At the end of September 2019, Rahim Blak published the response issued to him by the Office of the Polish Financial Supervision Authority (UKNF) to questions concerning the possible application of financial regulations to his planned and realised activity involving raising capital through distribution on the market of personal tokens. Although the response was issued in a specific case submitted to the Innovation Hub, given the lack of a public general position of KNF on the legal status of tokens, the document is also relevant to the broader market.
The response directly addressed the risk of application to Rahim’s business of two criminal provisions: Art. 171(1) of the Banking Law and Art. 287(1) of the Act on Investment Funds and Management of Alternative Investment Funds. The first penalises operation of activity without a licence consisting of “gathering funds of other natural persons, legal persons, or organisational units without legal personality with the purpose of granting credit or cash loans or encumbering such funds with risk in any other way.” The second penalises performing without a licence “activity consisting of the investment, in securities, money-market instruments or other property rights, of assets of natural persons, legal persons, or organisational units without legal personality, collected through a proposal to conclude a contract whose subject is participation in such venture.”
These provisions essentially impose sanctions for operating strictly regulated activity without the relevant licences. But due to their quite general wording, they can cause some innovative entrepreneurs on the financial market to lose sleep, when they do not conduct banking or fund management activity in the strict sense, but under a broad interpretation might be deemed to fall within the scope of these regulations and thus be exposed to very high sanctions (in both instances a fine of up to PLN 10 million or up to 5 years in prison). This problem was previously identified by UKNF when it published several case studies from its practice in order to provide the market more information about its interpretation of the regulations.
We should note that these are penal provisions, in respect of which UKNF’s role primarily consists of filing a notice of suspicion of commission of a criminal offence. Nonetheless, the office decided to issue a position interpreting these provisions.
UKNF’s response to Rahim’s inquiry contains for example an interesting analysis of the possibility of applying Art. 171(1) of the Banking Law in a situation where the collection of funds is not connected with an intention to use them to grant credit or cash loans, but only to launch and operate business activity.
Status of tokens under Polish law
But the UKNF document is noteworthy mainly for another reason: it provides an interesting insight into UKNF’s view of issues related to the legal status of blockchain tokens under Polish law. For example, UKNF apparently recognised that Rahim Blak’s tokens do not constitute securities.
So far KNF has not published any general stance on the legal status of crypto assets, and in particular on the status of tokens under regulations governing securities and other financial instruments. Practically the only publicly available source of information on this topic has been the KNF communiqué on initial token offerings (ITOs) and initial coin offerings (ICOs), published in November 2017, at a time when there was an overheated market for token issues in ICOs and shortly after publication of similar positions by the European Securities and Markets Authority.
Such a position from KNF was expected in the autumn of 2018. A report was even drafted, but never finalised. According to the word on the markets, work on this report has started again from scratch. Given the lack of a public stance from KNF on these issues, but assuming that a coherent and comprehensive vision of how blockchain and tokens fit into the existing financial regulations does exist, that view must be reconstructed based on specific statements by the office in individual cases.
My brief remarks below are detached as far as possible from the specific factual situation in which the position was issued in the Blak case. The aim is not to praise or criticise UKNF’s interpretation regarding Blak’s personal tokens, but to draw more general conclusions on the office’s reasoning, particularly against the background of the overall European understanding.
UKNF position and the situation in other EU member states
The UKNF position is particularly interesting from the perspective of the development of regulatory interpretations in other EU countries. The regulations there are after all a result of implementation of the same EU laws, such as MiFID II.
This is particularly evident in Germany, where there is an exceptionally well-developed tradition and legal doctrine surrounding the private law of securities. This legacy includes the requirement that a security should, as a rule, take a traditional (paper) form, although this is supposed to change in the upcoming months, as was even recognised by the federal government in a recently published strategy for blockchain technology. It seems that this requirement would prevent creation, issue or trading in securities on blockchain under German law. But in its recent regulatory practice, the German Federal Financial Supervisory Authority (BaFin) seems to accept the position that questions peculiar to civil law do not stand in the way of classifying a given instrument as a transferable security within the meaning of MiFID II and admitting the public offering of such instruments under the Prospectus Regulation—even if the civil-law classification seems to differ. This fits within BaFin’s fairly functional approach to financial innovations. The German approach as outlined above also seems to prevail in at least several other EU member states. To a certain degree at least, this is also viewed with understanding by ESMA (an institution that mainly handles European-wide regulations of the financial markets, and not civil-law issues, which largely remain within the domain of the individual member states).
What relevance does this have to the position adopted in Poland by UKNF? UKNF’s main argument for its view that Rahim Blak’s tokens do not have the status of a security appears to be that the token is regarded as an “identifying marker” (znak legitymacyjny). This is a category functioning chiefly under the civil law. Interestingly, UKNF does not conduct a direct analysis (as is found for example in the positions taken by other European financial watchdogs) concerning the status of a token as a security pursuant to financial regulations. It rather reaches the conclusion that based on the information it has received, the tokens should be regarded as identifying markers, and these in turn “are not subject to supervision by KNF.”
This peculiar approach may be criticised (for example, there are insufficient grounds to find that an identifying marker within the meaning of the Civil Code could never be a security for purposes of the Trading in Financial Instruments Act), but undoubtedly arguments could also be found to support UKNF’s position, derived from Polish civil law and also from historical (but to some degree still current) discussions on issues such as the existence of a fixed catalogue (numerus clausus) of securities. It should also be admitted that the conception of a token as an identifying marker, first presented by Adam Kotucha, is intriguing, particularly under the civil law. We should note, however, that the apparent convenience for business in a recognition that a token can never be a security (but at most an identifying marker, assuming for the moment that these are mutually exclusive categories), which facilitates issue and trading in such tokens, would greatly hinder the situation of businesses that would like to issue securities in the form of tokens (in a security token offering (STO)).
But as mentioned above, the visible trend, both at the EU level (ESMA) and the national level (BaFin, but also its counterpart in several other countries), involves to a certain extent setting to one side the convoluted civil-law issues and recognising that regardless of its classification under private law, a token may possess the regulatory status of a transferable security. This follows from the fairly flexible approach to what constitutes a security (running counter to the view mentioned above, popular in Poland, that there is a fixed catalogue of securities) for purposes of regulatory provisions, particularly those setting forth the public-law rules for public offering and trading in securities, which are guided among other things by the principle of protection of investors.
As can be seen, there are still many open questions concerning the legal status of tokens. This only opens the discussion of the legal consequences of what happens next with the tokens (trading, lending, creating “derivatives” and so on). Undoubtedly a position from KNF, so eagerly awaited by the market, would shed more light on this issue. But it appears that ultimately the unfolding of the situation on the EU level will have the greatest significance. There, a lot of attention is being paid to these issues, and the debate that is underway is at least to some degree liberated from the civil-law peculiarities of individual member states. This does not change the fact that we need a national discussion on this topic, and the published document from UKNF clearly offers a valuable perspective from a key stakeholder.