Blockchain, Tokens, and Fintech: Alternative Finance.

Introduction.

Despite the fluctuations in the value of Bitcoin and the end of the ICO era, blockchain is finally creating an ecosystem for its adoption by companies. In particular, the fintech sector is experiencing strong growth due to the ability to finance fundraising operations, in whole or in part, through the issuance of tokens and regulations that various countries offer to companies.

It is important, therefore, to address the following topics:

• Token economy, STO phenomenon, and utility tokens.
• Platforms for token crowdfunding.
• The regulatory approach in Italy and beyond.
• How to approach fundraising through tokens.

Token economy, STO phenomenon, and utility tokens.

The term “token economy” has long been prevalent in the blockchain industry, and the ability to create different or innovative business models is certainly one of the advantages it brings. Another advantage, to come to the topic of the article, is the ability to raise funds through the issuance of tokens, particularly through Security Token Offerings (STOs) and utility tokens.

In the first case, we are dealing with a real financial instrument that exposes investors to economic risk on the investment and obliges the issuer to prepare the “classic” white paper and carry out the relevant compliance (see below for more information). In contrast, in the second case, we have utility tokens, which allow the purchase of goods or services from the company that issued the token in order to i) finance the company in the event of a fundraiser and then sell the goods directly to those who purchased the token and ii) possibly create an alternative circle for the circulation of goods and the sale of services.

The problem with utility tokens lies in the not always easy legal qualification, as they are often associated with sales of future goods or services, and in this case, it is necessary to understand if one of these two categories falls, in whole or in part, into the category of financial products under art. 1, letter t) of the Consolidated Law on Finance (TUF): if it falls within, the token must be immediately considered a security and comply with the relevant regulations and compliance.

Platforms for token crowdfunding.

The token economy phenomenon has also affected crowdfunding, giving rise to ad hoc platforms for fundraising through tokens.

Obviously, the management of the token economy is only the technological part of a complex process that must also include a legal, business plan, and financial part, which must comply with the regulations concerning the countries that expressly regulate issuance, use, and compliance. Countries such as Switzerland, Malta, and Luxembourg are leading in this type of use.

The Italian regulatory approach and beyond.

Let’s focus on Italy and the relevant regulations.

The first question to ask is: is there any relevant regulation? The answer is partly yes, but practically no, considering how the topic has been addressed.

In particular, the regulatory framework refers to Distributed Ledger Technology (DLT) rather than blockchain, but smart contracts, which are exclusively developed through blockchain, are mentioned.

Furthermore, and crucial for the topic of this article, tokens are not mentioned, so the legal framework must be reconstructed.

As mentioned in the previous paragraphs, the application of TUF is applicable if the token is, in whole or in part, a financial instrument. In the case of a financial instrument, the rules for financial markets and CONSOB regulations for fundraising through public offerings must be followed.

In the case where there is no financial instrument, it is necessary to consider that the token may be considered a virtual currency, and therefore, the anti-money laundering regulations must be applied to both those who offer tokens and those who offer storage services (wallets) and exchange and conversion services (exchanges).

In addition, if there is the possibility of making payments through blockchain and tokens or electronic money, TUB and Bank of Italy compliance must be respected.

This is a first, general overview of the legal aspects in Italy, but it is also essential to pay attention to the relevant industrial sector to understand whether tokens also affect compliance.

What about beyond Italy?

Across the border, regulators and authorities have made much more advanced steps regarding blockchain and tokens. For instance, FINMA (the Swiss CONSOB) has already established a procedure for launching STOs and utility tokens since the ICO era. The same goes for Luxembourg.

Malta and San Marino, as well as France, have also established detailed regulations for capital fundraising for both STOs and utility.

In particular, it should be noted that Southeast Asia, with a particular focus on Singapore, pays close attention to and regulates the blockchain phenomenon and, above all, the token economy.

How to approach fundraising through tokens.

Having provided this general overview, it is essential to understand how to approach the launch of a fundraising campaign through tokens. Without going into excessive detail, the following fundamental aspects must be considered:

• Business plan and financial plan: first, it is necessary to understand the effects on the business development and how the cash flow will be thanks to the fundraising through tokens;
• Legal & compliance: subsequently, it is necessary to understand where to launch the project, what are the relevant legal issues, and the efforts in terms of compliance and costs (e.g., it would make no sense to raise only €200k and spend €100k in compliance);
• Technology: blockchain is the basis, but there are already standards that allow standardizing and lowering the technological cost;
• Marketing: carefully sponsor the fundraising through tokens to avoid investors perceiving it as a scam.