## Executive Summary

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### Overview of tokens and technological basis
- Tokens are digital items based on developments in cryptography and particularly in Decentralized Ledger Technology (DLT) and equivalent techniques; they are digital items that cannot be forged and whose transfer is traceable and economical.
- Tokens are units designated by entries in a digital ledger that uses cryptographic techniques and are numerical values incorporated to a ledger based on distributed ledger technology (DLT), such as blockchain.
- Tokens are purely digital creations that do not have physical reality; the term "token" is a metaphor for physical objects that represent value or give access to services.
- Tokens are different from electronic documents: the main difference is the use of cryptography and their integration in a database, which greatly reduces the possibilities of forgery. Tokens are a subcategory of electronic records.
- Through integration with smart contracts, tokens can be connected to rights to receive an asset, a payment, or the delivery of a service.
- DLT examples and variations include blockchain and alternatives such as directed acyclic graphs (DAGs), permissioned ledgers (“consortium blockchains”), and centralized databases under single-party control.
- Technical facts preserved:
  - The private key is a 64-character alphanumeric code.
  - Bitcoin network is a matrix of Unspent Transaction Outputs (UTXOs); partial transfers can result in multiple UTXOs.
  - As of January 2022, there were almost 19 million bitcoins (creation example: the Genesis block included 50 bitcoins).
  - Deployment and execution costs on Ethereum are paid in Ether (ETH) in units of gwei (each gwei = 0.000000001 ETH).
  - Permissioned ledgers (e.g., Quorum, Corda, Hyperledger Fabric) do not require a native cryptoasset to operate.

### Functional potential and economic implications
- Tokens can replace existing commercial instruments and perform additional economic functions.
- Tokens offer greater flexibility than traditional commercial instruments and can be deployed across economic activities.
- If efficiency and scalability issues of DLT and similar technologies are addressed, tokens could become the lynchpin of the new digital economy.
- Tokens can provide a new technique for the issuance, recording, and transfer of rights; when rights are adequately linked to tokens, they could benefit from DLT transfer technologies.
- Potential economic gains from wider token use include significant gains in liquidity, cost reduction and enhanced security.
- Advantages and limitations of DLT:
  - Advantages: enable parties worldwide to transact without intermediaries, generally low fees and short time frames for transfers, time-stamped tamper-resistant records useful for accounting and auditing.
  - Limitations: ledger size can raise efficiency and scalability concerns; technological changes (e.g., sharding) are being tested.

### Classification and legal implications
- Classification based on rights afforded:
  - Some tokens do not include any right and only have extrinsic value based on social consensus (native tokens, also known as crypto currencies).
  - Other tokens are connected to rights in the virtual sphere (Level 2).
  - Others are connected to rights to off-line assets or services (Level 3).
- Legal challenges arise where tokens are connected to rights: law’s intervention is indispensable to establish an enforceable link between tokens and off-line reality and ensure correspondence between tokens and off-line assets or services.
- Legal status designations under commercial law can trigger associated legal and regulatory regimes; classification as a security is particularly consequential.

### Fundamental legal issues to address
- Core legal rules needed to provide legal certainty include rules for:
  - transfer of tokens (loss, illegal transfers, good faith acquisition);
  - creation of security interests;
  - impact of insolvency;
  - use of enforcement actions;
  - jurisdictional and conflict of law rules for token relationships.
- These issues must be addressed across legal traditions and for all economic uses of tokens.
- Clear criteria are needed to distinguish tokens subject to securities laws; over-extension of securities law risks stifling innovation.

### Consumer protection, market functioning, and regulatory approach
- For tokens performing economic functions but not securities, law should respect innovation and take an enabling approach; this may require limited changes to commercial law beyond fundamental common rules.
- Tokens in consumer relationships should be subject to consumer protection rules adapted to token characteristics to offer equivalent protection to traditional relationships.
- The multilateral and decentralized nature of many token activities may require regulation of token markets and intermediaries to ensure smooth and fair functioning.

### Policy implications and recommendations
- Law should adapt existing legal frameworks rather than apply over-inclusive rules derived from strict technology neutrality.
- Solid legal foundations can support technological development and wider token adoption.
- Legislators should emphasize legal frameworks’ importance in supporting innovative technologies.

*IMF WORKING PAPERS — Digital Tokens: A Legal Perspective — Executive Summary*

### Box 1. Types of blockchains (selected technical clarifications)
- Public blockchains: open read, open transaction submission, open consensus participation; secured by crypto economics (proof of work, proof of stake); generally "fully decentralized".
- Consortium blockchains: consensus by pre-selected nodes; read rights may be public or restricted; considered "partially decentralized".
- Fully private blockchains: write permissions centralized; read permissions may be public or restricted; likely applications include internal database management and auditing.
- Addresses, keys, wallets, and tokens:
  - Cryptography links addresses to users via private/public keys; the address is a shortened form of the public key.
  - Wallets store public and private keys, exist as “hot” and “cold” wallets, can have a seed or secret recovery phrase, and are interfaces/keyrings that do not hold tokens.
- Consensus mechanisms:
  - Proof of work: blocks added by solving cryptographic problems; Bitcoin rewards the node adding a block ("mining").
  - Proof of stake, delegated proof of stake, and platform-specific techniques (example: NEAR using proof of stake and sharding) are alternatives.
- Tokens and smart contracts:
  - A token is a unit of value represented in DLT; native tokens (coins) provide platform incentives and have extrinsic value imposed by users’ collective belief.
  - Smart contracts are predefined relationships encoded in the ledger; often integrated in DApps (Ethereum, Solana, Avalanche).

### Box 2. The UNCITRAL Model Law on Electronic Transferable Records (MLETR)
- MLETR adopted in 2017; does not affect substantive law applicable to transferable documents or instruments.
- Key definitions:
  - “electronic record” — “information generated, communicated, received or stored by electronic means” (art. 2).
  - “electronic transferable record” — an electronic record that is a document or instrument entitling the holder to claim performance or transfer the right (arts. 2 and 10).
- Principles: technology neutrality and functional equivalence; control replaces possession; electronic records may include metadata; legal requirements for “writing” can be satisfied by electronic formats.
- Scope and limits: MLETR takes an enabling approach but does not provide technological guidance or substantive law adjustments.
- Adoption and impact:
  - Bahrain and Singapore have enacted the Model Law.
  - The UK is in the process of incorporating the Model Law through the Electronic Trade Documents bill 2023.
  - UK impact assessment estimates net benefits of “more than one billion pounds for the first ten years that the law is in force.”
- Legal implications for tokens: additional legal changes likely needed to integrate tokens into commercial instrument frameworks; UNCITRAL’s work provides a blueprint for negotiable instruments and documents of title.

### UNIDROIT guidance and private law aspects of digital assets
- UNIDROIT defines digital assets as “controllable digital records,” aligning with the revised UCC in the US.
- Guidance principles include treating digital assets as objects subject to property rights (principle 3), emphasizing control over possession (principle 6), and preferring transfer of control for perfection of security interests (principle 15).
- Key inventory of legal issues includes:
  1. Legal nature of tokens
  2. Applicable regime for transmission
  3. Connection to off-line assets/services
  4. Security interests
  5. Loss, fraud, illegal transfer
  6. Rights in insolvency
  7. Procedural remedies
  8. Conflict of laws
- Token legal characterization:
  - No single legal definition; tokens are code/electronically stored information and part of intangible assets.
  - Classifying tokens as assets implies they can be objects of property rights; courts in Singapore, England, and New Zealand have treated cryptoassets as “property” in specific cases.
  - Civil law jurisdictions show complexity; Germany used a legal fiction in the Electronic Securities Act of 2021 to subject security tokens to movable asset regimes.
  - Wyoming is a notable jurisdiction with statutory categories for tokens.
- Levels taxonomy and legal implications:
  - Level 1 (native tokens): token itself with no attached rights.
  - Level 2: rights attached via smart contracts within the digital domain.
  - Level 3: tokens linked to off-line assets/services require additional legal support (oracles, IoT, qualified intermediaries) to bridge virtual and real worlds.
- Transfer and private keys:
  - Proper DLT transfer is by issuing an order per protocol; private keys confer control but not necessarily ownership.
  - Laws should specify that crediting tokens to a DLT address has the legal value of transfer and permit DLT records to satisfy “writing” and signature requirements (examples: Illinois Blockchain Technology Act; UCC revisions removing writing/signature references).

### Section 4A-202. Connection of tokens to off-line assets or services
- Level 3 tokens require a “bridge to reality”; oracles and IoT help but do not alone establish entitlement to off-line assets/services.
- Smart contracts cannot self-enforce off-line delivery; legal tools and qualified intermediaries (e.g., validators) may ensure off-line performance corresponds to smart-contract terms.
- Laws must resolve conflicts between token-based rights and other rights over the same asset; one technique is statutory priority for DLT transfers or qualified intermediary guarantees.

### Box 5. The token container model of Liechtenstein (selected)
- Liechtenstein’s 2019 “Tokens and Trusted Technology Service Providers Act” uses a technology-neutral “trustworthy technology” (TT) concept.
- Token defined as “a piece of information on a TT System which can represent claims or rights of memberships against a person, rights to property or other absolute or relative rights.”
- The “token container” model allows tokens to digitally represent any right, certificate, obligation, or asset (tangible or intangible).
- Roles: TT service providers must register with the Financial Market Authority; roles include token issuers, TT key custodians, physical validators, and others.
- Under reformed civil law, tokens will have priority over the physical world where tokens exist for rights and assets.

### Security interests, loss, fraud, and insolvency
- Security interests over tokens:
  - DLT lacks native mechanisms to record security interests; tokens circulate unencumbered by default.
  - Collateral techniques include escrow addresses with smart-contract release conditions, transfer to third-party-controlled addresses, proprietary/fiduciary transfers, and pledges where creditor controls tokens.
  - Cryptocurrencies have been assimilated to money for secured-transaction purposes in some regimes; continuing control by the secured creditor is required.
  - UCC revision introduced “controllable electronic record” concepts permitting security interests perfected by control (see §§ 9-314 and 9-326A UCC; § 12-105 UCC; § 7-106 definitions).
  - Preventing unauthorized transfer of collateral is essential; pledges and fiduciary transfers are effective.
- Loss, fraud, and illegal transfer:
  - Critical risk is loss of private keys; native-token loss is often irrecoverable.
  - Illegitimate controllers may be personally liable; judicial remedies can enable recovery but may be too late against good-faith transferees.
  - For tokens linked to smart contracts or off-line assets, mechanisms should permit replacement tokens, blocking, or provision of the asset/service to rightful payers.
  - Law must reconcile legitimate holders’ rights with protections for third parties who acquire in good faith.
- Rights in insolvency:
  - Level 1/native tokens: focus on intermediaries holding tokens; outcomes depend on contractual terms and commingling; holder rights may be in rem or personal.
  - Level 2 tokens: intermediary insolvency has similar tracing/commingling issues; issuer insolvency typically yields in personam unsecured claims for non-delivery of virtual services.
  - Level 3 tokens: preferred approach is to provide in rem delivery rights to token holders; otherwise holders face unsecured claims; services generally treated under contract-in-insolvency rules.

### Procedural remedies (Chapter 7)
- Remedies should be available to token holders, including criminal law remedies where applicable.
- DLT transfers are irreversible; courts can order reverse transfers, award damages, or issue orders against persons controlling tokens.
- Courts cannot seize tokens without obtaining private keys but can order intermediaries and issue worldwide freezing orders (effectiveness in practice is untested).
- Need for procedural regulation tailored to tokens:
  - Native tokens cannot generate performance disputes.
  - Level 2 tokens are generally regulated by smart-contract terms; smart contracts often include arbitration clauses.
  - Full procedural regimes needed for asserting rights, recovering tokens, and preventing illicit control.
- Tokens linked to off-line assets/services should be recognized as executory titles so courts can enforce payment/delivery remedies.

### Box 7. Tokens and the US securities laws — The Howey Test and SEC Guidance (selected)
- Howey test elements:
  1. An investment of money (courts extend to any valuable consideration; only truly free distributions avoid this limb).
  2. In a common enterprise (vertical or horizontal integration).
  3. Expectation of profits (direct profits, dividends, capital appreciation; promotional materials matter).
  4. Profits derived from entrepreneurial/managerial efforts of others.
- Application to tokens:
  - SEC applied Howey to a token sale in the DAO case (2017).
  - SEC 2019 guidance lists factors for expectation of profits and reliance on promoters; decentralized networks may be less likely to be investment contracts.
  - Focus often on token sale contracts rather than the token object itself.
- Policy and regulatory diversity:
  - Internal SEC comments (Hinman) and Commissioner Peirce’s safe harbor proposal reflect policy-driven uncertainty and proposals for temporary exemptions.
  - National approaches vary: FINMA (Switzerland), BaFin (Germany), MAS (Singapore), Malta (VFA Act), Wyoming (Utility Token Act), EU MiCA (offer/white paper and exclusions).
- EU MiCA offering thresholds (art. 4.1 and art. 4.2):
  - White paper/marketing requirements do not apply when:
    - (a) offer to fewer than 150 natural or legal persons per Member State acting on their own account;
    - (b) over 12 months, total consideration does not exceed EUR 1 000 000;
    - (c) offer addressed solely to qualified investors where crypto-asset can only be held by such qualified investors.
- Tokenization as securities:
  - Benefits: increased liquidity, cost-reduction, facilitated settlement, transparency.
  - Challenges: scalability, energy consumption, legal certainty, interoperability, integration with clearing/settlement requirements, disclosure and prospectus complexity.
  - Many ICOs lacked basic securities offering disclosures.
- Regulatory reactions: public warnings by SEC, FCA, CNMV; enforcement actions against noncompliant offerings.
- IMF stance: advocate comprehensive regulation of crypto assets, focusing on unbacked tokens and stablecoins, and regulation of all actors dealing with crypto assets from prudential and financial integrity perspectives.

### Box 9. The token regime in Bermuda (selected)
- Bermuda defines digital asset as "anything that exists in binary format and includes a digital representation of value which is used as medium of exchange, unit of account or store of value and is not legal tender, debt, or equity." Definition excludes rewards programs and game-platform-only tokens.
- ICOs: offerings of digital assets to the public require authorization of Bermuda’s Minister of Finance; a FinTech Advisory Committee assists initial reviews.
- Private sales and digital asset businesses are regulated by the Digital Asset Business Act.

### Annex I. Development and Principles of the Law of Commercial Instruments (selected principles)
- Historical function: commercial instruments emerged to increase transmissibility of rights by embedding rights into documents, facilitating circulation and protecting good faith acquirers.
- Core principles:
  - Incorporation: the document embodies the right to payment or delivery.
  - Legitimation: possession/appearance of the document legitimates exercise of the incorporated right.
  - Literality: rights equal the contents of the document exactly.
  - Transferability: documents designed for transfer via bearer transfer, endorsement plus delivery, or nominative cession.
  - Formality: specific formal requirements make documents legally effective beyond bilateral parties.
  - Autonomy (abstraction): third-party acquirers in good faith are generally protected from defenses arising from the underlying contract.
- Limits and tensions:
  - Incorporation is not absolute; loss or theft does not always destroy underlying rights; regimes protect good faith acquirers.
  - Distinction between endorsement (transfers the document-incorporated right with robust protections) and cession (transfers full legal position and may expose transferee to defenses).

*Italic: Source — wpiea2023151-print-pdf (IMF Working Paper — Digital Tokens: A Legal Perspective)*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview of tokens and technological basis
- Tokens are digital items based on developments in cryptography and particularly in Decentralized Ledger Technology (DLT) and equivalent techniques; they are digital items that cannot be forged and whose transfer is traceable and economical.
- Tokens are units designated by entries in a digital ledger that uses cryptographic techniques and are numerical values incorporated to a ledger based on distributed ledger technology (DLT), such as blockchain.
- Tokens are purely digital creations that do not have physical reality; the term "token" is a metaphor for physical objects that represent value or give access to services.
- Tokens are different from electronic documents: the main difference is the use of cryptography and their integration in a database, which greatly reduces the possibilities of forgery. Tokens are a subcategory of electronic records.
- Through integration with smart contracts, tokens can be connected to rights to receive an asset, a payment, or the delivery of a service, among other possible content.
- DLT examples and variations mentioned include blockchain and alternatives such as directed acyclic graphs (DAGs), permissioned ledgers (“consortium blockchains”), and centralized databases under single-party control.

### Functional potential and economic implications
- Tokens have the potential of replacing existing commercial instruments and of performing additional economic functions.
- Tokens have greater flexibility than traditional commercial instruments and can be deployed in any economic activity.
- If efficiency and scalability issues of DLT and similar technologies are addressed, tokens have the potential of becoming the lynchpin of the new digital economy.
- Especially, tokens can provide a new technique for the issuance, recording, and transfer of rights; if rights are adequately linked to tokens, they could benefit from the technology used for DLT transfers.
- Potential economic gains from wider token use include significant gains in liquidity, cost reduction and enhanced security.

### Classification and legal implications
- The paper uses a classification based on the rights that each token affords:
  - Some tokens do not include any right at all and only have extrinsic value based on social consensus (native tokens, also known as crypto currencies).
  - Other tokens are connected to rights in the virtual sphere.
  - Others are connected to rights to off-line assets or services.
- Tokens connected to rights raise legal challenges: the law’s intervention is indispensable in establishing an enforceable link between tokens and the off-line reality, and in ensuring the correspondence between the tokens and the off-line assets or services.
- Legal status designations under commercial law may result in the application of an associated legal and regulatory regime; notably, when a token is classified as a security.

### Fundamental legal issues to address
- Fundamental legal rules are necessary to provide legal certainty to the operation of tokens, including rules for:
  - transfer of tokens (including rules for loss, for illegal transfers and for good faith acquisition);
  - creation of security interests;
  - impact of insolvency;
  - use of enforcement actions;
  - jurisdictional and conflict of law rules for legal relationships involving tokens.
- These legal issues will need to be addressed by all countries, irrespective of their legal traditions, and need to be resolved for all economic uses of tokens.
- Legal systems need to establish clear criteria to distinguish tokens that are subject to securities laws; extending securities law to tokens that are not securities can produce undesirable results and stifle economic innovation.

### Consumer protection, market functioning, and regulatory approach
- For tokens performing economic functions but not classifiable as securities, the law should respect innovation and take an enabling approach; this may require only some additional changes in commercial law, apart from the fundamental legal rules common to all uses of tokens.
- Tokens used in legal relationships with consumers should be subject to consumer protection rules adapted to the special characteristics of tokens to offer equivalent protection to that of traditional economic relationships.
- The multilateral and decentralized nature of numerous activities in the new digital economy may require regulation of markets for tokens and token intermediaries to ensure smooth and fair functioning.

### Policy implications and recommendations
- The law needs to provide responses to fundamental questions and adapt existing legal frameworks rather than apply rules that are over-inclusive due to strict technology neutrality.
- Solid legal foundations can support the technological development of tokens and help wider use across the economy.
- Legislators should pay particular attention to the importance of legal frameworks in supporting innovative technologies.

*IMF WORKING PAPERS — Digital Tokens: A Legal Perspective — Executive Summary*

### Box 1. Types of blockchains

### Box 1. Types of blockchains

### Classification of blockchains
- Public blockchains:
  - Anyone in the world can read.
  - Anyone in the world can send transactions to and expect to see them included if they are valid.
  - Anyone in the world can participate in the consensus process.
  - Secured by crypto economics (economic incentives + cryptographic verification) using mechanisms such as proof of work or proof of stake.
  - Generally considered to be "fully decentralized".
- Consortium blockchains:
  - Consensus process is controlled by a pre-selected set of nodes (example: a consortium of fifteen financial institutions, of which ten must sign every block for validity).
  - Read rights may be public or restricted to participants.
  - May be considered "partially decentralized".
- Fully private blockchains:
  - Write permissions are centralized to one organization.
  - Read permissions may be public or restricted.
  - Likely applications include database management, auditing internal to a single company; public readability may not be necessary.

### Addresses, keys, wallets, and tokens
- A decentralized ledger is a shared database that includes values (tokens) and transactions connected to addresses, instead of persons or entities.
- Cryptography links addresses to users:
  - A person generates a private key; a cryptographic function generates a public key from that private key.
  - The address is a shortened form of the public key.
  - A person who has the private key for an address can access the tokens using software ("wallets").
- The private key is a 64-character alphanumeric code.
- Wallets:
  - Store the public and private keys.
  - Exist as “hot” and “cold” wallets.
  - Can have a seed or secret recovery phrase.
  - The wallet is an interface or keyring; it does not hold tokens.

### Consensus mechanisms and block addition
- Proof of work:
  - Blocks are added by resolution of complex cryptographic problems (finding a hash below the target set by the blockchain).
  - Finding the nonce requires considerable computing capacity.
  - In Bitcoin, the node adding the new block is rewarded with tokens ("mining")—akin to a payment for bookkeeping.
  - Different nodes submit their solution; the fastest correct solution adds the new block.
- Alternatives:
  - Proof of stake: voting power provided to nodes according to relative stakes; only nodes with large stakes can add blocks.
  - Delegated proof of stake: users delegate votes to delegates.
  - Other platforms and techniques (example referenced: NEAR using proof of stake and sharding).
- Hashing:
  - Hash is a string specific to the encrypted data.
  - Hash functions convert data of arbitrary size into data of a fixed size.
  - Hashing concentrates information while maintaining confidentiality and integrity.
  - Hashing is a core aspect of all block-addition mechanisms.

### Advantages and limitations of decentralized ledgers
- Advantages:
  - Enable parties worldwide to transact safely without intermediaries, reducing trust obstacles.
  - Generally low fees and short time frames for transfers.
  - Time-stamped, tamper-resistant records useful for accounting and auditing (e.g., enhancing double-entry accounting integrity).
- Limitations and issues:
  - As blocks include all previous information, time to effect transfers can increase over time due to ledger size, raising efficiency and scalability concerns.
  - Technological changes (e.g., sharding, platform-specific scaling solutions) are being tested to address scalability.

### Tokens, native tokens, and smart contracts
- Token definition:
  - A token is a unit of value represented in DLT.
  - Tokens are numerical values connected to addresses; they lack physical reality and are not electronic documents or files.
  - Transfers are conducted by adjusting ledger values; there is no movement of a document.
- Native token:
  - DLT is premised on a native token (also called intrinsic token, coin, or crypto asset) such as bitcoin.
  - Native tokens can be used to reward participants who maintain ledger integrity.
  - Units in the blockchain do not incorporate rights outside the ledger; their source of value is extrinsic, imposed by collective belief of users.
- Smart contracts and DApps:
  - Smart contracts are predefined relationships encoded in the ledger; one party's action automatically determines another party's action.
  - Smart contracts are embedded in the ledger and associated with tokens; often integrated in decentralized applications (DApps).
  - Ethereum pioneered this integration; other platforms include Solana and Avalanche.
  - Native tokens are used as means of payment within platforms in exchange for deployment and maintenance of services.
  - Deployment and execution costs on Ethereum are paid in Ether (ETH) in units of gwei (each gwei = 0.000000001 ETH).
- Other tokens on native DLT:
  - Smart contracts can create additional tokens over the native crypto asset to represent separate values and services (e.g., allocating computing power in exchange for tokens).
  - Tokens can be programmed for a wide range of activities and products.

### Technical and legal clarifications (selected technical facts preserved)
- Bitcoin network is a matrix of Unspent Transaction Outputs (UTXOs); partial transfers can result in multiple UTXOs.
- As of January 2022, there were almost 19 million bitcoins (creation example: the Genesis block included 50 bitcoins).
- Permissioned ledgers (e.g., Quorum, Corda, Hyperledger Fabric) have lesser decentralization and do not require a native cryptoasset to operate; they can function as registries among participants.

*Source: IMF Working Papers — Digital Tokens: A Legal Perspective (Box 1. Types of blockchains)*

### Box 2. The UNCITRAL Model Law on Electronic Transferable Records

### Box 2. The UNCITRAL Model Law on Electronic Transferable Records

### Overview and definitions
- UNCITRAL adopted its Model Law on Electronic Transferable Records (MLETR) in 2017.
- The Model Law does not aim to affect in any manner existing law applicable to transferable documents or instruments (“substantive law”).
- Definitions in the Model Law:
  - “electronic record” — “information generated, communicated, received or stored by electronic means” (art. 2).
  - “electronic transferable record” — an electronic record that is a document or instrument that entitles the holder to claim the performance of the obligation indicated in it, or transfer the right to performance (arts. 2 and 10).

### Key principles and legal effects
- Enables the use of electronic technologies in the area of negotiable instruments and documents of title.
- Premised on:
  - technology neutrality; and
  - functional equivalence of electronic records and paper documents.
- Control replaces possession: the Model Law is based on the concept of control of electronic records, which is fundamental as it replaces possession of paper documents.
- Electronic records may include additional information (for instance, metadata).
- “The fact that a record is electronic cannot be a reason to deny its legal effects.”
- Legal requirements that a document should be in “writing” should be understood to be satisfied by an electronic format.
- Systems recognized under the law must be reliable and maintain integrity of the information, despite the framework being technology-neutral.

### Scope, limitations, and enabling approach
- The MLETR takes an enabling approach for the use of electronic technology in domestic and international trade.
- The Model Law “does not provide technological guidance on how this is to be achieved, nor does it provide guidance on how the underlying substantive law of paper instruments and documents can be adjusted to conform to their electronic equivalents.” (Gabriel, 2019).
- The Model Law does not include the introduction of other changes in substantive law.

### Adoption, reform activity, and estimated impact
- Countries enacting or incorporating the Model Law:
  - Bahrain and Singapore are the first countries to enact the Model Law.
  - The UK is in the process of incorporating the Model Law through the Electronic Trade Documents bill 2023.
  - Germany and France are in the process of drafting laws and regulations enabling the use of electronic documents in trade.
- UK impact assessment mentions:
  - reduction in costs associated with trade;
  - an acceleration in trade transaction times; and
  - an increase in trade volumes.
- The estimate for net benefits is “more than one billion pounds for the first ten years that the law is in force.”

### Legal implications for tokens and further legal changes
- Additional legal changes may be needed to maximize the potential of tokens.
- “The emergence of tokens requires another radical legal shift to integrate and absorb this innovative technology within the conceptual framework of commercial instruments and to extend similar techniques to other areas of commerce and finance.”
- The experience with dematerialization can provide valuable lessons, but it is likely that additional changes will be required.
- International organizations (e.g., UNCITRAL, Unidroit) provide guidance relevant to tokens; UNCITRAL’s work on electronic transferable records provides a blueprint for the use of tokens in the area of negotiable instruments and documents of title.

*Source: Box 2. The UNCITRAL Model Law on Electronic Transferable Records.*

### Box 2). UNIDROIT has engaged in a more general analysis of private law aspects of digital assets,

### Box 2). UNIDROIT has engaged in a more general analysis of private law aspects of digital assets,

### UNIDROIT guidance and key principles
- UNIDROIT defines digital assets as “controllable digital records,” following the approach adopted in the latest revision of the UCC in the US.
- The concept covers tokens and possibly also other digital assets that are not tokens.
- The Guidance is based on:
  - digital assets as objects that can be subject to property rights (principle 3);
  - assets being subject to control, instead of possession (principle 6);
  - transfer of control equaling the transfer of possession (principle 9);
  - transfer of control as the preferred technique for perfection of security interests (principle 15).
- As tokens can be subject to property rights, owners can have property rights in the event of the insolvency of custodians (principles 13 and 19).
- The Guidance does not cover the connection of digital assets with other rights (principle 4), or aspects of enforcement law (principle 17).

### Comprehensive inventory of legal issues (indicative list)
- 1. Legal nature of tokens
- 2. Applicable regime for the transmission of tokens
- 3. The connection of tokens to off-line assets or services
- 4. Security interests over tokens
- 5. Loss, fraud, and illegal transfer
- 6. Rights of token holders in insolvency
- 7. Procedural remedies
- 8. Conflict of laws

### 1. Legal nature of tokens — findings and legal characterisation
- There is no single legal definition of what a token is.
- Technically, a token is code, a piece of electronically stored information; essentially a value included in a database (DLT).
- A legal definition of token would need to be based on legal definitions of DLT and smart contracts, as these concepts are interdependent.
- Technology neutrality may demand open-ended definitions that apply to DLT and similar technologies, but definitions must capture defining features of innovative technologies to avoid being over-inclusive or inadequate.
- Tokens are classified as digital assets, part of the broader category of intangible assets:
  - “Digital asset” are non-tangible assets that are created, traded, and stored in a digital format.
  - The concept of digital assets is overly broad and may include any information stored electronically, such as software programs, and other forms of intellectual property.
  - Digital assets are included within the class of intangible assets.
- Classifying a token as an asset implies tokens can be the object of property rights.
- Tokens are primarily a digital creation, part of a database and software program; therefore tokens are immaterial objects rather than rights and can be owned — subject to exclusive control of the holder.
- Judicial decisions converging on tokens as property:
  - Singapore: B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(l) 3 found bitcoins qualify as “property” capable of being held on trust; Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) agreed cryptocurrencies could be assimilated into general concepts of property but noted difficult classification questions.
  - England: AA v Persons Unknown [2019] EWHC 3556 (Comm.) endorsed cryptoassets as “property” for proprietary injunctions.
  - New Zealand: Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728 held cryptocurrencies are a form of “property” for company law and capable of being held on trust.
- Civil law jurisdictions show more complexity; Japan and Germany have been traditionally reluctant to extend property principles to immaterial rights.
  - German law evolved to subject security tokens to the regime of movable assets by legal fiction (Electronic Securities Act of 2021).
- Few jurisdictions have designed a legal definition and typology of tokens; Wyoming is a notable exception with statutory categories and definitions.
- Classification as intangible property does not resolve all legal questions; existing categories may be insufficient and proposals seek new asset categories.

### Levels taxonomy and legal implications
- Level 1 (native tokens):
  - Simplest legal analysis.
  - Native tokens do not include any right — the holder acquires the token itself and can transfer it.
- Level 2:
  - Rights are attached to tokens by way of smart contracts.
  - Smart contracts issue tokens and connect them to assets or services in the digital domain.
  - Smart contracts are integrated with tokens and cannot be detached, ensuring effect of rights as tokens are transferred.
- Level 3:
  - Tokens need additional legal support for holders to have an actual right over an off-line asset or service.
  - Smart contracts alone cannot guarantee issuer’s delivery of an off-line asset or service.
  - Techniques to increase confidence in token rights include:
    - Oracles to integrate outside-world information into smart contract performance.
    - IoT to ensure off-line performance (example: programmed refrigerator requesting grocery items and transferring tokens; automated delivery systems).
- Key legal questions for level 2 and 3 tokens:
  - Whether there is full “incorporation” (i.e., right identifies with the token and follows it).
  - Whether control of the token is necessary for exercise of the right.
  - Whether loss of control of the token implies loss of the right.
  - Whether smart contracts can define consequences of losing control of tokens.
  - For level 3 tokens, whether the law should state that use of the token is the only possibility to exercise the right and provide measures to resolve loss-of-control issues.

### 2. Applicable regime for the transfer of tokens — issues and legal adaptation
- There is a widespread assumption that transfers in DLT have legal effects; many assume technology yields legally binding results.
- DLT transactions: holders issue an order to transfer tokens to another address in the blockchain; blockchain changes are understood to represent changes in legal positions.
- Transfer mechanics:
  - Proper transfer of control over a token is by issuing an order according to the DLT protocol so the token is transferred to another address.
  - In theory, a contractual transfer may exist, but it will not be fully executed unless there is a corresponding DLT transfer.
  - The law must reconcile general regimes for transmission of intangibles with DLT operation by integrating DLT transfer within generally applicable regime (valid consent, mechanics performing equivalent of transfer of possession).
  - Peculiarity: parties can effect transfers themselves without a registrar — a new development needing legal recognition.
- Private keys and transfer:
  - Private keys give the holder control (equivalent of possession), but not necessarily ownership.
  - Raises question whether transferring private keys constitutes valid transfer of ownership.
  - Analogy: tokens as objects in a private box — giving keys to transfer objects could circumvent AML/CFT rules.
- Existing legal requirements may obstruct token transmission:
  - Example: Switzerland required legislative reform because an electronic signature requirement created grave issues for token transfers.
- Legal backstops needed:
  - Law should specify that crediting tokens to a DLT address has the legal value of a transfer.
  - Rules should allow DLT records to be accepted as evidence and permit references to “written” documents to be satisfied by tokens and DLT records.
- Examples of statutory treatment:
  - Illinois Blockchain Technology Act, section 10, provides that:
    - (a) A smart contract, record or signature may not be denied legal effect or enforceability solely because a blockchain was used.
    - (b) Evidence of a smart contract, record, or signature must not be excluded solely because a blockchain was used.
    - (c) If a law requires a record to be in writing, submission of a blockchain which electronically contains the record satisfies the law.
    - (d) If a law requires a signature, submission of a blockchain which electronically contains the signature or verifies the intent of a person to provide the signature satisfies the law.
  - The revision of the UCC removed references to writing requirements and written signatures (examples of sections listed in source).

*IMF Working Paper excerpt: Box 2 on UNIDROIT Guidance and legal issues for digital tokens.*

### Section 4A-202.

### Section 4A-202.

### 3. The connection of tokens to off-line assets or services
- Level 3 tokens (third category) are valuable because of the right to receive an off-line asset or service and therefore require a “bridge to reality”.
- Native tokens are entirely disconnected from any right; level 2 tokens are integrated with smart contracts and can provide rights set in the smart contract (e.g., access to digital services or assets); level 3 tokens provide rights to off-line assets or services.
- Oracles integrate outside information into smart contracts, but oracles only address part of the problem: they supply information necessary for performance but do not by themselves establish how the token holder is entitled to receive an off-line asset or service.
- Tokens represent a contractual position—the rights of a party under a smart contract—and when performance refers to real-world assets/services (e.g., a car or a house), a mechanism is required for the virtual and real worlds to meet.
- Establishing the bridge with real services and assets requires legal tools similar to those used in commercial law; smart contracts cannot self-enforce the delivery of off-line assets or services.
- Internet of Things (IoT) and related innovative technologies could automatically perform obligations assumed under smart contracts, helping to synchronize digital tokens with physical outcomes.
- Legal rules are needed to ensure token holders receive the off-line asset or service exactly as prescribed by the smart contract; one possible enhancement is entrusting a qualified intermediary to guarantee that the asset or service corresponds to the contractual description.
- The law must resolve conflicts between tokens and other rights over the same asset; a qualified intermediary could ensure traditional transfers do not defeat the token holder’s rights, and a rule could establish that the DLT transfer prevails over other forms of transfer.

### Box 5. The token container model of Liechtenstein
- Liechtenstein’s “Tokens and Trusted Technology Service Providers Act” (2019) regulates the use of tokens and their interaction with off-line reality through a technology-neutral concept of “trustworthy technology” (TT).
- The law defines token as “a piece of information on a TT System which can represent claims or rights of memberships against a person, rights to property or other absolute or relative rights.”
- The token “container” model allows tokens to be digital representations of any right, certificate, obligation, or asset (tangible or intangible) such as a house, a car, a digital identity, a work of art, or rights to use a program or rent a property.
- Transactions with tokens that represent assets or services must respect the underlying laws applying to such assets or services.
- The law creates distinct roles for entities: TT service providers must be registered with the Financial Market Authority; roles include token issuers, token generators, TT key custodians, TT protectors, TT exchange service providers, TT price service providers, TT identity service providers, and the innovative “physical validator” who ensures physical reality corresponds to token contents.
- Under the reformed civil law, tokens will have priority over the physical world where tokens exist for rights and assets.

### 4. Security interests over tokens
- Traditional creation and perfection of security interests rely on transfer of possession (possessory) or registration (non-possessory); DLT records do not have the same legal significance as registry registration, though DLT actions are recorded and publicly accessible.
- Tokens circulate unencumbered by default because DLT lacks native mechanisms to record security interests; this stems from token design prioritizing ease of transfer and protection of acquirers’ rights.
- Use of tokens as collateral can be structured by:
  - placing tokens in addresses set up as escrow accounts with smart-contract-specified release conditions;
  - transferring tokens to an address under the control of a third party charged with the collateral;
  - proprietary, fiduciary transfers (grantor transfers tokens to secured creditor to hold until repayment);
  - pledge agreements where the creditor is in control of the tokens.
- Different classes of tokens may require different security-interest rules because token classification yields instruments of different nature and degrees of connection to rights/assets.
- Cryptocurrencies have been assimilated to money for secured-transaction purposes, making continuing control by the secured creditor a requirement for the existence of the security interest.
- Other tokens may fall under rules for securities or general intangibles; uncertainty exists about how general-intangibles rules operate with tokens (e.g., assumptions about selling collateral in the ordinary course and continuity of security interest over proceeds).
- The recent revision of the US Uniform Commercial Code (UCC) introduced the concept of “controllable electronic record”, which fits the description of digital tokens, permitting creation of security interests over tokens perfected by control (see §§ 9-314 and 9-326A UCC; § 12-105 UCC; § 7-106 definitions referenced).
- Preventing transfer of tokens used as collateral is essential; pledges and fiduciary transfers are the most effective techniques to prevent unauthorized disposal and preserve the effectiveness of security interests.

### 5. Loss, fraud, and illegal transfer
- Tokens offer security advantages: parties can deal directly without intermediaries, there is no risk of forgery, and technically no risk of loss of the token itself.
- The critical risk is loss of private keys: loss of tokens does not occur per se; instead, loss of the private key can render tokens unusable or confer illegitimate control to a finder.
- For native tokens, loss of the private key is irreplaceable by definition; tokens become stuck in the address and unusable—analogous to physical loss of money.
- If an illegitimate controller obtains private keys, the legitimate holder should be able to request judicial assistance to recover control, though judicial remedies may come too late to prevent good-faith transfers; the illegitimate holder remains personally liable to the legitimate one.
- For tokens connected with smart contracts, issuers should be able to replace tokens with newly issued ones, accompanied by processes ensuring old tokens cannot be reused.
- For tokens connected with off-line assets or services, there should be a possibility to block tokens and provide the asset or service to a holder who lost private keys but can show they actually paid for the tokens.
- Transfers procured by fraudulent means, violence, intimidation, or in violation of legal rules (e.g., transfers by a party subject to injunction) should not be recognized by law; DLT cannot undo actions, so avoidance requires reverse transfer mechanisms.
- Law needs to reconcile interests of the legitimate holder and third parties in good faith: legitimate owners should recover stolen tokens; acquisitions for value and in good faith should be protected (original token holder should receive compensation for damages); bad-faith acquirers should not benefit from protection.

### 6. Rights of token holders in insolvency
- The nature of token holders’ rights in the insolvency of issuers or intermediaries is central and varies by token class; recent crypto-sector insolvencies have highlighted these issues.
- Level 1/native tokens: no issuer; insolvency questions focus on intermediaries holding tokens. Key issues:
  - Relationship between original token holder and intermediary determines whether holder retains ownership or has transferred ownership to the intermediary.
  - Fungibility and traceability affect whether holders have in rem rights or only personal rights; commingling can lead to personal claims and sharing with unsecured creditors.
  - Rights of holders in insolvency can therefore be either in rem (right to recover tokens) or personal (unsecured claim), depending on facts.
  - Recent judicial decisions (e.g., Celsius, BlockFi, FTX references) have analyzed contract language to determine whether ownership passed to firms.
- Level 2 tokens (connected to online assets/services): two insolvency problems:
  - Insolvency of an intermediary controlling tokens—same tracing/commingling and fungibility questions as level 1.
  - Insolvency of the issuer—rights to virtual services or assets are typically in personam; non-delivery results in an unsecured claim against the issuer.
  - Non-fungible tokens reduce commingling risk.
- Level 3 tokens (connected to off-line assets/services): require special legal rules to determine the nature of token holders’ rights:
  - Insolvency of an intermediary treated similarly to level 2.
  - Insolvency of the issuer raises whether token holders have an in rem right to delivery of the off-line asset (preferred, as it yields robust rights) or only an in personam right (yields an unsecured claim).
  - For tokens that include a right to a service, insolvency treatment follows contract-in-insolvency rules—issuer may perform the service, but specific performance may not be available and replacement by damages is possible.

*IMF WORKING PAPERS Digital Tokens: A Legal Perspective — Section 4A-202.*

### 7. Procedural remedies

### 7. Procedural remedies

### Availability of remedies to token holders
- Remedies for the protection of property should be available to token holders.
- Ownership disputes may be referred to all types of tokens.
- As tokens are intangible assets, procedural remedies for protection of ownership can be applied, including those in criminal law.
- Because transfers in DLT are irreversible, it is technically not possible to “avoid” an illegal transfer of tokens; however:
  - It would be possible to order a reverse transfer to the legitimate owner.
  - If a transfer is not possible, the owner should be indemnified for damages.

### Enforcement mechanisms and limits
- Enforcement of decisions on tokens will generally be made in personam.
- Courts cannot “seize” tokens unless they gain possession of the private keys.
- Courts can issue orders on the persons who control the tokens, including intermediaries.
- Courts can also issue “worldwide” freezing orders on tokens106, but the effectiveness of these orders needs to be tested in practice.

### Need for procedural regulation tailored to tokens
- Many legal systems will need to regulate additional procedural remedies available to token holders.
- Native tokens cannot generate performance disputes since they do not include any right.
- Level 2 tokens should not be particularly contentious in terms of performance, as their operation is regulated by smart contracts.
- Smart contracts frequently include arbitration clauses (arbitration ex aequo et bono)107.
- There is a need for full procedural regulation of the rights of token holders, including:
  - Legal proceedings to assert the rights connected with the token.
  - Legal proceedings to recover tokens.
  - Legal proceedings to prevent actions by a party who has gained control of tokens illicitly.

### Remedies for tokens linked to off-line assets and services
- Remedies are necessary for tokens that include rights to off-line assets and services.
- If the issuer refuses payment or delivery of goods or services to the holder of the token, or if goods or services differ in quality or quantity from what was stipulated, courts should be able to provide all enforcement alternatives.
- To that effect, tokens should be recognized as an executory title108.

*IMF Working Paper — Digital Tokens: A Legal Perspective (Chapter 7: Procedural remedies)*

### Box 7. Tokens and the US securities laws– The Howey Test and the SEC Guidance

### Box 7. Tokens and the US securities laws– The Howey Test and the SEC Guidance

### The Howey test — elements and interpretation
- The Howey test requires the presence of the following elements:
  - (i) An investment of money: courts have extended this to any type of valuable consideration. "Only free distributions would avoid the application of this limb of the test."
  - (ii) In a common enterprise: courts interpret a need for some integration of the funds received into an organized form of business, either vertical (under the control of the promoter) or horizontal (sharing powers and responsibilities with other investors).
  - (iii) In which the investor is led to expect profits: the contract should make the investor expect profits, whether as direct profits, dividends, or capital appreciation. Promotional materials can be important in this assessment.
  - (iv) Derived from the entrepreneurial or managerial efforts of promoters or third parties: profits must result from the business efforts of promoters or third parties; this can be satisfied by a promoter holding assets and selling them at the right time to maximize profit.
- The test was articulated in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
- Courts have extended "investment of money" beyond cash to any valuable consideration; however, "free" should mean no consideration of any kind. The so-called "air drops" could be disqualified from being considered free where there is a promotional effect like sharing data or circulation to other investors (Bauer, 2020).

### Application to tokens and SEC practice
- The Howey test focuses on "investment contracts" and was applied by the SEC to a token sale for the first time in July 2017 in the DAO case (SEC, 2017), where the sale represented an unregistered securities offering given the transaction sought to create an organization similar to a company with token holders in a shareholder-like role.
- The SEC's 2019 guidance applies the Howey test to digital assets and provides long lists of factors, particularly for:
  - the elements of expectation of profits, and
  - reliance on efforts of promoters.
- The Guidance notes decentralized networks are less likely to be investment contracts because the element of reliance on the efforts of others is questionable, but "the long lists of factors in the Guidance 'are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of security, and no single factor is determinative.'"
- The critical analysis often centers on the contracts of sale of tokens (tokens likened to the "orange trees" in Howey) rather than the token object itself; tokens are not contracts, but token sales can have the elements of Howey.

### Legal uncertainty, policy considerations, and internal SEC perspectives
- The US approach appears driven by policy considerations (investor protection) rather than strictly the legal nature of instruments.
- SEC Director Hinman (Hinman, 2018) suggested tokens with financial rights will always be considered securities, while tokens providing access to goods and services could fall under Howey and might evolve over time to cease being considered securities — this leaves many questions unanswered and lacks legal certainty.
- Commissioner Peirce proposed a safe harbor rule providing a temporary exemption of three years during which tokens could be sold even if formally categorized as investment contracts, until the network effectively decentralizes and tokens cannot be subject to securities laws anymore. This safe harbor approach resembles the EU special rule design for speculative offers of utility tokens.

### State corporate law and tokenized shares issues
- Using tokens as shares faces state corporate law issues: some states may not recognize token transfer in DLT as valid without additional registry information (Delaware requires name, address, and number of shares recorded; Wyoming requires a digital wallet address as sole mandatory information).
- Pure token shares would require that the company’s certificate of incorporation and the bylaws be included in DLT.

### International regulatory approaches and classifications
- Examples of national approaches:
  - BaFin (Germany): stated utility tokens would not be classified as securities.
  - FINMA (Switzerland): privilege substance over form; classification includes payment tokens (cryptocurrencies), utility tokens, and asset-backed tokens. Cryptocurrencies excluded from securities since they do not include any claim; utility tokens excluded when the product/service is already available; asset tokens could be securities when they include financial claims or membership rights (FINMA, 2018).
  - MAS (Singapore, 2020): utility tokens limited for use on a particular company’s platform are not securities.
  - Malta (Virtual Financial Assets Act, 2018): created category of "virtual token" restricted solely to acquisition of goods or services within or related to the issuing DLT platform or limited network.
  - Wyoming (Wyoming Utility Token Act, 2019): a state "safe harbor" for utility tokens effective for state securities law. Tokens do not classify as a security if:
    1. The developer or seller did not market the token as a financial investment; and
    2. At least one of the following is true:
       - A. The developer or seller reasonably believed that it sold the token to the initial buyer for a consumptive purpose.
       - B. The token has a consumptive purpose that is available at the time of sale and can be used at or near the time of sale for use for a consumptive purpose.
       - C. If the token does not have a consumptive purpose available at the time of the sale, the initial buyer is prevented from reselling the token until the token is available for use for a consumptive purpose.
       - D. The developer or seller takes other reasonable precautions to prevent buyers from purchasing the token as a financial investment.
  - EU (MiCA) approach (see excerpt in the text and Box 8): seeks to regulate offers of crypto-assets other than asset-referenced tokens or e-money tokens, with requirements under art. 4.1 MiCA and exclusions under art. 4.3 MiCA (e.g., tokens offered for free; tokens automatically created as rewards for ledger maintenance; utility tokens providing access to a good or service that exists or is in operation; tokens usable only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror). MiCA clarifies tokens granted in exchange for data are not "offered for free."

### EU MiCA white paper and offering thresholds (art. 4.1 and art. 4.2 MiCA)
- Offers to the public of crypto-assets need to comply with:
  - the offeror is a legal person;
  - has drawn up, notified and published a crypto-asset white paper;
  - has drafted and published marketing communications in respect of the crypto-asset;
  - complies with general requirements for offerors (including fair conduct, prevention of conflict of interests and adequate systems and security access protocols) (art. 14 MiCA).
- White paper and marketing communications requirements do not apply to:
  - (a) an offer to fewer than 150 natural or legal persons per Member State where such persons are acting on their own account;
  - (b) over a period of 12 months, starting with the beginning of the offer, the total consideration of an offer to the public of a crypto-asset in the Union does not exceed EUR 1 000 000, or the equivalent amount in another official currency or in crypto-assets;
  - (c) an offer of a crypto-asset addressed solely to qualified investors where the crypto-asset can only be held by such qualified investors.

### Tokenization as securities — opportunities and technical/legal challenges
- Potential benefits:
  - Tokens can provide increased liquidity to many companies and support new business models.
  - DLT can bring advantages in terms of cost-reduction, facilitated settlement, transparency, and operability.
- Key technical and legal challenges:
  - Scalability of DLT and energy consumption.
  - Need for legal certainty for tokens to operate as securities.
  - Interoperability among different DLTs is required; solutions are nascent.
  - DLT pilot regimes highlight complexity combining DLT with legal/regulatory clearing and settlement requirements, particularly transparency and reporting.
  - If tokens are subject to securities law, issuers must comply with registration and prospectus requirements and provide full and fair disclosure that may need more technical content than traditional issuers.
  - Many ICOs did not conform to basic securities offering requirements (e.g., "more than two thirds the ICO whitepapers are either silent on the issuing entity, initiators, or backers, or they do not provide contact details").

- Examples of DLT initiatives and technical approaches:
  - Project Whitney by the DTCC (May 2020): tokenize private securities in Ethereum with additional connections to other blockchains.
  - France's DEEP system: allows blockchain to function as a securities registry for unlisted securities.
  - Atomic swaps and Hashed Timelock Contracts (HTLC) as interoperability mechanisms.

### Regulatory reactions and public warnings
- Regulators issuing warnings: the SEC (US), the FCA (UK), and the CNMV (Spain) have warned the public about risks in acquiring tokens, even if tokens (such as cryptocurrencies and utility tokens) fall outside the supervisory perimeter.
- Warnings can have side-effects: presenting tokens as risky investments implies a generic assessment of the whole digital economy and may obscure distinctions between high-risk ventures and more solid businesses or purely speculative activities.
- Enforcement actions: securities regulators have at times pursued enforcement actions in response to token offerings.

### IMF stance, global proposals, and national regulatory regimes
- The IMF advocates developing and applying comprehensive regulations of crypto assets, focusing on unbacked tokens and stablecoins due to their use for investment and payments.
- The Fund proposes comprehensive regulation of all actors dealing with crypto assets from prudential and financial integrity perspectives.
- IOSCO (2023) consultation report proposes comprehensive regulation of markets and market actors dealing with crypto assets to address market integrity and investor protection concerns.
- National regimes:
  - France: PACTE law (2019) created a voluntary regime under the securities regulator (AMF) distinguishing tokens that are securities (subject to securities laws) versus other digital tokens subject to a voluntary regime; companies may submit a white paper to the AMF for optional authorization.
  - Bermuda and Bahamas: binding regimes for token regulation (Bermuda: Digital Asset Business Act and Companies and Limited Liability Company Initial Coin Offering Amendment Act, both 2018; Bahamas: Digital Assets and Registered Exchange (DARE) act, 2020), with definitions and regimes for token types and issuer obligations (e.g., fit and proper issuer, offering memorandum).

*Italic: Source — wpiea2023151-print-pdf - Box 7. Tokens and the US securities laws– The Howey Test and the SEC Guidance*

### Box 9. The token regime in Bermuda

### Box 9. The token regime in Bermuda

### Overview
- Bermuda has designed a regime that defines digital assets and provides standards for ICOs and digital asset businesses.
- Similar regimes have been introduced in other jurisdictions in the Caribbean (The Bahamas and the Cayman Islands).

### Definition of digital asset
- Digital asset is defined as "anything that exists in binary format and includes a digital representation of value which is used as medium of exchange, unit of account or store of value and is not legal tender, debt, or equity."
- The definition excludes rewards programs and tokens that can only be used in game platforms.

### Regulation of ICOs
- ICO legislation regulates offerings of digital assets which are public crowdfunding or similar type projects.
- An ICO is considered a restricted business activity that requires the authorization of Bermuda’s Minister of Finance prior to an offering being made to the public.
- A FinTech Advisory Committee assists with initial reviews of applications to ensure that they meet minimum criteria regulations.

### Regulation of private sales and digital asset businesses
- Private sales of tokens or issuance of “virtual currencies” are regulated by the Digital Asset Business Act.

*Source: wpiea2023151-print-pdf - Box 9. The token regime in Bermuda*

### Annex I. Development and Principles of the Law

### Annex I. Development and Principles of the Law of Commercial Instruments

### Historical development and economic function
- Commercial instruments emerged from commercial practice and usages, later reinforced by legal doctrine and codification.
- Incorporation: embedding the right to receive a payment or delivery of goods into a document made that right exercisable by third parties who had not signed the underlying contract.
- Economic function: increasing the transmissibility of rights by turning rights into movable goods subject to rules protecting good faith acquirers and facilitating circulation.

- Medieval illustrative example (Box 10):
  - Florence, March 20, 1309: Mr. Francesco Datini delivers 2000 florins to Mr. Querini and receives a bill of exchange.
  - Bill of exchange gives the right to receive 1000 pounds in Lyon on May 20, 1309.
  - The bill is sent to the agent in Lyon, and payment is made upon presentation and verification of the signature.

### Core legal principles governing negotiable/commercial instruments
- The following principles developed from the fundamental principle of incorporation:
  - Incorporation:
    - The right is embodied in the document; the document "incorporates" the right to the payment or delivery.
    - Example: the right to receive a payment from Mr. Querini is incorporated into the bill of exchange.
  - Legitimation:
    - Possession of, or appearance in, the document legitimates exercise of the incorporated right.
    - The person indicated in the document (and in possession, with a regular chain of endorsements where required) has the right to collect payment.
    - The debtor is freed only by paying the person indicated in the document.
  - Literality:
    - The contents of the right are exactly what is written in the document (amount, currency, place, time).
    - Example: the bill specifies that Mr. Alberto Querini will pay 1000 pounds in Lyon on May 20, 1309; those are the holder’s rights and only those rights.
  - Transferability:
    - Documents are created to be transferred; transfer regimes vary in security and formality.
    - Transfer mechanisms include:
      - Bearer transfer: mere transfer of possession (simplest form).
      - Endorsement plus delivery: used for bills of exchange; requires signed endorsement and transfer of possession; an uninterrupted chain of endorsements is required for exercise of the incorporated right.
      - Nominative documents: restrict circulation and require full cession of rights.
    - Example: Mr. Datini could transfer the bill to Mr. Dupont by endorsing the bill and transferring possession; at payment, Mr. Querini pays the person who presents the bill and appears as the latest designated person in a regular chain of endorsements.
  - Formality:
    - Formal requirements make the document recognizable and effective beyond the bilateral drafting parties.
    - Example: a bill of exchange must include the words “bill of exchange” and respect a certain formulation to be legally recognized.
  - Autonomy (abstraction):
    - Separation between the rights incorporated in the document and other aspects of the originating legal relationship.
    - A third party acquiring the document in good faith and for value is generally protected from defenses arising from the underlying contract that are not reflected in the document.
    - Example: defects in an underlying sale (e.g., defective silk) cannot be raised by the drawer to frustrate payment of the endorsed bill of exchange.

### Limits, tensions, and legal effects
- Incorporation is not absolute:
  - The right does not literally "become" the document in a perfect identification; rights may circulate without physical circulation of the document.
  - Loss or theft of the document does not always destroy the underlying right; mechanisms may preserve rights despite loss of possession.
- Protection of good faith acquirers:
  - Because incorporated rights travel with a movable document, legal regimes often protect good faith acquirers even if the transferor was not the legitimate owner.
- Distinction between endorsement and cession:
  - Endorsement transfers primarily the right included in the document and provides the endorsee robust protection against defenses.
  - Cession transfers the whole legal position (all rights and obligations) and exposes the cessionary to defenses the debtor may raise.

*Annex I. Development and Principles of the Law of Commercial Instruments*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023151-print-pdf.pdf_