In July, The Tokenizer published The Security Token RegRadar Report produced in collaboration with the government of Liechtenstein. As part of the report, we did a line of qualitative interviews with leading legal experts from the selected countries, and in the coming weeks, we will publish these interviews on The Tokenizer.
Common to most of the interviews is that they provide an insight into the individual countries’ regulatory development history with regard to security tokens. Also, the interviews give an impression of to which extent the countries in question have an accommodating and friendly attitude towards the new industry of security tokens. In this first interview, we are looking at Austria and interviewing Oliver Völkel, Partner, Stadler Völkel.
Could you try to put Austria’s current position in the security token industry into a historical perspective? Why are you where you are now as a country, and what has happened?
Oliver Völkel (OV): Already in November 2018, the Austrian Financial Markets Authority approved a capital market prospectus for a token-based security offering. And we were lucky enough to advise on that project. This was the first approval of such a prospectus within the European Union, and since then, we have seen many more in other member states of the EU. The Austrian regulator has approached this topic rather early on and offered guidance on its website. Since the first approval of a prospectus based offering, it has been relatively clear what needs to be done to conduct a security token offering.
So the Austrian regulator mentioned STOs on their website already in 2018. That’s pretty impressive…
OV: I think so too. But also, the German regulator did that, if I’m not mistaken. So they were not far apart.
Obviously, the regulator is connected to the government, but anyways, at the time, how apparent was it for the government that something interesting was going on here?
OV: Already in 2017, the finance minister, Harald Mahrer, organised a large-scale summit with everybody in Austria who was somehow connected to the crypto world and invited guests from other countries. It was a brainstorming workshop on how Austria could become a crypto hub, and out of this workshop came the idea of a fintech sandbox model that has already been implemented. Also, in 2017, there was a research centre for crypto-economics established at Vienna university of Economics and Business.
That’s interesting. Did you notice a drawback from the government when the ICO market went down at the beginning of 2018?
OV: I would say they continued the same line. But it’s not so much that the government has favoured crypto entities or crypto enterprises, but instead that they decided to let them do their thing, let them experiment. Also, if you look at the prospectus based offering for security tokens approved by the Austrian regulator, it’s an entirely regulated procedure. They simply looked at this as if it was a completely regular capital market offering. So, I think that the important issue to underline is not so much that there are many incentives. The government doesn’t give you a pot of money and say,” Come to Austria.” But they simply leave you alone if you comply with European capital markets regulations. This is what would need to be stressed.
The RegRadar to become a software tool Besides being a standalone report in its own right, The Security Token RegRadar Report marks the starting point for developing The Tokenizer’s global regulatory software-based tool The RegRadar. With The RegRadar, we intend to deal with one of the most severe challenges of the emerging security token space – the lack of regulatory clarity. When The RegRadar is fully developed, it will keep track of all regulatory changes across jurisdictions worldwide regarding security tokens. The RegRadar will be launched as a professional software tool before the end of 2021. It will be a subscription-based service available on The Tokenizer.
And from the beginning, they believed that the MiFID II was sufficient as a regulatory framework for this, right?
OV: Yes. So MiFID II, in some sense, but at the time, the prospectus directives, and now the prospectus regulation. It was clear from 2017 onwards that you would simply view a token that was created on a blockchain as a piece of paper. And whatever you can do with a piece of paper, you could also do with tokens. So, for example, if you print a security note on it, it becomes a security. If you print a voucher on it, it becomes a voucher. So basically, you can do the same with tokens. This was clear rather early on, so it didn’t take much effort to get a prospectus based security token offering approved. And this cemented the legal view that the token can be a security.
However, there’s still a couple of obstacles. What’s really an issue at the moment is the secondary market for security tokens. There is no regulated entity that operates a regulated marketplace, like an MTF or OTF or whatever sort of regulated exchange. This poses difficulties, and at the moment, there is no real effort, neither on the regulator side nor on the government side, to enable this quickly.
The regulatory sandbox model was put in place earlier this year, and the first project has something to do with creating a marketplace for security tokens. But this is not an effort that came from the regulator side or the government side. This is the market trying to establish itself. In my opinion, we’ll only see a regulated market for security tokens once the market in Crypto-assets Regulation has been implemented on the EU level. What’s perhaps interesting to note is that the Austrian regulator allows you to run your own marketplace on your website. So how it usually would work is, the issuer implements a subscription form, basically, and people subscribe to the security, make a payment on the security, and the issuer transfers the security tokens to the Ethereum address of the subscriber. And your placement is then completed. The issuer takes care of everything. You don’t need a custody bank or a payment agent to do that.
Would you call it easy for a foreign company within the industry of security tokens to settle down and start operating in Austria?
OV: Absolutely. But first of all, companies wouldn’t even need to incorporate in Austria if they only want to conduct a security token offering. You can do this within any EU member states and simply apply to the Austrian Financial Market Authority for approval of your prospectus based offering. And you don’t need to be a resident in Austria or have a company in Austria. If you want to settle down in Austria, you can also do that rather easily. It doesn’t take much time. It’s not very expensive. I want to make a distinction between a couple of thresholds. So if you’re going to make a localised or a national offering, there are a couple of different thresholds that you need to keep in mind in Austria. If you’re raising 250,000 euros maximum, you don’t need to prepare any offering documents.
Not anything at all?
OV: Not anything at all. If it’s between 250,000 euros and five million euros within a period of seven years (within a period of 12 months, you are not allowed to raise more than two million euros), you need to publish a standardised information sheet. If you want to go any bigger, you would need a capital markets prospectus. And then, this is the crucial thing, the capital markets prospectus can be passported to other EU member states, whereas the first two options can not be passported.
Okay. So if you want to passport to the entire EU, you have to go for the big one?
OV: Exactly. Yes.
What about the practicalities of passporting? I know you have to notify the authorities in the different countries, but what does that mean? And how cumbersome is that?
OV: In practice, it means that you have to draw up your prospectus in English and include a summary for every member state in its local language. The summary is standardised with standardised items, so you create a summary in English once and translate it into the local languages of the countries in which you would like to make the offer.
Another thing you need to do is to include a short description of how the securities you are offering are being treated under the jurisdiction’s tax laws in which you make the offer. Those are the only two hurdles. The passporting itself is simply an email that the regulator sends to the other regulators stating that “We have approved this prospectus and notified it to you, so it’s now also approved for an offering in your jurisdiction.” That’s all there is to it.
Okay. So, as a company, you don’t need to approach the other regulators yourself. That will be done by, in this case, by the Austrian regulator?
OV: Yes, exactly. You tell them where you want it to be notified, and they do it for you.
Would you say that Austria, from a regulatory perspective, is a frontrunner in the security token space?
OV: Yes, I would say so. We didn’t need the lawmakers to create any new laws to make this possible. This was all achieved by discussing the literature and concluding that the security tokens fall under the regime of MiFID II. They are to be considered transferable securities; they are comparable to bonds, shares and the like. Also, the literature on civil law methods concluded that you could regard them as securities. And this was done with the literature and not by the lawmakers.