2025]

[44] Zetzsche, D. A. Buckley, R. P. and Arner D. W. (2019) The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain. University of Illinois Law Review, 4

[45] Zhang, Y. Gong, B. and Zhou, P. (2024) Centralized use of decentralized technology: Tokenization of currencies and assets. Structural Change and Economic Dynamics, Volume 71

[46] (2023) A complex scheme: The rise and demise of FTX, [online] BDO Canada, Available from: https://www.bdo.ca/insights/fraud- deconstructed-ftx-cryptocurrency [Accessed 3 January 2025]

[47] (2024) Bitpanda Pioneers Security Token Access for European Retail Investors With Steelcoin Listing, [online] Fintech Finance News, Available from: https://ffnews.com/newsarticle/cryptocurrency/bitpanda-pioneers-security-token-access-for-european-retail-investors-with-steelcoin-listing/ [Accessed 3 January 2025]

[48] (2024) Boerse Stuttgart Digital partners with Fenergo to scale regulatory compliant crypto solutions across Europe, [online] Fenergo, Available from: https://resources.fenergo.com/newsroom/boerse-stuttgart-digital-partners-with-fenergo-to-scale-regulatory-compliant-crypto-solutions-across-europe [Accessed 3 January 2025]

[49] (2024) STM Market Report: April 2024, [online] Medium, Available from: https://medium.com/security-token-group/stm-market-report-april-2024-82b253d80626 [Accessed 3 January 2025]

[50] (2024) Building the Digital Asset Securities Ecosystem Digital Asset Securities Control Principles: a framework for adoption, An Industry Paper from DTCC, Clearstream, and Euroclear with the collaboration of BCG. [online] DTCC. Available from: https://www.dtcc.com/-/media/DASCPWhitePaper.pdf [Accessed 3 January 2025]

[51] Electronic Securities Act 2021, Germany. Bundesgesetzblatt. In: German

[52] Law of 22 January 2021 amending the law of 5 April 1993 on the financial sector and the law of 6 April 2013 on dematerialised securities 2021, Luxembourg. In: Luxembourgish

[53] Securities and Exchange Commission v. W. J. Howey Co. et al., 328 U.S. 293 66 S. Ct. 1100; 90 L. Ed. 1244; 1946 U.S. LEXIS 3159; 163 A.L.R. 1043

[54] Security token offerings: The next phase of financial market evolution?, [online] Deloitte, Available from: https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/audit/deloitte-cn-audit-security-
token-offering-en-201009.pdf [Accessed 3 January 2025]

Metrics

0

Crossref logo

0


0

Views

0

PDF views