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While the use of DLT-based financial services is rapidly
transforming the whole picture of financial markets for both market
investors and market infrastructure providers (payment systems,
stock exchanges, trading venues, securities custodians, issuing
companies), these raise specifically challenges for both regulators
and market participants due to the uncertainty on how the existing
regulatory framework can be applied toThe Law “On financial
markets based on the technology of Distributed Ledgers”, (the
“Law”) in additional to what we have explained thus far,
also regulates two very important steps for the system organization
and functioning, in particular the Initial Coin Offering
(“ICO”) and the Security Token Offering
(“STO”).
In simple words, the Initial Coin Offering is the cryptocurrency
industry’s equivalent to an initial public offering (IPO)
whilst the Security Token Offering is a type of public offering in
which tokenized digital securities, known as security tokens, are
sold in cryptocurrency exchanges, or security token exchanges. The
Law applies to STOs and ICOs issued by an issuer in or from
Albania. An STO or ICO is considered to be launched in or from
Albania, if the issuer is an individual/entity registered in
Albania (according to the definition of the Law).
ICOs
Initially ICOs were the first crowdfunding option to surface in
the Blockchain ecosystem. This method of fundraising enabled
anyone, from anywhere, to finance the development of a company or
project. In exchange for their investment, the investor will
receive a number of utility tokens, or, user tokens in other words.
These tokens represent future access to a company’s product or
service. There’s no entry barrier for neither sellers nor
buyers, it’s open to crowd investing. Once the ICO is launched
and has a defined timeline, the investors can buy the tokens.
Compared to STO, it’s a short-term investment. The teams have
the liberty to use the funds in the way they deem most beneficial.
Later, the tokens are distributed in a simple automated way via
smart contracts1.
The Law defines ICOs as: “…method for raising funds,
different from an STO, in which a Digital Token and/or Virtual Coin
issuer offers them in Albania or abroad, in exchange for capital,
in accordance with this law”. When the offer to the public is
expected to have a total equivalent value of, or higher than
8,000,000 (eight million) euros or the equivalent of this amount in
ALL, within a period of 12 months, inter alias, the issuer has the
obligation to publish a prospectus.
For ICOs in which the offer to the public is expected to have a
total value of less than 8,000,000 (eight million) euros, the
issuer will be required to publish an information document
regarding the offer, the form and content of which is determined
through regulation of the Albanian Financial Supervisory Authority
(“AMF”), albeit it has less obligations to fulfill (i.e.
authorization, presentation of whitepaper, etc., do not apply).
STOs
As a general concept, an STO is in its essence similar to an
ICO. STOs surfaced as a reaction to the lack of oversight when it
comes to ICOs, to bring regulation to Blockchain based crowdfunding
and offer more guarantees in the space of raising funds using
tokens issued on a Blockchain. When ICOs are more commonly used to
raise funds for a tech product, STOs are more linked to financial
services. Therefore, before the launch of the idea and
announcement, the company has to come up with a scalable business
model, which makes the projects more mature and trustworthy. To
launch an STO, it takes more time to get the regulators on board
and carry out the necessary tokenization of the assets. Generally,
it’s limited to accredited investors only and the amounts of
money required are bigger. Later on, the securities tokens are
going to be traded via broker-dealers supervised by regulatory
bodies.
The Law defines an STO as: “…a public offer, where
the issuer of DT of securities offers them in Albania or abroad, in
exchange for funds, according to the provisions of this
law“.
According to the Law, when the offer to the public is expected
to have a total equivalent value of, or higher to 1,000,000 (one
million) euros or the equivalent of this amount in ALL, within a
period of 12 months, inter alias, the provisions of the legislation
in force for capital markets, regarding the terms of the offer and
prospectus and the provisions of the legislation in force for
collective investment undertakings (in case the issuer of DT of
securities is an alternative investment fund offered to
professional clients) shall apply. These provisions shall be
applicable to the extent they do not run counter to the Law. When
the offer to the public is expected to have a value of less than
1,000,000 (one million) euros or the equivalent in ALL, within a
period of 12 months, STOs are exempted from the obligation to
publish a full prospectus. For these STOs, the publication of an
offer will be required, according to the provisions of the Law no.
62/2020 “On Capital Markets”2.
As a general rule, legal entities that seek to launch an ICO
(with an expected value above 8,000,000 Euro) or a STO, must obtain
a prior authorization by the competent authorities.
Footnotes
1 “Smart Contract” is a technological
agreement, essentially dependent on or linked to a DLT, which
contains a set of rules and conditions, which set in motion
predetermined reactions and which are automatically implemented in
case of fulfillment of the conditions set out in it. Smart
contracts fall under the definition of “innovative technology
agreement”, within the meaning of the Law.
2. Law no. 62/2020 “On Capital Markets” has
entered into force on September 1, 2020.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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