Secondary Market for Security Tokens — The need for a new regulatory approach at the European Union level

Thomas Nägele
Jul 23 · 103 min read
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Abstract


1 Introduction


2 The technological basis

2.1 Trustworthy technologies (TT) and TT systems


3 Tokens in civil and regulatory law

3.1 General classification of tokens under civil law

3.1.1 Definition of tokens according to the TVTG

3.2 Basis in civil law for the transfer of tokens and the rights represented by tokens

3.2.1 Transfer of claims and membership rights

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Fig. 1 Comparison of the forms for transferring claims and membership rights, including in the form of securities, traditional book-entry securities and uncertified rights in the form of tokens.

3.2.1.1 Claims in general

3.2.1.2 Membership rights in general

3.2.1.3 From physical securities to claims and membership rights to uncertified rights (“Wertrechte”) and an electronic register system

3.2.1.4 On the civil law meaning of the term “uncertified rights” in accordance with Art. 81a SchlT PGR — “functionally equivalent securities in tokenised form”

3.2.1.5 Transfer of uncertified rights (Wertrechte) in securities trading

3.2.2 Interim conclusion on the conditions under securities and civil law

3.3 Classification of security tokens under regulatory law

3.4 Interim conclusion on the classification of security tokens under regulatory law


4 Secondary Market for Security Tokens

4.1 The capital market

4.2 Financial instrument transactions

4.2.1 Trading via markets with a centralised organisation pursuant to MiFID II

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Fig. 2 Market infrastructure pursuant to MiFID II and EMIR¹⁸²

4.2.1.1 Regulated market (stock exchange)

4.2.1.2 Multilateral trading facilities (MTF)

4.2.1.3 “Börse Stuttgart” MTF for cryptocurrencies

4.2.1.4 Organised trading facilities (OTF)

4.2.1.5 Systematic internalisers (SI)

4.2.1.6 Interim conclusion on trading via central markets

4.2.2 Trading via decentralised exchanges (DEX)

4.2.2.1 Trustworthy technologies as the basis for decentralised exchanges

4.2.2.2 DEX order books (on-chain/off-chain)

4.2.2.3 Operating an order book as a service subject to licensing

4.2.3 Transaction clearing

4.2.3.1 Central counterparty (CCP)

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Fig. 3 Risk-minimisation and increase in efficiency as a result of multilateral netting through the interposition of a central counterparty (CCP)³¹⁰

4.2.3.2 Clearing obligations for derivatives

4.2.3.3 Clearing as a service subject to licensing

4.2.3.4 Interim conclusion on clearing

4.2.4 Transaction settlement

4.2.4.1 Central securities depository pursuant to the Central Securities Depositories Regulation (CSDR)

4.2.4.2 Obligation to book securities in a book-entry account pursuant to the CSDR

4.2.5 Settlement on decentralised trading exchanges

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Fig. 4 Progress of an atomic swap

4.2.5.1 Settlement via decentralised systems as a service subject to licensing

4.2.5.2 Interim conclusion on settlement

4.3 Conclusion on trading, clearing and settlement


5 On a new regulatory approach for the secondary market for security tokens

5.1 The necessary functions/roles of a secondary market based on TT systems

5.1.1 Fiat tokens

5.1.2 Identity

5.1.3 Custody/registration

5.1.4 The new role of (Token-)CSDs, — provide custody/registration

5.2 On the antithesis of the incompatibility of security tokens with the current regime

6 Conclusion


Notice


Footnotes


References

Thomas Nägele

Written by

Attorney at Law specialized in Banking & Finance and Technology | Former coder | member of the workgroup drafting the Liechtenstein Blockchain Act.

Thomas Nägele

Written by

Attorney at Law specialized in Banking & Finance and Technology | Former coder | member of the workgroup drafting the Liechtenstein Blockchain Act.

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