Security tokens

How Nash views regulation in the new digital economy

Early last week, we announced the approval of the Nash Exchange security token (NEX) by regulators at the Financial Market Authority (FMA) of Liechtenstein. While this approval has finally allowed us to begin raising money from public investors, it has much broader implications for our company and the cryptocurrency market as a whole. The NEX security token allows us to deliver strong token economics for investors in our exchange. It also sets a precedent for many other projects that are seeking to issue tokenized securities on European markets and lays the groundwork for our future plans to interact legally with governments and regulators.

The Nash Exchange security token (NEX)

Our issuing of a security token brings Nash investors many benefits, such as protection against market manipulation, fraud and insider trading. Perhaps most importantly, it allows us to pay our investors dividends through fees taken by the exchange, a form of profit-sharing.

Investors can stake their Nash Exchange tokens for a share of profits from our exchange.

Besides these advantages, we believe that every exchange token is, in practice, a security. These tokens primarily derive their value from the success of the exchange, not from any fixed utility or the efforts of the individuals holding them. For example, what is the value of an exchange token if the exchange that issued it stops being developed or operated? Other projects have attempted to circumvent this logic with legal arguments that may or may not hold up to scrutiny, and they continue to operate their platforms without following security and anti-money laundering (AML) laws. In our view, this poses a major risk to investors, as these platforms may suffer harsh consequences when the laws are eventually enforced. When facing these issues we decided to take the route that would bring the most value to investors with the least legal risk.

The long road to approval

Issuing the first regulated exchange security token has been a year-long effort, requiring the combined efforts of several legal firms and dozens of lawyers. In essence, we needed to convince the regulators at the FMA that blockchain technology could form the basis for issuing and transacting traditional securities. This was an enormous challenge, because if the FMA accepted our argument, they would need to justify their reasoning to the entire European market: their decisions affect a very wide regulatory jurisdiction, and approval of NEX as a security in Liechtenstein means that it can be listed on any conventional European securities exchange.

To convince the FMA, we wrote a legal opinion detailing the properties of cryptographic tokens and addressed all possible existing regulatory frameworks that our token might fall under. This was an interdisciplinary challenge that required a team of more than twenty lawyers who were comfortable with international law and digital ledger technology. After many months of communication and iteration, the FMA finally agreed with our opinion and accepted the prospectus for our security, registered as LI0428264928 / CH42826492. We then immediately executed all planned steps: we announced the public sale, took a moving average one day before the smart contract was published and open sourced the token smart contract before the sale began on 3 September. Given the precedent we have set, other companies will find it much easier to issue security tokens in these markets.

The FMA officially approved our security on 30 August 2018.
One requirement for issuing our security was to place an ad in a national newspaper in Liechtenstein.

While receiving approval from the FMA is a major step forward for us, it is only the beginning of our engagement with regulators around the world. In the near term, we will be working to acquire a Security Dealers License, which would allow us to issue other securities to the public and is a requirement for an Organized Trading Facility (OTF) license, which would allow us to support trading of NEX and other European securities. We are also working towards a Banking License, which would allow us to operate regulated bank accounts and store customer money. This would open the door to new products such as index funds and margin trading. In the United States, we are working towards Broker Dealer, ATS and FINCEN licenses, which would allow us to trade US securities. Approval of the NEX token in the European Union also helps pave the way for our application to become a US security.

Impact beyond Nash

We see tokenized securities as an asset class that will reshape the future of finance. Imagine, for example, a world where investors receive equity in an early stage startup as tokens and are able to trade those tokens on a new class of highly liquid securities exchanges. Or imagine the benefits of locking some of that equity in a smart contract to enforce fair dilution mechanics for early employees or investors. Digital ledger technology allows traditional forms of equity, such as shares of a company or property, to be transacted more efficiently and intelligently, and in more liquid markets. At Nash, we aim to be driving both the legal and technological sides of these changes.

How can I support Nash?

We are hiring, and if you have blockchain, security, DevOps or Elixir skills, we would love to hear from you. Otherwise, we hope that you join us on the exchange when it is launched later this year. And of course, if you have been KYC approved to buy the NEX security, several days still remain until the end of our sale.