The Bank of Lithuania has issued its first set of guidelines for Digital Security Offerings / Security Token Offerings (STOs).
The Guidelines have been developed by the bank to
assist market participants in understanding whether tokens they have employed, fall within the regulatory and supervisory financial markets framework," and "clarify ... expectations for market participants carrying on activities related to tokens qualified as transferable securities or other financial instruments within ... Lithuania.
This is a further development in the global legal recognition of cryptocurrencies, as there is currently no STO-specific regulatory framework within Lithuania or the European Union. Although some of EU Member States such as Malta and France have introduced ICO-specific national regulation, within the EU itself there has been little to no legal qualification and interpretation of tokens which inhibit features of transferable securities or other financial instruments.
As such, the guidelines are primarily focused on the classification of the tokens and their applicable legal regulation. Marius Jurgilas, Member of the Board of the Bank of Lithuania said:
The current focus on security token offerings ... is taking over the waning interest in initial coin offerings... Businesses are interested in this particular way of raising capital as an alternative to bank lending. The Guidelines on Security Token Offering are aimed at explaining our position in this regard rather than creating new regulatory arrangements. In a strict regulatory environment, such as the securities market, it becomes crucial to set rules in order to avoid any miscommunication, misunderstandings, and consequences.
The BoL is of the opinion that tokens that meet the relevant conditions should be treated as equivalent to financial instruments and regulated from a technology neutral perspective. This means that the application of financial markets legislation does not depend on the fact of whether any technology is used or what kind of technology is used.
The Guidelines state at [38] that:
Where tokens are qualified as equivalent to financial instruments these tokens should be treated as financial instrument in the light of the existing relevant financial markets legislation despite technology that is applied to such tokens (for instance, DLT).
The Guidelines reinforce that in order to qualify as a transferable security, defined in Lithuanian law under Article 3 (52) of the Law on Markets in Financial Instruments, the token should (and is likely to) qualify as:
(a) circulating in the capital market shares in companies and other securities equivalent to shares in companies, partnerships, and other entities, as well as depository receipts representing shares;
(b) circulating in the capital market bonds and other forms of non-equity securities, including depository receipts in respect of non-equity securities;
(c) circulating in the capital market other securities conferring the right to acquire or transfer the transferable securities or underlying the cash-settlements determined having regard to the transferable securities, currencies or exchange rates, interest rates, yield of securities, stock exchange commodities, or other indices or instruments
Further guidance for token issues (similar to Australia's guidance from the ASX Updated Guidance on Crypto-assets or ASIC's INFO225) is important as this industry evolves towards greater compliance.