Europe Opens the Door to a New Category of Financial Instrument: Security Tokens
By Helga C. Zanotti
With judgment no. 44378 of 2022, the Italian Supreme Court (Corte di Cassazione, Criminal Division) revisited the legal nature of virtual currencies, adding an important element to the evolving concept of a financial instrument.
The definition of virtual currency contained in Article 1 of Legislative Decree No. 231/2007, as amended by Legislative Decree No. 125/2019, expands upon the definition introduced by Directive (EU) 2018/843 by expressly recognising investment purposes as a possible reason for acquiring virtual currencies.
Where the sale of Bitcoin is promoted as an investment opportunity rather than as a means of payment, Articles 91 and following of the Italian Consolidated Finance Act (TUF) become applicable. This position had already been anticipated by Supreme Court judgment no. 26807 of 17 September 2020. As a result, failure to comply with the obligations established by those provisions may constitute the criminal offence of unauthorised provision of financial services.
Article 166(1)(c) of the TUF sanctions anyone who offers, promotes or places financial products, financial instruments or investment services through off-premises activities or remote communication techniques. Virtual currencies purchased through exchange platforms may qualify as financial instruments when the investment displays specific characteristics, including the use of capital, the expectation of a financial return and the assumption of investment risk.
When these elements are present, Bitcoin may be treated as a financial investment instrument, triggering the application of financial intermediation rules. This classification provides investors with a higher level of protection through a regulatory framework specifically designed to safeguard investments, including extensive disclosure obligations towards consumers and investors.
However, questions remain regarding the terminology used. The expression “virtual currency” suggests a form of money rather than a financial instrument as defined by Article 1(2) of the TUF, which does not expressly include cryptocurrencies such as Bitcoin. The Court also examined the broader concept of financial products, encompassing forms of investment beyond traditional financial instruments.
The judgment draws a parallel between a specific token known as LWF Coin and Bitcoin, treating both as investment products. Nevertheless, some uncertainty remains as to whether the tokens involved in the case should instead be classified as utility tokens, granting access to digital goods and services, rather than security tokens, which constitute genuine financial instruments.
An important contribution to clarifying the concept of a financial instrument comes from the EU DLT Pilot Regime Regulation (EU) 2022/858. The Regulation expands the definition contained in MiFID II by expressly recognising blockchain-based financial instruments, including security tokens.
Contact Information
Helga C. Zanotti
h.zanotti@bmvinternational.com
