Securities are broadly defined as instruments evidencing “the holder’s ownership rights in a firm (e.g., a stock), the holder’s creditor relationship with a firm or government (e.g., a bond), or the holder’s other rights (e.g., an option)”.1 The term is prevalent within most US federal securities statutes,2 articulated in a similar vein.3 Various instruments qualify as securities, under US law, including, but not limited to, stock, bonds, options, investment contracts, certificates of deposit, etc.4 This statutory definition has been criticized as comprehensive and over-prescribing, considering that it comprises the ‘catch-all’ ambiguous concept of an ‘investment contract’.5
When interpreting such notion, US jurisprudence emphasizes on the substance and economic reality of a financial instrument in question, rather than the ostensible formalities, thereof.6 To facilitate the process, the Howey Test, as established under SEC v. W.J. Howey Co.,7 provides the requisite criteria that must be cumulatively fulfilled in order for a financial contract to be classified as a security, which include: (i) a financial investment, in cash and/or in goods or services,8 in a manner entailing the risk of financial loss;9 (ii) in a common enterprise; commonality may stipulate either the pooling of funds and pro rata sharing of profits (horizontal commonality) and/or the interrelation of the enterprise’s success with the efforts of the enterprise’s management (vertical commonality);10 (iii) with the reasonable expectation of profit, arising out of the capital appreciation of an investment and/or the participation in earnings;11 and (iv) derived from the efforts of a third party, i.e., the enterprise’s management.12
In the Greek jurisdiction, securities’ regulation is primarily European Union (the EU) – mandated. Thereunder, US securities are captured by the broader term ‘financial instruments’, as such is defined within the Greek Securities’ Law,13 which transposed MiFID II in the Greek legal system.14 Notably, financial instruments comprise “assets and/or evidence of ownership over assets and/or contractual agreements for the receipt and/or delivery of assets”.15
The Greek Securities’ Law outlines an exhaustive list of regulated financial instruments,16 ranging from transferable securities and derivatives to money-market instruments (excluding instruments of payment).17 Transferable securities, in particular, constitute asset classes18 that are: (i) transferable; (ii) negotiable, or else fungible and capable of being freely traded,19 notwithstanding any restrictions;20 and (iii) standardized, i.e., whose attributes are not individually negotiated with investors.21
A recent amendment to MiFID II22 further broadened the scope of financial instruments, so as to include assets issued through distributed ledger technology (the DLT).23 Hence, MiFID II captures any asset qualifying as a financial instrument, irrespective of its form of issuance. This recent revision has not yet been integrated in the Greek jurisdiction, though.24
Crypto-assets are broadly classified into four (4) categories: (a) security tokens, which resemble traditional ‘securities’ (i.e., equity tokens, debt tokens, fund tokens, income share-tokes, derivatives); in other words, they represent financial investments and provide proprietary (e.g., ownership, pre-emptive rights, entitled to dividends, coupons, profits, etc.) and/or non-proprietary rights (e.g., voting, management, information rights, etc.);25 (b) utility tokens, which function like ‘coupons’, granting access to other goods and/or services offered on the DLT;26 (c) non-fungible tokens, representing ownership over a unique asset piece;27 and (d) exchange tokens, otherwise referred to as cryptocurrencies.
Cryptocurrencies, otherwise referred to as exchange tokens, constitute a subclass of crypto-assets, which formulate a virtual currency28 and provide an alternative to fiat currency,29 by serving as a store of value, a unit of account, and a means of payment (e.g. Bitcoin, Ethereum, Tether, etc.).30 Cryptocurrencies are not backed by established institutions nor have any underlying financial claims31 and legal tender.32 Cryptocurrencies are often used as a means of payment within the context of Initial Coin Offerings, a funding mechanism, resembling the initial public offering process for traditional securities, whereby an issuer issues and publicly offers digital tokens, representing interest and/or financial value attached to said issuer, acquired in exchange for an agreed sum of money payable in a fiat, but most often in a cryptocurrency.33 Cryptocurrencies also represent a common means of payment in the case of ‘smart contracts’,34 i.e., computerized transactions self-executed and self-enforced on the basis of computer code, in an automated manner, subject to the fulfillment of ‘digital conditions precedent’.35
Nevertheless, it has been argued that tokens may also be of a hybrid nature, combining a currency and an investment function; in particular, it has been held in financial scholarship that cryptocurrencies may be sold for profit, subject to the efforts of the pertinent issuers, in view of value maximization.36
Cryptocurrencies are not explicitly stated within the US statutory securities’ definition. Nonetheless, the Securities Exchange Commission (the SEC) stipulates that they could be deemed as ‘investment contracts’, subject to the Howey Test. To start off, the SEC advances that the criterion of financial investment is satisfied in the case of cryptocurrencies, as holders pay money in exchange for financial value.37 In principle, though, cryptocurrencies constitute a digital equivalent of conventional currencies;38 there is no financial investment involved in holding them, as by definition investment entails the transfer of value in exchange for future (not present) returns through capital appreciation and/or income generation.39
Furthermore, the SEC somewhat arbitrarily accepts that commonality exists in the case of cryptocurrencies, and that profits could be reasonably expected through cryptocurrency sales in the secondary money markets.40 As discussed, though, cryptocurrencies represent digitalized liquidity, subject to the overall market price fluctuations (thus functioning more like commodities rather than securities), and do not entail any pooling of assets nor do they entitle holders to any profit participation as do other investment instruments (e.g., shares).41 In addition, cryptocurrencies are transacted on a fully anonymous and autonomous basis, within a purely decentralized DLT system, which is accessible to anyone (‘permissionless’) and depends on the market dynamics and not the actions of others (e.g., the issuer’s management).42 Albeit the latter has been accepted by the SEC for certain cryptocurrencies (Bitcoin and Ether),43 it fails to adhere to the hybrid exchange token conundrum.44
Notwithstanding the above, US courts have not adopted a common approach towards the legal nature of cryptocurrencies, as many appear to loyally replicate the SEC’s stance, without any justification; refer, for instance, to US District Judge Jed Rakoff who alleged that “cryptocurrencies are considered securities regardless of how they are sold”.45 However, in the groundbreaking ruling of the recent Ripple case, it was held that a cryptocurrency per se cannot be deemed as a security;46 in any case, whether a token in primarily offered and/or sold in the secondary market as an investment (having a hybrid nature) depends on an ad hoc assessment of “the totality of circumstances and the economic reality of that specific contract, transaction, or scheme”, as per the Howey Test.47
Neither an explicit definition of cryptocurrencies nor an equivalent to the Howey Test exist under Greek law. Within the context of the Greek anti-money laundering (the AML) regime,48 which extends to digital currency issuers and custodians, virtual currencies are articulated as “digital representations of value, not derived nor guaranteed from a central bank and/or public authority and not necessarily adhering to the legal status of currency, but commonly accepted as an electronic means of payment”,49 a definition broad enough to capture cryptocurrencies.
In addition, under EU case law,50 cryptocurrencies (such as Bitcoin) have “no other purpose than to be a means of payment”51 and, therefore, should not be treated as a “a security conferring a property right nor a security of a comparable nature”,52 but in a similar vein as conventional currencies.53
The capacity of cryptocurrencies as purely ‘virtual value’ is also evidenced under the recently adopted Greek Digital Content Law,54 whereby cryptocurrencies are explicitly stipulated as “digital representations of value having no other purpose than to serve as a method of payment” and are thus excluded from the regulatory definitions of digital content, digital services and/or goods with digital elements.55
In view of their nature as digital payment instruments, as per the above, it would be hard to argue that cryptocurrencies could qualify as transferable securities, and subsequently as financial instruments, under Greek (and EU) law, since payment instruments are explicitly excluded from the definition of transferable securities and the regulatory scope of the Greek Securities’ Law (and MiFID II).56
Other than the discussed Greek AML Law provisions, cryptocurrencies are not regulated by virtue of Greek legislation; however, the recently adopted Markets in Crypto-Assets EU Regulation (MiCAR)57 is directly applicable in Greece, which is an EU member – state. MiCAR applies to all issuers of and/or service providers relating to: (a) asset-referenced tokens,58 i.e., stablecoins replicating the price of one or various underlying assets (e.g., fiat – backed, commodity – backed, cryptocurrency-backed, etc.);59 (b) electronic money tokens,60 or else crypto-assets referencing the price of an established fiat currency; 61 (c) utility tokens, as described above; 62 and (d) any crypto-asset, including cryptocurrencies, not explicitly exempt from MiCAR’s scope (e.g., NFTs).63 The Regulation imposes on the regulated issuers/service providers certain pre-issuance disclosure obligations (white paper requirements),64 organizational and licensing prerequisites65 and conduct of business rules.66
It is noted that MiCAR is complementary to the existing EU financial instruments’ regulatory regime;67 in this respect, financial instruments, as defined and regulated under the Greek Securities’ Law (and EU MiFID II) are exempt from MiCAR’s scope.68 Further to the precedent analysis, though, cryptocurrencies are not deemed as financial instruments pursuant to the EU securities’ framework and are thus not regulated thereunder. Notwithstanding, tokens of a dual nature (combining functions of currencies and securities) remain a grey area, as it is unclear whether they are captured under MiCAR’s ‘catch-all’ scope or whether they should be treated as transferable securities under the Greek Securities’ Law. It is argued that the former approach is more consistent with the current regulatory framework, which requires transferable securities to be standardized (a criterion not met by hybrid tokens, given their inherent ‘atypical’ nature).
The author acknowledges the EU’s pioneering MiCAR initiative, as an attempt to establish a bespoke framework for crypto-assets. Nonetheless, the current regime fosters a globally fragmented interpretation of the legal nature of cryptocurrencies; in effect, conflict and incompatibilities of obligations as regards the issuance and provision of services relating to cryptocurrencies are created, and legal insecurity, in terms of procedures and substance, is encouraged.69
In this respect, and in pursuit of higher legal certainty, it is hereby suggested that the competent EU and Greek authorities (e.g., European Banking Authority, European Securities and Markets Authority, Bank of Greece, Hellenic Capital Markets Commission) issue further guidelines and/or technical standards, stipulating the legal nature of cryptocurrencies and the regulatory framework therefor, in an explicit manner. Targeted amendments to the Greek Securities’ Law, MiFID II and MiCAR, are also advanced as a potential regulatory reform, so that the conditions pursuant to which cryptocurrencies are regulated thereunder are clearly provided for; particularly with respect to hybrid tokens, comprehensive conditions (in line with the US Howey Test) should be established, so that regulated entities can clearly distinguish whether such instruments fall within the regulatory scope of MiCAR or the Greek Securities’ Law and EU prospectus requirements.70
On a final note, considering the decentralized nature and lack of an established governance and geographic identification of cryptocurrencies, coordinated efforts between Greek, EU and worldwide authorities and legislators are highly promoted, as imperative for achieving regulatory oversight and preventing systemic risk contagion, as well as regulatory arbitrage, across the global financial markets.71
In principle, as a matter of Greek (and EU) law and jurisprudence, cryptocurrencies, in their capacity as digital representations of value and an electronic alternative to fiat currency, fail to meet the criteria of transferability, negotiability and standardisation provided for the qualification as ‘financial instruments’; hence, it would be hard to argue that they fall within the regulatory scope of the Greek Securities Law. A similar stance towards the legal nature of cryptocurrencies is adopted in the US, as well, where exchange tokens have been postulated to fail the infamous US case law Howey Test. The author advances that due to their unique nature, cryptocurrencies should be captured by the special crypto-regime established under the new MiCAR, which extends to any type of crypto-asset not regulated under one of the existing financial law regimes.
Nonetheless, the regulatory conundrum of cryptocurrencies is very much still prevalent, especially when considering hybrid tokens, resembling several type of financial products. The legal nature of cryptocurrencies appears to be subject to fragmented interpretation within the various jurisdictions, which in effect fosters legal uncertainty. Hence, globally coordinated regulatory reforms, of a soft and/or hard law nature, delineating the exact legal framework for cryptocurrencies, are highly encouraged. Particularly at an EU level, targeted amendments to existing regulations clarifying the legal framework for cryptocurrencies are strongly advanced.72 n
