Source: https://www.legalico.io/references/
Timestamp: 2019-04-25 22:29:34+00:00

Document:
As a general rule, innovation requires a safe space for people to explore, test, launch, and iterate with new technologies. Hence, in order for innovation to be made possible, this space must be defined and fairly administered by authorities and clearly communicated to all relevant stakeholders.
While we recognize that there are many different kinds of token sales—many of which do not bear any resemblance with traditional IPOs or securities issuance—for the purpose of this report, we have chosen to refer to all practices and projects involving the issuance and sale of blockchain-based tokens to the public as Initial Coin Offerings (ICOs).
https://spectrum.ieee.org/tech-talk/computing/networks/ethereums-150-million-dollar-dao-opens-for-business-just-as-researchers-call-for-a-moratorium, accessed January 16th, 2018.
https://hacked.com/meteoric-rise-continues-ico-funding-reaches-3-25-billion-in-october/, accessed January 16th, 2018.
Note that the European Union will be solely looked at in brief in an isolated fashion due to the reasons highlighted in the respective report.
See e.g. Hacker/Thomal classification of utility tokens, investment tokens, payment tokens etc. in Hacker, P., & Thomale, C. (2017), Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, 1.
SEC Chairman Clayton, Statement on Cryptocurrencies and Initial Coin Offerings, December 11, 2017, https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11, accessed January 11th, 2018; SEC Order in the matter of Munchee (Inc.), Release No. 10445 / December 11th, 2017, https://www.sec.gov/litigation/admin/2017/33-10445.pdf, accessed January 11th, 2018.
Note, that this is not an exhaustive list and many other categories and subcategories may be defined. Further note, that we will not pay attention to hybrid forms which combine elements from different main- and subcategories. This is due to the limited length of this document and the difficulty in distinguishing these hybrid forms from the "pure" forms. This difficulty stems from the fact that merely all of these tokens have a payment utility to them and can be swapped in exchange for assets and services on exchange platforms, provided they are fungible enough. We will, therefore, focus on the defining characteristic of each token when subsuming them under one of the below categories. One could draw an analogy to the theory of absorption under contract law, which defines the governing contract type for innominate contracts (compound contracts to be exact) to be the one which governs the majority, i.e. the lion's share—however quantifiable—of the legal relationship between two or more contracting parties.
With dividend certificates, the holder has a claim towards the issuer to receive a fixed amount; whereas, with profit share tokens, the token holder has no claim towards the issuer but rather receives consideration as part of the purchase agreement underlying the transfer, with no right to receive back the fixed amount.
For a good overview of Section 5 of the Securities Act of 1933 and its implications for token sales, see J. Dax Hansen & Carla L. Reyes, Legal Aspects of Smart Contract Applications: Digital Asset Sales and Capital Markets, Supply Chain Management, Land Registries, Government Records and Smart Cities, and Self-Sovereign Identity (May 2017), https://www.virtualcurrencyreport.com/wp-content/uploads/sites/13/2017/05/Perkins-Coie-LLP-Legal-Aspects-of-Smart-Contracts-Applications.pdf and Coalition of Automated Legal Applications, A Primer on Crytposecurities (Dec. 2015), http://coala.global/uploads/COALA-A-Primer-On-Cryptosecurities-Dec-2015.pdf.
Jonathan Rohr & Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets, at 26, available at https://ssrn.com/abstract=3048104 (citing Zachary J. Gubler, Public Choice Theory and the Private Securities Market, 91 N.C. L. Rev. 745, 747 (2013)).
15 U.S.C. § 78a et seq.
See Rohr & Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (citing 15 U.S.C. § 78j (Section 10b)).
See 17 C.F.R. § 240.10b-5. Note that a material fact has been defined to include any fact that would be important to investors when making a decision to buy or sell securities.
See Hansen & Reyes, Legal Aspects of Smart Contract Applications: Digital Asset Sales and Capital Markets, Supply Chain Management, Land Registries, Government Records and Smart Cities, and Self-Sovereign Identity (May 2017) (noting that the Securities Act includes short-term instruments with maturities of less than nine months in its definition of security, while the Exchange Act does not).
See SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946).
See Landreth Timber Co. v. Landreth, 471 U.S. 681, 690 (1985).
See, e.g., Carla L. Reyes, Nizan Geslevich Packin & Benjamin P. Edwards, Distributed Governance, 59 Wm & Mary L. Rev. Online 1, 28-29 (2017); Coalition of Automated Legal Applications, A Primer on Crytposecurities (Dec. 2015), http://coala.global/uploads/COALA-A-Primer-On-Cryptosecurities-Dec-2015.pdf.
Securities Exchange Commission, Release No. 81207: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, July 25, 2017, available at https://www.sec.gov/litigation/investreport/34-81207.pdf [hereinafter "The DAO Report]; see also 15 U.S.C. § 77e.
SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946).
SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943).
Hansen & Reyes, Legal Aspects of Smart Contract Applications: Digital Asset Sales and Capital Markets, Supply Chain Management, Land Registries, Government Records and Smart Cities, and Self-Sovereign Identity (May 2017).
Leading commentators concur that a token need not be purchased for fiat currency in order to satisfy the "investment of money" prong – any "good, service, promissory notes, and other exchanges of value" can satisfy the first element of the test. See Jonathan Rohr & Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets, at 27 (citing Uselton v. Commercial Lovelace Motor Freight, Inc. 940 F.2d 564, 574-75 (10th Cir. 1991)). See also, Carla L. Reyes, Nizan Geslevich Packin & Benjamin P. Edwards, Distributed Governance, 59 Wm & Mary L. Rev. Online 1, 28-29 (2017);, at 29 ("While the exchange of a cryptocurrency for a token would likely qualify as an investment of money, a contribution of computational power might not.") (citing Marco Santori, AppcoinLaw: ICOs the Right Way, CoinDesk (Oct. 15, 2016, 2:04 PM), http://www.coindesk.com/appcoint-law-part-1-icos-the-right-way/).
The common enterprise element has a "focus on the extent to which the success of the investor's interest rises and falls with others involved in the enterprise." Miriam R. Albert, The Howey Test Turns 64: Are the Courts Grading This Test on a Curve?, 2 Wm. & Mary Bus. L. Rev. 1, 16 (2011). Since the Supreme Court never specifically defined "common enterprise" the lower courts were left to determine what it meant. At least three lower court tests have developed: horizontal commonality, broad vertical commonality and narrow or strict vertical commonality. Jonathan Rohr & Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets at 28 (citing Thomas Lee Hazen, The Law of Securities Regulation § 1:52 (2016)). Although an exhaustive treatment of these tests lies beyond the scope of this discussion, generally speaking, "[t]he horizontal commonality test requires multiple purchasers (more than one) who are all exposed to the risk of the enterprise" while the vertical commonality tests looks at the connection, in varying degrees, between the investor and the promoter. Id. at 29 (citing SEC v. Infinity Group Co., 212 F.3d 180, 188 (3d Cir. 2000); Steinhardt Group Inc. v. Citicorp, 126 F.3d 144, 151 (3d Cir. 1997); SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n.7 (9th Cir. 1973); SEC v. SG Ltd., 265 F.3d 42, 49 (1stCir. 2001)).
Press Release, U.S. Sec. & Exchg. Comms'n, SEC Emergency Action Halts ICO Scam, 2017-219 (Dec. 4, 2017), https://www.sec.gov/news/press-release/2017-219.
U.S. Sec. & Exchg. Comms'n, SEC Exposes Two Initial Coin Offering Purportedly Backed by Real Estate and Diamonds, 2017-185 (Sept. 29, 2017), https://www.sec.gov/news/press-release/2017-185-0.
For a short summary of these enforcement actions, see Keith Miller, SEC Files Emergency Action to Halt Alleged ICO Scam, Perkins Coie Virtual Currency Report (Dec. 4, 2017), https://www.virtualcurrencyreport.com/2017/12/sec-files-emergency-action-to-halt-alleged-ico-scam/.
In re Munchee, Inc., No. 3-18304, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order, at 2 (Dec. 11, 2017), https://www.sec.gov/litigation/admin/2017/33-10445.pdf. For a more detailed discussion of the Munchee Order, see Perkins Coie LLP, SEC Takes Aim at Initial Coin Offerings Again, Virtual Currency Report (Jan. 11, 2018), https://www.perkinscoie.com/en/news-insights/sec-takes-aim-at-initial-coin-offerings-again.html.
Juan Batiz-Benet, Marco Santori & Jesse Clayburgh, The SAFT Project: Toward a Compliant Token Sale Framework, Protocol Labs & Cooley (Oct. 2, 2017), https://www.cooley.com/~/media/cooley/pdf/reprints/saft-project-whitepaper.ashx.
Cardozo Blockchain Project, Research Report #1: Not So Fast – Risks Related to the Use of a 'SAFT' for Token Sales (Nov. 21, 2017), https://cardozo.yu.edu/sites/default/files/Cardozo Blockchain Project - Not So Fast - SAFT Response_final.pdf.
Robert N. Rapp, How to Apply Blue Sky Laws to Securities Offerings, Law360 (Nov. 14, 2013), https://www.law360.com/articles/488533.
In the Matter of BitConnect, Order No. ENF-18-CDO-1754, Texas State Securities Board, at 8 (Jan. 4, 2018), https://www.ssb.texas.gov/sites/default/files/BitConnect_ENF-18-CDO-1754.pdf.
In the Matter of BitConnect, Order No. ENF-18-CDO-1754, Texas State Securities Board, at 2, 8 (Jan. 4, 2018), https://www.ssb.texas.gov/sites/default/files/BitConnect_ENF-18-CDO-1754.pdf.
In the Matter of BitConnect, Order No. ENF-18-CDO-1754, Texas State Securities Board, at 6-8 (Jan. 4, 2018), https://www.ssb.texas.gov/sites/default/files/BitConnect_ENF-18-CDO-1754.pdf.
See, Coinflip, Inc., CFTC, Docket No. 15-29, at 3 (Sept. 17, 2015) (order), available at http://www.cftc.gov.idc/groups/public/@Irenforcementactions/documents/legalpleading/enfmintcocomplaint091615.pdf.
Pillsbury Winthrop Shaw Pittman LLP, Initial Coin Offerings (ICOs): The Current State of Play, JDSupra (Nov. 3, 2017), https://www.jdsupra.com/legalnews/initial-coin-offerings-icos-the-current-75078/.
Andrew P. Cross, Laurie Rosini & Thomas Ahmadifar, Retail Commodity Transactions Involving Virtual Currencies: An Overview of the CFTC's Proposed Interpretation (Part 1), Perkins Coie Derivatives & Repo Report (Dec. 16, 2017), https://www.derivativesandreporeport.com/2017/12/retail-commodity-transactions-involving-virtual-currencies-an-overview-of-the-cftcs-proposed-interpretation-part-1/.
Andrew P. Cross, Laurie Rosini, & Thomas Ahmadifar, CFTC Virtual Currency Proposed Interpretation – Part 2, Perkins Coie Derivatives & Repo Report (Dec. 19, 2017), https://www.derivativesandreporeport.com/2017/12/cftc-virtual-currency-proposed-interpretation-part-2/.
J. Dax Hansen, Carla L. Reyes & Joseph P. Cutler, New FinCEN Guidance Changes Regulatory Landscape for Virtual Currencies and Some Prepaid Programs, Cyberspace Law. (Thomson/Legalworks, New York, N.Y.), Apr. 2013, at 12.
U.S. Dep't of Treasury, FinCEN, Admin. Ruling, FIN-2013-G001, Application of FinCEN's Regulation to Persons Administering, Exchanging, or Using Virtual Currencies (2013) [hereinafter, FinCEN, Virtual Currency Guidance], https://www.fincen.gov/statutes-regs/guidance/pdf/FIN-2013-G001.pdf.
Carla L. Reyes, Moving Beyond Bitcoin to an Endogenous Theory of Decentralized Ledger Technology Regulation: An Initial Proposal, 61 Vill. L. Rev. 191, 204 (2016) (citing FinCEN, Virtual Currency Guidance).
FinCEN, Virtual Currency Guidance, at 4.
FinCEN, Virtual Currency Guidance, at 5.
Alert, Washington DFI, DFI Reminds Investors to Approach Cryptocurrency with Caution (Jan. 9, 2018), https://dfi.wa.gov/consumer/alerts/cryptocurrency-investing.
FTC, A Brief Overview of the Federal Trade Commission's Investigative and Law Enforcement Authority (July 2008), https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority.
Specially Designated Nationals and Blocked Persons List (SDN) Human Readable Lists (Jan. 12, 2018), https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx; Sanctions List Search Tool, https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fuzzy_logic.aspx.
In re Munchee, Inc., No. 3-18304, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order, at 2 (Dec. 11, 2017), https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
Jonathan Nieh, Brave Browswer's ICO Raises $36 Million in 30 Seconds, Crowdfund Insider (June 2, 2017), https://www.crowdfundinsider.com/2017/06/101301-brave-browsers-ico-raises-36-million-30-seconds/; Jon Russell, Former Mozilla CEO raises $35M in under 30 seconds for his browser startup Brave, TechCrunch (June 1, 2017), https://techcrunch.com/2017/06/01/brave-ico-35-million-30-seconds-brendan-eich/.
Ari Levy, There's a new way for casual investors to get in on the cryptocurrency craze, CNBC Tech (June 4, 2017), http://www.cnbc.com/2017/06/04/bitcoin-and-ethereum-rallies-have-led-to-funds-like-for-storj-ico.html.
Smith & Crown, Observations on the Geography of Token Sales (Oct. 26, 2017), https://www.smithandcrown.com/observations-geography-token-sales/.
Cryptocurrency ICO Stats 2017, CoinSchedule.
Securities Act RSA 2000, c. S-4.
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Monetary Authority of Singapore, A Guide to Digital Token Offerings, 2 seq., http://www.mas.gov.sg/News-and-Publications/Monographs-and-Information-Papers/2017/Guidance-on-Digital-Token-Offerings.aspx, accessed January13th, 2018.
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Monetary Authority of Singapore, A Guide to Digital Token Offerings, 3 seq.
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"Widely accepted stored value facility" means a SVF (a) in which the stored value is held by an approved holder, and (b) in respect of which an approved bank has undertaken to be fully liable for the stored value.
Paragraph 2A, MAS Notice PSOA-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism – Holders of Stored Value Facilities (dated 30 November 2015).
http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Anti-Money-Laundering-and-Countering-the-Financing-of-Terrorism.aspx (visited last, January 7th, 2017).
http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Anti-Money-Laundering-and-Countering-the-Financing-of-Terrorism/Notices-and-Guidelines.aspx (visited last, January 7th, 2017).
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Section 14A in connection with the Schedule, CTA.
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Notice on Guarding Against the Risks of Bitcoins, issued jointly by PBoC, MIIT, BRC, SRC and IRC, 3 December 2013, Yin Fa  No. 289.
Notice on Guarding Against the Risks of Bitcoins, issued jointly by PBoC, MIIT, BRC, SRC and IRC, 3 December 2013, Yin Fa  No. 289.., para. 1 - 5.
Announcement on Guarding Against the Risks of Financing by Initial Coin Offerings, issued jointly by PBoC, MIIT, BRC, SRC, IRC, State Administration of Industry and Commerce ("AIC"), and Cyberspace Administration of China ("CAC"), 4 September 2017.
Announcement on Guarding Against the Risks of Financing by Initial Coin Offerings, issued jointly by PBoC, MIIT, BRC, SRC, IRC, State Administration of Industry and Commerce ("AIC"), and Cyberspace Administration of China ("CAC"), 4 September 2017_._, para. 1-4.
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Chapter 2, Implementing Rules of the Administrative Measures for Personal Foreign Exchange.
Bitcoin debuts on world's largest futures exchange, and prices fall slightly, https://www.cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html, December 17, 2017, CNBC, last visited January 15, 2018.
Implementation Plan for the Special Rectification on Risks in Equity Crowdfunding, Zheng Jian Fa  No. 29, April 14, 2016.
Art. 1, Interpretation of the Supreme People's Court on the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fundraising, Fa Shi  No. 18, effective January 4, 2011. However, promotion to or absorption from specific persons are not considered illegal.
Professor Deng Jianpeng, Correct Recognition of the Legal Risks of ICO, September 8, 2017, Caixin ( http://opinion.caixin.com/2017-09-08/101142415.html), last visited January 15, 2018; also Professor Li Aijun, Legal Interpretation of Virtual Currency and ICO, November 6, 2017, Caixin ( http://opinion.caixin.com/2017-11-06/101166121.html), last visited January 15, 2018.
Art. 176, PRC Criminal Law.
Arts. 3, 4 & 7, Measures Banning Illegal Financial Institutions and Illegal Financial Business Activities, Decree No. 247 of the State Council, effective July 13, 1998.
Art.5, Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitisation of Financial Institutions, BRC Decree  No.3, effective December 1, 2005.
SRC Decree , effective November 19, 2014.
"Qualified investor" are those who meet the requirements under art. 12 of Interim Measures for the Supervision and Administration of Privately-Raised Investment Funds, i.e. entities with net assets no less than RMB 10 million, or individuals with financial assets of no less than RMB 3 million or average annual personal income of no less than RMB 500'000 in the last three years.
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China moves to shutter bitcoin mines, https://www.ft.com/content/adfe7858-f4f9-11e7-88f7-5465a6ce1a00, January 10, 2018, Financial Times, last visited January 15, 2018; also China wants an "orderly exit" from bitcoin mining, https://qz.com/1174091/china-wants-an-orderly-exit-from-bitcoin-mining/, January 8, 2018, Quartz, last visited January 15, 2018.
PRC Announcement on Risk Prevention of ICOs: https://goo.gl/EzvRka.
http://www.csai.cn/ico/1248168.html, last visited January 15, 2018.
http://www.csai.cn/ico/1248191.html, last visited January 15, 2018; see also further below.
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Caixin, http://finance.caixin.com/2018-01-04/101193143.html, last visited January 15, 2018.
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Although the European Prospectus Regulation entered into force in 2017, most parts will not be applied until 2019.
Article 3(1) of the European Prospectus Directive.
Article 211-2 of the AMF General Regulation.
Section 3(1) of the Austrian Capital Markets Act.
Article 35.2(2) of the Securities Market Act as concluded by the Royal Legislative Decree 4/2015 of October 23.
Hacker, P., & Thomale, C. (2017). Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, 14 seq.
192https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-markets/post-trade-services/derivatives-emir_en, accessed January 13th, 2018; see legal definition in points (4) to (10) of Section C of Annex I of Directive 2004/39/EC.
Hacker, P., & Thomale, C. (2017). Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, 15.
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For instance, Estonia has been ranked as high as 12 in the "Doing Business" by World Bank: http://www.doingbusiness.org/data/exploretopics/starting-a-business, accessed January 14, 2018.
The latest version of the Act entered into force on January 3, 2018, transposing the provisions of MiFID II into Estonian legislation. Available in Estonian: https://www.riigiteataja.ee/akt/117112017044?leiaKehtiv, accessed January 10, 2018. (English translation to be published soon).
A qualified investor in the meaning of the Act is a credit institution, investment firm, management company, investment fund, insurance undertaking and another financial institution subject to financial supervision; the Republic of Estonia, a foreign state, a local or regional government or the central bank of Estonia or a foreign state; an international institution or organisation, including the International Monetary Fund, the European Central Bank, and the European Investment Bank; a financial institution whose only business activity is investment in securities, a market trader in commodities and commodity derivatives; a large enterprise; or another professional client not specified above or an eligible counterparty pursuant to the Act or a person who is considered a professional client or an eligible counterparty pursuant to the current legislation of another Contracting State, excluding the case when the client has applied for being treated as a retail client.
Webpage of EFSA, available in English: https://www.fi.ee/?lang=en, accessed January 10, 2018.
Available in English: https://www.riigiteataja.ee/en/eli/517112017001/consolide, accessed January 10, 2018. Amendments to the law, transposing new revised payment services directive (PSD2) into Estonian legal order, are pending and have not yet been adopted at the time of writing. Such amendments, however, shall not in any substantial way impact the potential applicability of the part of Payment Institutions and E-money Institutions Act to the tokens/ICO-s for these amendments do not change provisions concerning the issue of e-money.
Available in English: https://www.riigiteataja.ee/en/eli/521122017004/consolide, accessed January 10, 2018.
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The list of services currently included in article 3 of the Act is to be extended after the implementation deadline for PSD2, whereby payment initiation and account information services will be added to the list (not yet available at the time of writing).
Available in Estonian: https://www.fi.ee/public/20150908_Krediidiasutuse_tegevusala.pdf, accessed January 10, 2018.
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See article 1 et seq. Available in English: https://www.riigiteataja.ee/en/eli/521082017004/consolide, accessed January 10, 2018.
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EFSA 13.11.2017 notice, available http://www.fi.ee/index.php?id=21902, accessed January 10, 2018. See the chapter on the European Union for more details.
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Legislative Decree no. 58/1998, as subsequently amended and supplemented.
Legislative Decree no. 231/2007, as subsequently amended and supplemented.
Legislative Decree no. 385/1993, as subsequently amended and supplemented.
Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institution.
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Note that Switzerland does not have noteworthy regulation regarding commodities which would affect token sales. Consumer Protection also only tangentially affects token sales. One example being Article 3 para. 1 letter s of the Federal Act Against Unfair Practices, pursuant to which, amongst other provisions, the order of a customer must be confirmed electronically. Therefore these regulatory frameworks are not treated as part of this report.
Article 2 letter b FMIA in connection with Article 2 para. 1 FMIO.
Commentary regarding Swiss Private Law, CHK-H. KUHN, Article 965 CO, N 20.
Hess/Spielmann, Cryptocurrencies, Blockchain, Trading Venues & Co. - Digitized Assets under Swiss law, in: Capital Markets Law and Transactions XII, 195.
Article 4 para. 2 FISA.
Uncertificated securities may only be transferred by assignment, which requires written form (Article 973c para. 4 Code of Obligations), as opposed to negotiable (certificated) securities.
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References: § 78
 § 78
 § 240
 v. 
 v. 
 § 77
 v. 
 v. 
 v. 
 § 1
 v. 
 v. 
 v. 
 v. 

Art. 1

Art. 176

Art.5
 art. 12
 Art. 1156
e contrario