Governments and regulators worldwide have been left playing catch-up when monitoring and understanding the crypto market – a fact that’s left plenty of uncertainty for those who want to invest in virtual coins. However, as this new type of currency continues to grow in popularity, governments and regulatory bodies are beginning to take notice. As a result, numerous legal regulations regarding cryptocurrency usage and purchasing exist that investors and entrepreneurs need to know about before buying or selling crypto tokens.
How to be a Legal Entity in Crypto
Blockchain-related businesses remain largely unregulated in most nations, even though the sector is expanding rapidly. In addition, cryptocurrency is still often seen as a method or tool for criminal activity in some circles, leading traditional businesses to be extremely wary and unwilling to serve people involved in cryptocurrency. Therefore, to demonstrate their credibility, many blockchain-related businesses are seeking regulation.
Throughout this article, we hope to assist entrepreneurs in understanding the legal implications of creating a token by covering what a token legal opinion is and why it is essential, the advantages and disadvantages of cryptocurrency legal regulations, and offer some examples of crypto-friendly/fully compliant countries.
Legal Considerations when Issuing your Own Token
A Web3 project’s token distribution typically involves three phases: developing a smart contract and issuing and distributing tokens.
The distribution phase can take many forms, such as:
- private token sales;
- airdrops;
- staking rewards;
- token mining;
- token minding;
- token swap;
- public token sales via launchpads or listings on cryptocurrency exchanges.
Each distribution method has different legal requirements, ranging from preparing the required documents to receiving public authority authorization.
What is a Token Legal Opinion, and why do you need it?
Prepared by a qualified and licensed professional, a Token Legal Opinion describes the legal nature of the token (Token Legal Design) and explains the legal requirements for issuing it. Due to potential liabilities such as having to reimburse all their raised funding or being slapped with hefty fines, the legal qualification of tokens is crucial for entrepreneurs operating in regulated jurisdictions.
In addition to the legal aspect of the document, a good token opinion will examine the token in detail from a technical perspective, including its accompanying whitepaper and all other documentation and media. Technical matters such as the tokens’ innate ability to be swapped or converted into other token types would be vitally important in determining the token’s legal status.
Once a token’s legal standing is established, the next phase of legal work begins. Here, the legal professionals determine the regulations governing the issuance and distribution of tokens. Depending on a token’s legal standing, it may be subject to various legal requirements. For example, a utility token might require a special license or token approval from the regulator. In addition, securities or financial instruments must be authorized and registered with the public authorities overseeing securities and stock markets to issue and distribute them. Similarly, digital goods must comply with consumer protection and e-commerce laws.
Selecting the Best Jurisdiction to Issue Tokens
By analyzing the legislation affecting the token they want to issue, lawyers can help startup founders choose the jurisdiction with the most significant regulatory certainty. The extent of the token’s authorizations and licenses required for the issuance and the token’s legal status are important considerations.
Are some Jurisdictions more Amenable to Certain Token Types than Others?
Yes, some are. Here are a few examples:
- Utility Tokens: Switzerland, Singapore, Cayman Islands, Hong Kong;
- Security Tokens: Switzerland, Liechtenstein;
- Financial Instruments/eMoney: Singapore, UK, Lithuania, Malta;
- Digital Goods/NFTs: UK, US (Delaware), Netherlands, Estonia.
Advantages and Disadvantages of Crypto Legal Regulations
Some crypto enthusiasts believe self-regulation is the key to making the world a better place. In contrast, others believe that regulation is the only way forward for mass adoption.
Is regulation bad for the crypto space? It depends on your perspective on the long-term future of the market. Here are some advantages and disadvantages of regulating the crypto market.
Advantages:
Increased legitimacy and mainstream adoption: Regulatory compliance can help cryptocurrency gain acceptance by the general public and mainstream financial institutions;
Can provide greater clarity for investors: At present, there is a great deal of uncertainty surrounding cryptocurrencies due to the lack of regulation in this area. Proper legislation would provide much-needed clarity for investors interested in putting their money into this burgeoning market;
Can promote innovation and competition: Cryptocurrencies are a new and innovative technology, and proper regulation could promote further innovation in this area. Additionally, it could promote competition by providing a level playing field for both established firms and new startups alike;
Regulation might also provide greater clarity for tax purposes, making it easier for businesses and individuals to comply with the law. Also, cryptocurrency regulations could create standardized rules and procedures that would make it easier for businesses to accept crypto payments.
Disadvantages:
- Stifling innovation: Too much regulation could stifle innovation in the cryptocurrency space. By over-regulating the industry, authorities could inadvertently make it more difficult for new projects to get off the ground and prevent existing ones from reaching their full potential;
- Creating barriers to entry: Another potential downside of increased regulation is that it could create barriers to entry for both businesses and individual investors/users. If regulatory requirements are too burdensome, it could dissuade companies from operating in the space and individuals from buying or using cryptocurrencies altogether;
- Increased scrutiny: Another downside of crypto legal regulation is that it would likely lead to increased scrutiny from governments and other agencies. This could result in more significant compliance costs and stringent know-your-customer (KYC) requirements. It could also lead to more hacks and data breaches, as exchanges and wallets would be required to store sensitive information about their users;
- Less anonymity and privacy: One of the benefits of cryptocurrencies is that they offer users a high degree of anonymity and privacy when making transactions. However, if cryptocurrencies are subject to legal regulation, this could potentially reduce the level of anonymity and privacy offered by these digital currencies.
Conclusion
A Web3 project’s well-designed legal framework for token creation helps shield founders from legal violations and regulatory fines and simplifies the listing of tokens on secondary market platforms such as cryptocurrency exchanges.
Furthermore, token issuance and regulatory restrictions are issues that investors typically bring up during the funding process for Web3 ventures, and prospective investors may reject improperly structured tokens as they pose a significant risk.
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Sources:
https://www.investopedia.com/terms/b/blockchain.asp
https://www.coinbase.com/learn/crypto-basics/what-is-a-token
