The Crypto Valley Association (CVA), a Swiss-based not-for-profit association supporting the development of Blockchain and cryptographic related technologies and businesses, today distributed a paper on behalf of MME and Blockhaus, proposing a new method for token classification.
Both MME, the leading Swiss consultancy firm for law, tax and compliance in Blockchain applications and Blockhaus, a developer of decentralized investment banking platform applications for tokenized ecosystems, are active members of the CVA. The framework was developed specifically for utilization for regulatory and critical risk-assessment purposes.
The paper, entitled “Conceptual Framework for Legal & Risk Assessment of Blockchain Crypto Property,” introduces the concept of Blockchain Crypto Property or BCP.
BCP is defined as digital information that contains all elements of a property right that is registered on a Blockchain or in an alternative digital ledger, which can be transferred via protocol, that may carry out additional functions governed by a Smart Control System, following coded or manual input.
“Information on a Blockchain is unlike any other previous incarnation of digital information. Blockchain Crypto Property shares many of the characteristics attributed to physical and other tangible properties as we understand them in the law, and yet BCPs are expanded with purely digital characteristics as well. These are groundbreaking concepts that require further examination and novel classification. Our paper examines the legal and risk characteristics of this completely new kind of property.”
“A common understanding of the underlying nature of different kinds of cryptographic tokens would allow policymakers to construct thoughtful and enforceable legal and regulatory frameworks. Moreover, an agreed-upon framework could also provide investors and issuers with standard tools to evaluate, mitigate, and communicate risks in token design and launches,” said Dr. Luka Müller, Partner at MME.
The MME and Blockhaus paper contains a functional approach in defining the three main categories of BCPs: tokens without a counterparty, tokens that have a counterparty, and a completely new asset-class, tokenized co-ownership.
The “without counterparty” classification is represented by native currency tokens, infrastructure tokens, and application tokens that do not grant holders any rights and have no underlying assets; tokens like Ethereum and Bitcoin fall into this class.
The second classification, or “counterparty class,” refers to tokens which include any form of a relative right, such as the right to receive an asset or financial payment, either against the token generator or a third-party. The final classification, the “co-ownership class,” denotes tokens with smart contracts that are programmed or registered on the Blockchain, allowing individuals to participate and co-own a technical platform or a form of intellectual property.
The main purpose of functional categorization is to grant a structured approach for legal, regulatory and tax assessment purposes. In addition, the BCP concept provides tools that will enable interested parties to make clear and well-founded analyses of tokens from legal and risk perspectives, in turn making it easier to identify frauds and uncover potential flaws. Consequently, the ability to categorize assets and assess risks is of huge value not only to regulators but to investors and token issuers.
In addition to the three BCP classes, MME has devised risk cases in order for regulators and potential investors to assess the risks associated with tokenized assets. These fall under four categories: functionality and protocol-related risks, such as network attacks and faults; storage and access of private key-related risks, like hacked wallets and exchanges; market-related and counterparty risks, such as insider trading and liquidity risks; and regulation and money laundering-related risks.
“The issue of the legal and regulatory status of cryptocurrencies is currently the most pressing concern in our community. Crypto Valley Association has called on regulators to devise clear, comprehensive, and flexible regulation on tokenized assets that protects investors but also supports innovation. We believe that MME’s BCP concept is an important contribution to this debate. It can be of immense use to both regulators seeking to understand cryptocurrencies and investors looking to evaluate their risks,” said Oliver Bussmann, President at Crypto Valley Association.
With offices in Zurich and Zug, MME is a leading consultancy firm in law, tax, and compliance. MME advises and represents companies and private clients in commercial, corporate and private business matters. Prominent in the Blockchain legal space, MME has assisted many crypto organizations set up in Switzerland.
“We are now entering a new age of the tokenized ecosystem. In order to understand the opportunities associated with tokenized assets, while also recognizing the risks, we require a clear conceptual framework to open the doors of the tokenized economy for mainstream adoption. The BCP concept we are proposing should serve as a method of structured discussion between all participants of the Blockchain community,” said Dr. Müller.
Headquartered in the Swiss canton of Zug, Crypto Valley Association is the independent, government-supported association established to take full advantage of Switzerland’s strengths to build the world’s leading Blockchain and cryptographic ecosystem, working with government to foster the development of pioneering digital technologies in Switzerland and internationally. To date, four of the five largest token sales recorded have been completed by companies based here in Switzerland, attracting a combined investment in bitcoin and ether of over $600 million USD.
Conceptual Framework for Legal & Risk Assessment of Blockchain Crypto Property can be accessed here. The paper was written by, Dr. Luka Müller, Stephan D. Meyer and supported by Christine Gschwend and Peter Henschel.
An in-depth interview with Luka Müller on the BCP concept is available on the Crypto Valley Association blog.
The paper “Conceptual Framework for Legal & Risk Assessment of Blockchain Crypto Property (BCP)“ was written by Dr. Luka Müller and Stephan D. Meyer, supported by Christine Gschwend and Peter Henschel.
It has the following aims:
- It attempts to qualify the digital information on the blockchain in a legal context by answering the question “what is the legal qualification of a token?” The conclusion is that there is a need to introduce a new type of property: the blockchain crypto property or BCP.
- It employs a functional approach to define three main categories of BCPs (see below). These functional categorisations allow for a structured methodology for making legal, regulatory and tax assessments of different kinds of tokens. This is intended to support a common understanding of BCPs for all the participants in the blockchain space.
- It demonstrates how the functional approach can be used to carry out detailed risk assessments of each class of BCP. This includes a large number of detailed sample risk reports of different existing tokens.
The paper defines three classes of BCPs, with sub-classes:
- BCP Class 1: No counterparty
- These are native currency tokens (bitcoin), infrastructure tokens (ether), or application tokens (golem).They do not give the holder any rights vis-a-vis a legal person, and have no underlying asset.
- BCP Class 2: Counterparty
- These confer a relative right against a legal counterparty. Every contractual and/or participation right can fall under such a classification.
- BCP Class 3: Co-Ownership
- These are tokens which have functions and/or rights programmed and/or registered on the blockchain using smart contract systems. Such a token structure allows users to participate in co-owner like structures to co-own for example intellectual property rights.
BCP Risk Assessment
The paper also defines four risk classes, with sub-classes:
- Functionality & Protocol-Related risks (bugs in the underlying technology, improvements in cryptography rendering protocol vulnerable, network attacks, consensus attacks, etc.)
- Storage & Access of Private Key-Related Risks (bug-filledgy or hacked wallets, hacked exchanges, lost private keys)
- Regulation & Money Laundering-Related Risks (regulatory risk of any kind)
- Market-Related & Counterparty Risks (liquidity risk, insider trading, token loses value, etc.)