Thread by @Deanpress

Long thread: How @binance "BEP2 Tokens" may always be securities, and subject to more regulatory obligations than other tokens.

I'm also compiling this into a Medium post later today.

⚠️ This thread is not intended as negative towards @Binance. They do great things for crypto.

Disclaimer: This thread does not contain legal advice or investment advice. The contents of this post are personal opinions based on personal interpretation.

This is intended to educate people about crypto regulations.

1) Binance Chain, the blockchain that powers @Binance_DEX , launched its Mainnet last night. Binance's founder @cz_binance tweeted that he expects a large amount of tokens migrating to the exchange giant's new blockchain.

2) Tokens issued on Binance Chain are called BEP2 Tokens, following Binance Chain's official BEP-2 Proposal.

You may think BEP2 tokens are similar to ERC20 tokens. But are they really?

3) Issuing a token on a smart contract platform (e.g. Ethereum, EOS, or NEO) and on Binance Chain may be very different from a legal perspective.

4) @Binance, @nOSplatform, @CoinMarketCap and many other blockchain projects are registered in (and operating from) Malta, also known as the Blockchain Island.

5) The regulatory clarity introduced by the Malta Financial Services Agency (MFSA) has offered legal safety and security for projects, investors, and users alike. @MFSAComm

6) Malta's VFA regulations give different legal obligations to different types of tokens. For this article we should understand the differences between Virtual Tokens (VTs) and Virtual Financial Assets (VFAs).

7) In short:

➕ Virtual Tokens are exempt from many regulatory obligations.

➕ Virtual Financial Assets come with many regulatory obligations.

8) The question we're asking:

Are Binance Chain's BEP2 Tokens always at least classified as Virtual Financial Assets, and therefore subject to VFA regulations at minimum?

And what about US @SEC_News securities laws?

9) Let's start with a short overview on Virtual Financial Assets and Virtual Tokens.

=== Virtual Financial Assets ===

What's a VFA?

A Virtual Financial Asset (or VFA) is a token of which its issuer (the team behind its ICO) must follow clear and strict regulatory guidelines.

10) From my understanding and according to the @MFSAComm's VFA Regulation FAQ, if a token is classified as a VFA, the issuer must, among other requirements:

11)

➕ Hire a custodian for the safekeeping of their assets.

➕ Hire a compliance officer, VFA agent, and systems auditor.

12)

➕ Register their whitepaper with the MFSA and file any whitepaper updates in the future.

➕ List specific details in a whitepaper, including information about the issuing company's shareholders.

13) When is a token a VFA?

From my perspective, a token can generally be classified as a Virtual Financial Asset if the issuer intends for it to be traded on exchanges, or it must hold some sort of monetary value in order to realize its utility.

14) Of course, a token can also be classified as a security, e-money, or any of the other classifications, but when we're talking about "generic tokens" where monetary value and the intent to be traded plays a role, we can generally assume them to be VFAs at minimum.

15) === Virtual Tokens ===

What's a VT?

A Virtual Token (or VT) is a legal classification for a DLT asset that is *exempt from VFA regulations*.

16) This means that the issuer of a VT does not need to hire any external parties (so no custodian, VFA agent, compliance officer etc), nor do they need to register their whitepaper with the MFSA in order for the token to circulate legally from the MFSA's perspective.

17) When is an asset a Virtual Token?

From my perspective, a VT classification generally applies to "pure utility tokens".

18) For example:

➕ Tokens that exist to power decentralized networks or smart contract applications (dApps) that do not need to be traded, nor do they need to hold monetary value in order to realize their intended utility.

19) ➕ Tokens such as loyalty points or credits (e.g. to unlock special features or in-game goods), as long as the tokens are not directly bound to monetary value.

20) It's also important to note that, in order for the token to qualify as a VT, the token issuer ⚠️ must not intend to list the token on exchanges ⚠️.

21) Example: The token that powers @nOSplatform, a full-stack blockchain app development and discovery platform, is classified as a Virtual Token, as the whitepaper clearly outlines the utilities of the token.

22) The issue: Can a Binance Chain BEP2 Token be classified as a Virtual Token?

Page 10 of the MFSA's Virtual Financial Instruments Test Guidebook mentions that a token can only be classified as a Virtual Token, if (among other restrictions):

23) "The issuer does not intend to list or admit a DLT asset to trading on an exchange (…) " - @MFSAComm VFA Regulation Guidelines

24) However, Binance Chain's official documentation has the following definition:

"Binance Chain essentially is a digital asset creation and exchange platform."

25) Aside from its description as an exchange platform, Binance Chain also appears to offer specific features for trading on Binance DEX (such as viewing exchange rates). The BEP2 standard's specification also describes the making of orders.

26) So, given the above information, with the current state of regulations, should we assume that *any BEP2 token cannot be classified as a Virtual Token, and instead is always a Virtual Financial Asset at minimum*?

27) ‼️ Note that this would by no means be a bad thing, as most tokens should in fact be Virtual Financial Assets. VFAs offers more legal security to both users and issuers.

28) However, for tokens where the classification is clearly a Virtual Token (and audited as such by a reputable law firm), it could be beneficial for the token's issuer to be exempt from VFA regulations, considering they are deemed unnecessary for VTs.

29) === US Securities Laws ===

According to US Securities Laws, tokens are considered securities if they are most likely to be issued with the intent to allow for speculation.

30) As Binance Chain describes itself as an exchange platform, and there are technical features made for trading BEP2 tokens, it's also very likely that the U.S. Securities and Exchange Comission (SEC) would consider any Binance Chain-issued token as a security.

31) Binance arguably has the best legal team and awareness in the entire blockchain space, so I hope to hear their feedback. cc @cz_binance @binance @Binance_DEX

32) Fin.

cc @APompliano - hope to hear your thoughts on this as well 🙏