Beyond the Hype: The Legal Weight of Crypto-Asset White Papers Across Jurisdictions

Background of White Papers

White papers, which have been used since the 1990s, can be defined as sales and marketing reports or guides that are used to showcase, introduce, and inform potential customers to a certain product, service, or technology. A white paper will often inform its readers about the issuing body’s philosophy, core concept and ideas and explain any complex issues relating to their product, service, or technology. White papers have been commonly designed for business-to-business marketing objectives between manufacturers and wholesalers or between wholesalers and retailers, offering comprehensive reports on how-to about the product, service, or technology, supported by statistical and cited information.

White papers can vary in types and format regarding project documentation. For example, problem-solution types of white papers identify a particular issue that the target audience may have and propose a solution, while others may be written to focus solely on an issue or debate and inform the reader. Others may just provide technical assessments and provide promotions for a certain product or service or be purely technical analysis of a product or service or technology. Another type of white paper may be one that provides market research based on the new or relevant research provided by the organizer for potential customers.

How Crypto Asset White Papers Distinct from Other Project Documentations?

White papers regarding crypto assets or blockchains mainly focus on the technical, economical, and philosophical aspects of an innovative crypto asset or a blockchain. Their primary concern is generally about tokenomics, consensus mechanisms, cryptography, etc. On the other hand, traditional white papers generally examine specific technology or a proposed solution to a complex challenge.

More importantly, crypto asset white papers have a non-negligible effect on the fundraising aspect of the underlying project. While traditional white papers generally are not used in a way that calls for a fundraising, sometimes the main reason for issuing a white paper for a crypto asset is fundraising. When it comes to evaluating whether a crypto asset / blockchain project is worthy of investing in, white papers of such a project are generally all there is to evaluate. Because investors and even ordinary customers’ unfortunately only piece of information regarding a project is the white papers of said project, the white papers of crypto assets play a vital role in the success of a project.

Furthermore, traditional white papers are generally issued by established and well organized traditional legal entities. On the other hand, the developers of a crypto asset / blockchain project generally lack legal entities. Most of the time, these crypto asset projects are developed by individuals who are subject to different jurisdictions and lack a legal entity. The lack of legal entities sometimes causes trust problems. In this regard, crypto asset white papers are useful tools for building trust between the developers and the investors.

Why Do White Papers Matter?

Most importantly, since issuers of most crypto asset / blockchain projects lack legal entities, and the only piece of reliable information regarding a crypto asset is white papers of such a project, white papers play a crucial part in legal evaluation of a crypto asset. Governmental authorities tend to examine the white papers when it comes to legal qualification of a crypto asset. Any miswording may result in legal ramification and therefore hinder the development of the project.

For example, in the event of drawing up a white paper in a way that may be against the laws of a jurisdiction may consequently result in governmental intervention. For example, jurisdiction such as Türkiye bans the usage of crypto assets in payment systems in any way. Therefore, a crypto asset project whose white paper foresees usage of the project’s crypto assets in payment systems will automatically draw attention to the project and ultimately may result in taking adverse action on the project by the state.

Furthermore, many jurisdictions are concerned with customer protection when it comes to crypto assets. The European Union, for example, has prepared a regulation called Markets in Crypto Assets, in which it determines some guidelines for crypto asset issuers to properly inform the customers and investors of such crypto assets. For the sake of the future of the project, it is important to closely examine whether the jurisdiction you are subject to has laid out some ground rules or guidelines for white papers.

Characteristics of Crypto Asset White Papers

Crypto asset white papers may be defined as documents on which underlying blockchain technology, smart contracts used in the project if any, the scope and aim of the crypto asset, the rights, and opportunities to be granted to the buyers if any, timetable for the project, and the project in general, and people who are working on the project are explained. White papers are like but not same as offering circulars used in public offering in the capital markets.

First to come across in white papers is stating the problem. Clearly determining the problem is the first step to catch the investor and to solve the problem. Second most common characteristic of crypto asset whitepapers is proposing a reasonable and achievable solution to the determined problem. Afterwards, the main idea is how to convince people to invest in the crypto asset and therefore in the project.

Since white papers are commonly used in the ICO process, crypto asset white papers almost always propose a business plan. The main questions to answer when it comes to tokenomics in this regard are as follows:

• When and how many coins/tokens will be issued?
• How will the coins/tokens be distributed amongst the purchasers?
• How will the purchasers acquire the crypto asset they will be entitled to?
• What are the main features of the crypto assets and what rights and utilities will it grant to its purchasers?
• How much capital is needed and if the project fails to collect the required capital, how will the collected funds be returned to the purchasers?
• What is the estimated and desired schedule / timeline for the project?
• How and on what will the collected capital be spent?

Legal and Regulatory Disclaimers

Every white paper must include a disclaimer for its readers at the very start. This disclaimer can be vital for the white paper in indemnifying the party that has made the white paper against legal claims.

It would be advised to list, concisely, that the company and its team members behind the project are not to be held liable against claims arising from the issuance of the white paper. It should be stated that the company or entity behind the project of the white paper as well as the team members, distributors etc. are not to be held liable. This statement should also address that the aforementioned shall not be held liable for any loss or damages incurred or possibly suffered as a result of accessing the white paper.

Especially in the context of crypto assets service providers, white papers must include a disclaimer stating that the white paper does not constitute any financial, legal or tax advice. It may also be necessary to include that the white paper and its contents have not been reviewed by a governmental entity.

Furthermore, some jurisdictions may ban crypto assets altogether. That’s why, it is important to address the people of such jurisdictions about the matter and ask them to not read, distribute or share the white paper in this jurisdiction, and if they happen to be subject to such jurisdiction, then, warn them that it is their responsibility to cease their relations to the crypto assets or its white paper.

Risk Appraisal

Risk appraisal or risk assessment is a process evaluating and analyzing potential risks, uncertainties or vulnerabilities associated with a project. Although not all crypto assets or blockchain projects bare extreme risks that must be evaluated and result in a white paper needing such a risk appraisal, for a crypto asset or blockchain project, a form of risk appraisal can be included in the white paper that identifies, analyzes risks and poses ways that the project team will combat them.

The goal of a risk appraisal is to systematically identify, quantify and understand the potential consequences of risks and aid in making informed decisions for potential investors.

A risk appraisal for the project may include an analysis of regulatory risks, as crypto assets have varying regulations, some only in developmental stages and some prohibiting their use in some nuanced way.

Another important factor that can be identified and evaluated is market volatility as crypto assets markets are known for their high volatility. For example, it can be stated that the value of the crypto asset may fluctuate significantly and impact investors’ confidence and that to manage this the project aims to establish strong partnerships and a community that will work on stabilizing the crypto assets’ value in such events.

The Role of a White Papers in Crypto Asset Launch

The white paper can be a sort of drawing board for potential investors or users of the crypto asset or token that is being launched. Meaning that the educational aspects of the white paper can help the users or the crypto assets to come and refresh their knowledge on the project. Here, the white paper will serve as an educational resource, explaining the underlying technology and the goals and vision behind the crypto asset project. The white paper also helps form transparency between potential investors and the project’s aims, its team members, and the roadmap that the project has adapted.

The white paper can provide the technical details that investors should be aware of before investing. Further, the white paper will usually include information on the tokenomics, meaning the distribution of tokens, the supply, mining and creation and the incentives of miners, developers, or stakeholders.

The whitepaper can also serve as a promotional or marketing tool that attracts investors or community members by effectively communicating the value propositions of the crypto asset project. All of this results in a roadmap to the crypto asset launch, building investor confidence and growing the community which can result in effectively competing in such a competitive market.

Established Guidelines for White Papers

Markets in Crypto Assets regulation, MiCA, is the leading legislation regarding crypto assets, their offerings, documentations regarding offered crypto assets, etc. Since MiCA will have a huge impact on the regulatory aspect of blockchain technology and crypto assets in various countries and jurisdictions, it is important to closely examine MiCA.

Utility Tokens White Papers and MiCA

The European Union’s Markets in Crypto Assets Regulation (“MiCA”) mandates that market participants must publish a White Paper before making any crypto-assets available to the public. MiCA holds an important place as, once fully adopted by EU member states, it will be setting out clear cut requirements that every White Paper must include in terms of the offer of crypto assets or utility tokens. Another important factor is that, often, the EU is seen to be the first that regulates new legal areas with the development of technology, having other countries follow in tow of the EU directives and regulations.

According to Article 4 titled Offers to the public of crypto-assets other than asset-referenced tokens or e-money tokens, for a person to make an offer to the public of a crypto asset other than an asset-referenced token or e-money token within the European Union, a crypto asset white paper in respect to that crypto asset must be drawn in accordance with Article 6 of MiCA. Further, the crypto asset White Paper must be notified in accordance with Article 8 and published in accordance with Articles 9 and 12.

Article 4 of MiCA further states that, if the offer to the public of the crypto asset concerns a utility token that provides access to goods and services that don’t yet exist or have not been put into operation, the duration of the offer to the public described in the white paper mustn’t exceed 12 months from the publishing date of the white paper. This limitation regarding the duration period of the offer to the public is not related to the moment when the goods or services come into existence or start operating and can be used by the holder of the utility token after the expiry date of the offer.

It is important to note that the requirement of issuing a white paper prior to the offering to the public is not mandatory for crypto assets that are not asset-referenced or tokens or e-money tokens, in cases where (i) offer to the public is made to less than 150 natural or legal persons per EU member state, or (ii) over a period of 12 months, starting with the beginning of the offer, the total consideration of an offer to the public of a crypto-asset in the Union does not exceed EUR 1 000 000, or the equivalent amount in another official currency or in crypto-assets; or (iii) an offer of a crypto-asset addressed solely to qualified investors where the crypto-asset can only be held by such qualified investors.

According to Article 6 of MiCA, a crypto asset white paper must contain information on:

• the one offering or seeking admission to trading,
• the issuer if the issues is a different person,
• the operator of the trading platform for the crypto asset in cases where it draws up the White Paper,
• information on the one who has drawn up the White Paper if it is a different person,
• detailed information about the crypto asset project,
• the offer to the public or its admission to trading,
• detailed information on the crypto asset itself,
• Information on the rights and obligations attached to the crypto asset,
• information on the technology that underlines the project,
• clear information about the potential risks,
• information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the crypto asset.

Liability Arising from Information in Utility Token White Papers

According to the Article 15 of the MiCA, in the event of information contained in the white paper is contrary to the rules set out in Article 6 of the MiCA, meaning that information given is not complete, inaccurate, fair, clear; the offeror of the ICO or other relevant natural or legal persons will be held liable to the holders of the issued crypto asset for any loss incurred due to such infringement. Furthermore, it is important to state that any contractual exclusion or limitation of liability stated in a white paper will have no effect in accordance with the infringement.

Asset-Referenced Token White Papers and MiCA

MiCA has regulated different types of tokens and their corresponding white papers separately. According to Article 19 of MiCA, an asset-referenced crypto asset’s white paper must contain:

• Information about the issuer of the asset-referenced token,
• Information about the asset-referenced token,
• Information about the offer to the public of the asset-referenced token or its admissions to trading,
• Information on the rights and obligations attached to the asset-referenced token,
• Information on the underlying technology,
• Information on the risks,
• Information on the reserve of assets,
• Information on the principal adverse impact on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the asset-referenced token.

Furthermore, it is expressly forbidden to provide any assertions regarding the future value of the asset-referenced crypto asset. However, white paper must clearly and unambiguously state that:

• The asset-referenced token may lose its value in part or in full,
• The asset-referenced token may not always be transferable,
• The asset-referenced token may not be liquid,
• The asset-referenced token is not covered by the investor compensation schemes under EU Directive 97/9/EC,
• The asset-referenced token is not covered by the deposit guarantee schemes under EU Directive 2014/49/EU.

Liability Arising from Information in Asset-Referenced Crypto Asset White Papers

According to the Article 26 of the MiCA, in the event of information contained in the white paper is contrary to the rules set out in Article 19 of the MiCA, meaning that information given is not complete, accurate, fair, clear; the offeror of the ICO or other relevant natural or legal persons will be held liable to the holders of the issued crypto asset for any loss incurred due to such infringement. Furthermore, it is important to state that any contractual exclusion or limitation of liability stated in a white paper will have no effect in accordance with the infringement.

E-Money Token White Papers and MiCA

The content and form of the white paper needed for e-money tokens are specified under the Article 51 of MiCA. According to Article 51, a crypto asset white paper for an e-money token shall contain the following information:

• Information about the issuer of the e-money token,
• Information about the e-money token,
• Information about the offer to the public of the e-money token or its admission to trading,
• Information on the rights and obligations attached to the e-money token,
• Information on the underlying technology,
• Information on the risks,
• Information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the e-money token.

Furthermore, it is essential for the crypto-asset white paper to contain the following clear and prominent statement on the first page that “This crypto-asset white paper has not been approved by any competent authority in any Member State of the European Union. The issuer of the crypto-asset is solely responsible for the content of this crypto-asset white paper.”.

One other requirement foreseen by MiCA is that e-money crypto asset white papers shall contain a clear warning stating that: (a) the e-money token is not covered by the investor compensation schemes under Directive 97/9/EC; and (b) the e-money token is not covered by the deposit guarantee schemes under Directive 2014/49/EU.

National Regulations Regarding White Papers

Certain EU member states have already established laws regarding digital assets, with a focus on the legal details outlined in a white paper. The Maltese Virtual Financial Assets Act defines a white paper as a document that must contain specific information and follow certain requirements. This includes stating the date, providing the information outlined in the First Schedule, and including a statement from the board of administration confirming compliance with the Act. The First Schedule specifies that the white paper should include details about the issuer, VFA agent, development team, advisors, and other service providers involved in the project. It should also include information about taxes, risks associated with the virtual financial assets and investment, pre-emption rights, anti-money laundering procedures, and intellectual property rights.

The PACTE law in France introduced a new regime for ICOs, allowing the AMF to approve them. This regime aims to encourage the growth of ICOs and applies only to utility tokens, not security token offerings. Token issuers can apply for approval from the AMF if they want to conduct an ICO. Before granting approval, the AMF ensures that an information document (referred to as a white paper) is prepared in accordance with Article 712–2 of the AMF General Regulation and AMF Instruction DOC-2019–06. which outlines the content of the white paper and specifies the information that should be included in different sections. According to paragraph 1.3. of AMF Instruction DOC-2019–06, the white paper should provide all relevant information about the offering and the issuer of the token.

The contents of Annex II to Instruction AMF DOC-2019–06 outline the specific sections that must be included in a white paper, to be presented in a predetermined order. Alongside the commercial and technical information typically found in a white paper, there are also crucial sections that address legal matters. These include details about the token issuer, such as their company description, legal structure, ownership, background, and activities. It is important to outline the procedures for the custody and refunding of funds and digital assets collected through the initial coin offering, as well as the subscriber reimbursement process. The white paper should address systems for verifying subscriber identities, as well as anti-money laundering and security measures. It should also specify the applicable legal framework and competent courts in case of disputes and outline the tax regime for holding tokens in France for French subscribers. Lastly, the white paper should include a declaration from the individuals responsible for its content.

Swiss law has regulations regarding the content of a white paper for initial coin offerings. The Swiss Financial Market Supervisory Authority (FINMA) is responsible for overseeing financial matters in Switzerland and has published guidelines for ICO regulations. These guidelines include a section outlining the minimum information that must be provided in a white paper, such as details of all individuals involved in the ICO and whether they have obtained financial market licenses in other countries. The white paper must also specify the rights acquired by investors and how they are documented, as well as whether a financial intermediary will be hired to fulfil due diligence requirements.

Since different countries have different regulations for ICOs, there are no consistent legal requirements for the content of white papers. However, all countries emphasize the need for disclosure of information about the issuer and project developers, which is important for investor protection. Additionally, certain legal provisions in white papers are influenced by the unique characteristics of blockchain technology.

In United Arab Emirates, Securities and Commodities Authority has issued a regulation on crypto assets offerings. In this regulation amongst other matters, white papers are also regulated. However, the regulation does not use the term white paper and instead it calls the document “Offering Documentation”. These Offering Documentations shall be clear, fair, accurate and not misleading, truthful and not omit essential information.

Furthermore, the Offering Person must ensure that all asset rights and features are recorded in the supporting technology, regularly update investors about progress towards project milestones and specify update intervals in the Offer Documentation, notify and explain to investors if technology development or other obligations aren’t met, update Offering Documentation, and inform investors about redemption rights if relevant, inform investors promptly of significant changes in software relevant to their rights, clearly disclose to investors if the crypto asset does not provide a claim right against an Offering Person for default in performance benefits.

The Securities and Commodities Authority of UAE foresees a list of information that is required to be present in the Offering Documentation. Offer Documentation for Crypto Assets must include, where relevant:

1. Clarity on fund handling until Crypto Assets are issued, and details about issuance after funding.
2. Description of all major technology-related investment risks.
3. Explanation of the software, protocols, developer engagement, software control, and implications for changes, including rights and obligations of crypto asset holders. If open source, a link to the code is needed.
4. Milestones or dependencies behind crypto asset development, failure implications, and potential refund mechanisms.
5. Timeframes for achieving project goals, manager commitments, and incentives.
6. Financial data about the offering entity/business for the last three fiscal years.
7. Information about crypto asset custody arrangements and how investors access and manage them.
8. Technology/software requirements for investors to exercise rights related to crypto assets.
9. Notice about investor rights to refunds, and refund mechanism details.
10. Information about disaster recovery, back-up, and/or insurance/guarantee strategies, or confirmation if none are present.
11. Intellectual property details, including ownership of software, patents, and copyrights.
12. Details of the team’s existing business operations and relevant personal and project history.
13. Identification of the Offering Person and, if different, the Offering entity, with details about governance and legal notification addresses.
14. Previous investor obligations for the related project.
15. Information about the outstanding token provision, token burning, token release, token reserve requirements, and third-party audit details.
16. Details of compensations for management, developers, or other contributors.
17. Liability and risk allocation between the Offering Person and the software service provider, including disruption risks.

Additionally, a “key investor information” section must succinctly present crucial crypto asset characteristics in non-technical language, ensuring understandability for non-qualified Investors. Please be aware that this list of information may vary depending on the nature and the feature crypto asset presents.

Potential Pitfalls and Red Flags

Certain aspects in a white paper can serve as a red flag or be pitfalls. This becomes relevant both from the reader or potential investors perspective, meaning that they should take note of such red flags, and from the team members working on the white paper, meaning that they should show care when producing the white paper.

The main aspect to take note of would be a lack of technical detail in the white paper as a legitimate white paper would, and should, provide detail on the technical aspects of the project, the underlying technology, consensus mechanism, cryptography, tokenomics… etc. Having a lack of technical detail and depth can be a major red flag to potential investors. Although it’s important to be able to simplify the difficult concepts behind the technological aspects of the project, it is equally, if not more, important to not be overly simplistic.

Since transparency is very important to build trust with potential investors or community members, the white paper should not be completely devoid of the identities and backgrounds of the project’s team members. A lack of transparency in this aspect can raise some red flags. The white paper also shouldn’t have any plagiarized content since this will be a major red flag, hindering the professionality behind the team and the quality of the project.

Another aspect to investigate is if the white paper is giving any unrealistic promises. It is important to be able to market and promote the crypto asset that is being launched but especially in the context of the volatility, making extravagant claims or promises of high returns can come off as a major red flag. This can also happen when a white paper claims that the technology being introduced is revolutionary or game changing, and combined with, for example a lack of technical explanation, this will be a major pitfall. Ultimately, the white paper shouldn’t just be a document that hypes the potentials of the project without providing proper and substantial information.

The tokenomics section of the white paper should be drafted very carefully and there should be a transparent token distribution. If a significant portion of the tokens is held by a single or small group of individuals or the team, this can serve as a red flag. Also, a non-detailed, dismissive section on tokenomics will not build trust with potential investors or community members.

If the white paper does not explain the utility and purpose of the project’s token within the ecosystem, it may lack a clear value proposition. This also leads to the role that the white paper plays as a road map. The credibility of the project lies in its ability to serve as a road map, building trust with potential investors and community members. A lack of detail regarding how, when and what the plans of the project are, and what the future goals are can be a red flag.

The white paper should also have adequate risk disclosure as this will legitimize the project. Outlining potential risks and challenges can provide a balanced view of the project and a lack of this will result in mistrust. The white paper should also be clear with its legal compliance. For example, if the project is conducting token sales or ICOs, it should give information on their legal and regulatory compliance. Lacking such elements will be a red flag and the project must consider legal requirements.

Consequences of Misrepresentations in White Papers

From the legal aspect, misrepresentation can lead to actions by investors, regulatory bodies or any party affected by the misrepresented information. An investor who finds that they have been misled may very well sue the project company or its founders for claims such as fraud or misrepresentation. The project may also be subject to regulatory sanctions by authorities. Regulatory authorities may investigate and impose fines or halt the project if they find misleading or false information contained in the white paper. In extreme cases, this may even result in criminal charges against the individuals involved in the project.

Misrepresentation will erode the trust of investors and hinder their confidence in the project. If the investors find that they have been misled, they won’t be very likely to keep supporting the project or invest in the future. This would also be very negative publicity, and this would result in negative backlash towards the project and its future offerings. All this can essentially lead to the downfall of the project as this is a very community support-based area. If investors purchase tokens based on misrepresented information, this will lead to loss of investment and a major market reaction such as a sharp decline in value.

Misleading information in a white paper can potentially lead to the crypto assets exclusion from exchanges, criminal liability and perhaps abandonment of the project once the misrepresentation yields consequences that are not compensable. If legal actions are taken against the individuals behind the project, the project members may be required to financially compensate for the damages incurred by investors. Therefore, to avoid these consequences, the white paper should be transparent and provide accurate information and comply with the relevant laws and regulations.

Please see the Annexes I, II and III of MiCA regarding the content and specifics of each type of crypto assets.

LEGAL DISCLAIMER

THE INFORMATION PROVIDED IN THIS PAPER PROVIDES GENERAL INFORMATION AS TO THE POSSIBILITIES IN MULTIPLE JURISDICTIONS. PLEASE KEEP IN MIND THAT LAWS THAT APPLY TO THE SUBJECT HEREIN MAY DIFFER IN EACH JURISDICTION. THUS, NOTHING CONTAINED HEREIN CONSTITUTES ANY LEGAL OPINION OR SUGGESTION OF ANY KIND. PLEASE CONSULT TO LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.