Regulation of token brokers, custodians, exchanges, finders…

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Published on February 1, 2019

It may be a bit chewed up, but I like the gold rush/crypto boom analogy. both are not bubbles but formidable industries with crazy hypes and disillusionment. Both are highly lucrative. Both created new civilizations. And while the aftermath of the blockchain civilization’s creation is yet to unfold, I tend to think that it will resemble that of the gold rush. It seems like the biggest benefactors will be the providers, rather than the miners themselves.

The key difference here is the risk factor. placing investment deals (“finding”), running investmet pools and setting up exchanges dealing with all kinds of tokens (often securities)- these are all endeavors with a risk factor that producing shovels and jeans did not have. The real problem rises when these finders, exchanges and pool operators mistake themselves for jeans makers and shovel sellers. I like to call this the innocent risk taker syndrom (or: Ignorance ISN’T bliss).

Finders, pools and exchange operators usually don’t have bad intentions, most of them are breaking the law out of mere oversight. More often than not, they believe the tokens they’re touching are in fact utility tokens or just aren’t aware that the mere activity they are engaing in is one that requires a license.

I’ll cover several main activities for which licensing is needed. Mercifully, I realize this post is long enough already so I won’t go into it here, but you should know that financial licenses require that you present and “lock” some amount of capital (and you will need to prove that this money is clean). The logic is to make sure that those in charge of people’s money would have an ability to indemnify investors in case the company fails.

Finders / placers will usually be considered brokers or investment advisors

When you get an investor to invest in a certain security token, there is a very fine line between a friendly recommendation and giving investment advice.

US- Investment Advisor / BD- In the US, the appropriate license would usually be an investment advisor license or a broker-dealer license. An investment advisor license would impose a fiduciary (“heavy”) duty on you to put the investor’s best interest above all else and to eliminate or disclose any compensation you are from the project you placing investments for. Finders in the ICO space may find this challenging.

EU- MiFID Licenses- no, it’s not an iPhone app… MiFID is a pivotal directive in the EU. it actually means Markets in Financial Instruments Directive, and it regulated mainly brokers and market makers which deal with financial instruments (securities included). A category 2 broker license would usually be a good fit for a finder or even for an investment pool operator as it allows the license holder to hold clients’ funds, give investment advice and execute orders on behalf of clients.

“Investment pools” will usually be considered funds or brokers.

Commodity Pool Operator- America, the land of infinite licensing opportunities! a CPO is basically a hedge fund investing in commodities, rather than other securities such as equity and debt securities. the CPO would usually be managed by CTAs (commodity trading advisors) and regulated by the CFTC. IMPORTANT: investing in non-security crypto outright wouldn't trigger a CPO licensing requirement, but investing in crypto DERIVATIVES (margin and leveraged trades, futures, CFD, swaps…) would.

confused about the US? security token > investment advisor. non-security token > technically unregulated. commodity-token derivatives > CPO.

In Europe, again, any kind of an investment pool operator (investing in financial instruments) would usually fall under EU fund regulations (for example, the Alternative Investment Funds Managers Directive, or AIFMD) or MiFID (a broker license).

Hedge Fund/ AIF (Alternative Investment Fund)- in the US, a hedge fund investing in securities will need to be qualified as an investment advisor.

In Europe, there’s no distinction between fund investing in commoditied vs. those investing in securities. the AIFMD regulates hedge funds, real estate funds, PE funds, and other “alternative” funds. Therefore, this directive is a natural fit for funds investing in crypto assets. an exemption from the regulation is given to funds with AUMs under 100m EUR (or 500m if unleveraged).

Platforms enabling token issuers to sell security tokens to the public will usually be considered crowdfunding platforms.

Crowdfunding- a crowdfunding platform is a plartform that enables start-ups to sell of secuirites without being authorized themselves. they hitchhike on the crowdfunding license of the operator to sell their securities through the platform. in terms of licensing, crowdfunding is still very un-harmonized. in the US, it imposes an unworkable annual capital raise limit of approx. 1m$. in europe, there’s no pan-EU crowdfunding regime yet (although I think we expect it by 2020). There are many European countries with existing crowfunding laws: Lithuania, Austria, Belgium, Italy, Germany, UK, Portugal, and by the way in Israel there’s a new crowdfunding law as well. Out of these, Lithuania is the one with the highest raise limit of an annual 5m EUR per project, and a positive regulatory stance towards using this license for STOs. there are also “tricks” for passporting the license throughout the EU, for example by piggy-backing it to a pasportable license such as EMI or PI.

A quick summary for your weary eyes:

Investment Pool

EU: Security tokens/ Crypto commodities > Broker (MiFID cat 2) or AIF (AIFMD), depending on business model.

US: Crypto commodities > CPO+CTA. Securities > hedge fund licensed as investment advisor.


EU: cat 2 broker

US: broker-dealer or investment advisor

Exchange trading in securities



Crowdfunding Platforms

US: JOBS act, up to annual 1m$ per start-up.

EU: state-specific laws, Lithuania pro-tokens use and with high limits of 5m EUR.

Published on February 1, 2019