i INTRODUCTION TO THE LEGAL AND REGULATORY FRAMEWORK
Swedish law does not contain any express and specific provisions governing virtual currencies. As virtual currencies fall outside the existing legislation in many aspects, they are, to a large extent, unregulated. However, in their capacity of constituting instruments of payment and, potentially, transferable securities (as further elaborated in Sections II and III), some aspects regarding virtual currencies and various activities relating to them are subject to regulation pursuant to more general legal frameworks.
The legal status of virtual currencies is, in some aspects, relatively clear. However, in other aspects, it is subject a high degree of uncertainty as well as controversy as to whether virtual currencies fall within the scope of various regulated types of property. As a starting point and a basis for the discussion of the issue of legally classifying and categorising virtual currencies, which issue has bearing on the applicable obligations of persons conducting various types of activities involving virtual currencies, it is possible under Swedish law for intangibles to have the legal status of property without any explicit statute granting such status to a specific category of intangibles.2 While there is no express statute governing the legal status of virtual currencies under Swedish law, it is sufficient that a virtual currency is recognised as an object under customary practice, as well as by the parties to a legal relationship involving such virtual currency, for it to constitute property. Consequently, it is legally possible to own virtual currencies under Swedish law, and virtual currencies are afforded the same general protection as other types of property under the legal concept of ownership.
Having noted this, the more detailed classification of virtual currencies as financial instruments (more specifically transferable securities) or instruments of payment, or both, is discussed further below.
In recent years, following the increasing popularity of virtual currencies, and in particular consumers' interest in investing and trading in them, both national and international regulatory authorities, including the Swedish Financial Supervisory Authority (SFSA), have issued statements of warning relating to virtual currencies and initial coin offerings (ICOs), noting the lack of applicable regulation in many material aspects. The increasing significance of virtual currencies and the fact that regulators have taken note of them to a great extent have also sparked a number of initiatives to enact legislation on various levels, both jointly within the EU and on an autonomous national level, which will target virtual currencies more specifically. It is possible that with a widening of the legislative framework surrounding virtual currencies will come both specific legislation setting forth various provisions governing virtual currencies, and clarification as to the applicability of various general legal frameworks, such as those relating to financial instruments, to virtual currencies. Ongoing and upcoming legislative actions targeting virtual currencies are described in further detail in Section XI.
ii SECURITIES AND INVESTMENT LAWS
i Classification as a financial instrument
It has not been explicitly settled whether virtual currencies may qualify as financial instruments under Swedish law. The key to making this determination is whether virtual currencies constitute transferable securities, as defined in the Swedish Securities Market Act, which implements MiFID and MiFID II.3 The European Securities Markets Authority (ESMA) has stated that virtual currencies may, depending on how an offering of coins or tokens is structured, constitute transferable securities.4 No statement by the SFSA or any other relevant regulator in Sweden has been made directly confirming or conflicting with ESMA's statement in this regard.5
A question of a more general nature, which has significant implications on the issue of whether virtual currencies qualify as financial instruments, is the extent, if any, to which national deviations in the interpretation of what constitutes transferable securities are legally permissible under MiFID II. European capital markets law has undergone a shift in character from generally setting forth minimum harmonisation rules, with greater possibilities of national discrepancies and margins of appreciation, to an increased use of directly applicable regulations and full harmonisation directives leaving no room for national discrepancies. The structure of the legal framework, with the definitions found at the beginning of MiFID II playing an essential role in the application of other legal acts within capital markets law, further questions the room for national deviations in this regard. Since the definitions (e.g., of financial instruments and transferable securities) found in MiFID II are used to determine the scope of applicability of several other legal acts, some of which take the form of directly applicable regulations (e.g., the MAR6 and the upcoming Prospectus Regulation),7 allowing national deviations from the definitions may have a considerable impact on the European capital markets regulatory framework in its entirety. Since one of the purposes of MiFID II is to harmonise the legal framework of the EU, and considering the important role that the definitions play for other legal acts, the position most consistent with the EU regulator's intentions concerning the interpretation and implementation of the definitions would be to consider the room for national deviations from the definitions in MiFID II to be extremely limited. Further, allowing deviations would open up the possibility of EU Member States interpreting the definitions to treat essential investor protection law, such as the prospectus rules, as not applicable in order to make themselves more attractive to new industries, such as the virtual currency industry. This could open up a race to the bottom in terms of investor protection, which is directly contrary to the purposes of European capital markets law. In light of the above, when assessing whether virtual currencies may constitute transferable securities, the national legislation must be interpreted in such a way that it does not deviate from the definition under EU law.
As regards whether virtual currencies constitute financial instruments, mainly by being transferable securities, tokens or coins created and marketed through an ICO and subsequently traded in some form of secondary market appear to be the most relevant units of analysis. The rights associated with a token may vary with every issuance, so this chapter is written with adoption of the classification of tokens as currency tokens, utility tokens and investment tokens.8
Currency tokens such as Bitcoin and Ethereum are intended to be used as a general means of payment and function in a similar manner to regular currencies. These virtual currencies are unlikely to constitute transferable securities since they generally do not constitute securities. The ownership and possession or the equivalent registration on the blockchain of currency tokens usually does not give any rights towards the issuer or any other physical or legal person, which is a prerequisite of such tokens being considered as securities. As a consequence, they generally fall outside the scope of the definition. In cases where they are classified as securities due to them granting such rights, and are negotiable on the capital market, they may still fall outside the scope of the definition of transferable securities under MiFID II on the basis of being regarded as instruments of payment.
Utility tokens function mainly as either a means of payment in a specific setting with no use as a general means of payment, for example, paying for services or goods from a specific vendor, or as granting access to a service or product through ownership of such tokens. The product or service does not always exist at the time of the ICO. In general, these tokens do not constitute transferable securities in the sense of the definition under MiFID II; they appear not to fit into the purposes and intentions of MiFID II and other capital markets law. In essence, utility tokens function more as a means of purchase of a product or a service, with an added element of uncertainty regarding whether a product or service will be able to be delivered owing to it not being available at the time of the purchase of the tokens. The various problems that may arise in the context of such issuances are mainly dealt with through legislation other than capital markets law, for instance consumer protection law. However, if tokens are being marketed with the expectation of being able to be sold for a profit as the project that the tokens finance develops, there is an increased possibility of the tokens being classified as transferable securities, provided that they are securities and meet the requirements of transferability and being negotiable on the capital market. Further, if the tokens give rights to financial benefits, such as dividends or put options with a financial gain in the event that the underlying project of the issuance is successful, the tokens are likely to be considered transferable securities.
Investment tokens are tokens whose main purpose is being an investment, and generally give financial rights and in some cases participation rights analogous to shares in a company. Investment tokens are likely to be considered transferable securities, provided that they are securities and meet the requirements of transferability and being negotiable on the capital market.
The classification of tokens is not absolute, which means that some tokens may have attributes from different classes. An analysis of the rights of tokens must be done on a case-by-case basis to determine whether they constitute transferable securities.
In conclusion, there is currently a lack of sufficiently strong indications to validate the position that virtual currencies would generally qualify as financial instruments under Swedish law. However, this depends on the structuring of and the rights associated with the virtual currency. In the case of ICOs, if coins or tokens have an investment component, for instance a right to dividends or payouts depending on the success of the issuer, they may be deemed transferable securities, provided that they meet the requirements of transferability and are negotiable on the capital market according to MiFID II. Additionally, derivative instruments related to virtual currencies may constitute financial instruments, for example where they relate to price differences for virtual currencies.
ii Prospectus obligations
If tokens are considered to be transferable securities, they may be subject to the prospectus regulations of Swedish law that implement the European prospectus regime. If transferable securities are offered to the public or are being listed on a regulated market, a prospectus must be prepared unless an exemption is applicable.9 It is customary as part of the ICO process to publish a white paper. The white paper usually describes the project and related topics in brief. At the time of writing, the content of such white papers does not, in general, live up to the Swedish prospectus requirements.
iii BANKING AND MONEY TRANSMISSION
i Banking activities
Transmitting transactions using virtual currencies do not constitute regulated banking activities pursuant to the Swedish Banking Act, as payments using virtual currencies are not made through a general payment system. Whether institutions transmitting transactions using virtual currencies could potentially fall within the scope of the banking legislation in the future if payment systems using virtual currencies have grown to such an extent that they constitute general payment systems has not been established definitively. It is, however, notable that the Swedish legislator has discussed whether institutions transmitting payments using e-money could be subject to the banking legislation if the extent of such payments grew in commonality to such an extent as to be considered to be made in a general payment system.10
ii Payment services
Virtual currencies do not constitute funds as defined in the Swedish Payment Services Act11 Accordingly, services provided relating to virtual currencies do not currently constitute payment services regulated under the Payment Services Act.
iii Classification matters
Virtual currencies may constitute instruments of payment under Swedish law. While the concept is relevant, as the classification of a virtual currency as an instrument of payment has certain legal repercussions, there is no legal definition of instruments of payment under Swedish law, although the traditional view expressed in legal literature is that any instrument that is intended to be used to make payment is not subject to transfer restrictions and is of some value to the recipient may constitute an instrument of payment from a general law of obligations perspective.12 The SFSA has also issued a general statement adopting this view of virtual currencies, that is, that they constitute instruments of payment.13 However, the SFSA's statement cannot be interpreted as a statement that all virtual currencies meet the requirements to qualify as instruments of payment: it is submitted that the general definition of instruments of payment cannot be applied when determining which virtual currencies should be regarded as instruments of payment. Applying such a broad definition would, in order to be consistent in relation to other instruments than virtual currencies, have unreasonable consequences, as it governs the scope of entities subject to the anti-money laundering obligations described in Section IV. Therefore, a more nuanced assessment of individual virtual currencies should be made. There is however, no guidance from the authorities or in Swedish legal literature that offers any indication as to how the assessment should be made. Relevant factors in making the assessment may be similar to those used to identify whether a virtual currency is within the scope of MiFID II's definition of transferable securities: for example, whether the virtual currency is primarily intended to be used as a general means of payment, and the extent to which it is connected to a specific issuer (by way of rights to goods or services or by way of a possible increase in value, depending on such issuer's success).
A number of other relevant factors, as well as the fact that virtual currencies and their characteristics are undergoing constant and rapid evolution that may quickly render the foregoing conclusion less relevant, should be noted. Such conclusion regarding the interpretation of instruments of payment under Swedish law is made with the view that there should, as far as possible, be consistency between the common EU interpretation of instruments of payment as relevant for the definition of transferable securities on the one hand, and instruments of payment as relevant for national legislation on the other. While this view has not been explicitly supported by the Swedish regulator, it would appear to be consistent with the intentions of the regulator as it will, to the greatest extent possible, ensure that virtual currencies either constitute financial instruments or instruments of payment, thereby reducing the number of potential virtual currencies that completely fall outside the current regulatory framework.
Virtual currencies are not recognised as legal tender in the sense that there is any legal obligation to accept them as payment.14
iv ANTI-MONEY LAUNDERING
The Swedish Currency Exchange Act sets forth requirements that certain types of financial institutions comply with anti-money laundering provisions, despite not being obliged entities as relevant to determine the direct scope of applicability of the Swedish AML Act.
Pursuant to the Currency Exchange Act, an institution conducting financial operations on a professional basis that primarily consist of, inter alia, providing instruments of payment must be registered with the SFSA prior to commencing such activities. An institution that offers to purchase or sell virtual currencies that are considered to be instruments of payment is thereby providing instruments of payment and is accordingly subject to this registration obligation. The requirement that the operations be conducted on a professional basis is fulfilled where an institution conducts its operations with sufficient independence, regularity and continuity, and generally with a purpose to profit from such operations. The Currency Exchange Act does not apply to a number of institutions that are subject to supervision pursuant to other legislation, such as credit institutions, investment firms, payment institutions and insurance companies.
To become registered, an institution applying for registration must show that there are grounds to assume that the operations will be conducted in a manner compliant with the applicable anti-money laundering legislation, and must also pass an ownership assessment procedure. The ownership assessment procedure prescribed by the Currency Exchange Act constitutes an assessment of whether any individual applying for registration under the Act has materially failed to adhere to his or her professional obligations or has been convicted of a severe criminal offence. In the case of legal entities applying for registration, this assessment shall be made in relation to all individuals in the entity's managing body and all holders of a qualifying holding in the entity. A qualifying holding is defined as a direct or indirect holding representing 10 per cent or more of the shares or votes in the legal entity, or both, or, in other cases, a holding that makes it possible to exercise significant influence over the management of the legal entity.
Virtual currency providers within the scope of the Currency Exchange Act must consequently comply with the rules of the AML Act, which include requirements to prepare a risk assessment, conduct customer due diligence, and monitor and report suspicious transactions.
v REGULATION OF EXCHANGES
Depending on the nature of an exchange, different legal regimes may be applicable. For a discussion of currency exchange matters, see Section III. If an exchange is dealing with virtual currencies that are considered to be financial instruments, the requirements for operating such markets may be applicable and will require authorisation by the SFSA.15 At the time of writing and as far as we are aware, no such operations are being conducted by any Swedish entity on a regulated or unregulated basis, although there have been initiatives in the market that have not succeeded in reaching the operational stage. As a consequence, it is difficult to assess how and to what extent the current legal regime regulating traditional exchanges should be adapted to an exchange of blockchain-based financial instruments. However, this difficulty should not be per se be taken as an indication that the traditional exchange rules would not be applicable to an operator of a virtual currency exchange.
vi REGULATION OF MINERS
Virtual currency mining activities as such are not regulated under Swedish law. There are no licensing, registration or authorisation requirements specifically applicable to virtual currency mining activities. It can be noted that the SFSA has acknowledged virtual currency mining as a well-established form of activity within the FinTech industry in Sweden.16
There are no restrictions under Swedish law prohibiting, limiting or otherwise stipulating any mandatory provisions specifically applicable to the sale of virtual currency mining machines in Sweden. Provided that such machines are not sold to consumers, the parties to any sale of virtual currency mining machines are at liberty to set out the terms applicable to such transaction at their own discretion.
Certain computer and software products are subject to authorisation requirements when exported from Sweden, pursuant to the Dual-Use Items Regulation,17 which is directly applicable in all EU Member States. Virtual currency mining machines will generally not fall within the categories of computers and software subject to the Dual-Use Items Regulation. However, as the scope of the Regulation is, in part, purely capacity-based, it cannot be categorically ruled out that certain virtual currency mining machines may fall within the scope of the Regulation (e.g., machines exceeding a certain processing power or being specifically designed to be operable at extreme temperatures), and thus authorisation would be required to export such products from Sweden.
vii REGULATION OF ISSUERS AND SPONSORS
A public offering of coins or tokens of a virtual currency may constitute an alternative investment fund as defined in the Swedish Alternative Investment Fund Managers Act (AIFM Act) to the extent that such an offering is used to raise capital from a number of investors with a view to investing such capital in accordance with a defined investment policy.18 Similarly as in relation to the definition of financial instruments discussed in Section II, offerings of virtual currencies will typically not constitute alternative investment funds, but owing to the broad range and varying nature of virtual currencies, it cannot be categorically ruled out that an offering thereof could constitute an alternative investment fund, in which case a number of obligations under the AIFM Act would apply.
viii CRIMINAL AND CIVIL FRAUD AND ENFORCEMENT
Swedish legislation criminalising, inter alia, fraud, embezzlement and money laundering is relatively modern in the sense that it criminalises such actions regardless of whether they relate to traditional money or virtual currencies. For example, neither fraud nor embezzlement require the transfer of any money. Rather, the relevant criterion is whether the action entails a profit or gain for the perpetrator and a loss for the victim, which can be the case even where the property embezzled or to which the fraud relates is a virtual currency. In a similar vein, money laundering is criminalised where the conducted action relates to money or any other property that is derived from criminal activities. Accordingly, the broad scope of the provisions covers actions taken to hide the criminal source of virtual currencies to the same extent as traditional money, as virtual currencies constitute property under Swedish law.
The Swedish legislator has acknowledged the increasing need to address crimes relating to virtual currencies and has, in addition to actively participating in the EU initiatives regarding the fifth AML Directive19 (addressed further in Section XI) and the European Commission's proposed directive on combating fraud and the counterfeiting of non-cash means,20 implemented an enhanced and strengthened coordination unit against money laundering and terrorism financing within the Swedish Police Authority.
ix OTHER ISSUES
Riksbanken, the Swedish Central Bank, is currently assessing the possibility of establishing an e-currency backed by Riksbanken: the e-krona. In its capacity as being backed by the Central Bank, the contemplated e-krona would differ from the typical cryptocurrencies. Notwithstanding this, Riksbanken states in a September 2017 report that the e-krona may, depending on which technical solution is ultimately decided upon, constitute a virtual currency (subject, further, to how such a term is defined).21
The Central Bank notes in its report that the current regulatory framework will need to be adjusted to enable the establishment of an e-krona. It is therefore expected, if the initiative materialises, that there will be relatively significant changes to the current legal status and Swedish regulation of e-currencies and virtual currencies. At the time of writing, the initiative to establish an e-krona is at a very early developmental stage, and it can be expected that it will be several years before any specific legislative action is taken, if it is at all.
x LOOKING AHEAD
i The fifth AML Directive
The applicable Swedish anti-money laundering legislation will need to be adjusted to ensure its alignment with the fifth AML Directive, which entered into force in July 2018 and must be implemented by all EU Member States by January 2020. Among other amendments in relation to its predecessor, the fifth AML Directive extends the scope of its provisions to virtual currency exchanges and custodian wallet providers, that is, entities providing services to safeguard cryptographic keys on behalf of their customers to hold, store and transfer virtual currencies.
As obliged entities (i.e., entities covered by the AML Directive), these providers will be subject to obligations to implement preventative measures and report suspicious activity. While these providers do not constitute obliged entities under the fourth AML Directive, virtual currency exchanges are already required to comply with anti-money laundering legislation on the basis of the Currency Exchange Act, as described above.
ii The Prospectus Regulation
The new Prospectus Regulation22 will fully enter into force within a year. One of its main purposes is to reduce the administrative burden under the prospectus regime, especially for smaller companies. The Regulation will be guided by the principle of proportionality, where the information required to be disclosed should be proportional to the size of the issuer and the burden the disclosure requirement places on it. As part of this, and to make it easier for smaller companies to raise capital throughout the EU, a growth prospectus will be introduced that is less burdensome, imposing less extensive requirements than a regular prospectus. Further, the threshold of capital to be raised before triggering the prospectus obligation will be increased, and there will also be room for even higher national thresholds. This may have an effect on ICOs where tokens are considered to be transferable securities. First, more ICOs will be exempted from the prospectus obligation by reference to their limited size. Secondly, ICOs by smaller organisations may fall under less burdensome prospectus requirements. Thirdly, and on a more speculative note, the less burdensome prospectus rules may have an impact on the interpretation of whether ICOs fall within the Regulation at all, since the commonly presented argument – that it would be contrary to the intentions of the legislation to include virtual currency issuers in the prospectus regime due to considerations regarding their size and the burden the current regime places on issuers – may no longer hold the same weight where there are less burdensome requirements specifically adapted to smaller issuers.
1 Niclas Rockborn is a partner at Gernandt & Danielsson Advokatbyrå.
2 See, inter alia¸ Government Bill 2004/05:18, p. 57. Cf. the position under English law following the judgment in OBG v. Allan, United Kingdom House of Lords Decision.
3 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, and Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, respectively.
4 See ESMA's statement dated 13 November 2017, Reference No. ESMA50-157-828.
5 See Section III regarding virtual currencies' status as instruments of payment. To the extent a virtual currency qualifies as an instrument of payment, it is by definition excluded from possibly constituting a transferable security and, by extension, a financial instrument.
6 Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse.
7 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.
8 Cf. the classification of the Swiss Financial Market Supervisory Authority in the Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), published 16 February 2018.
9 Chapter 2 Section 1 Financial Instruments Trading Act.
10 Government Bill 2002/03:139, p. 195.
11 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market and Directive (EU) 2015/2466 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, respectively.
12 Elgebrant, Emil, , Wolters Kluwer Sverige AB, Stockholm, 2016, s. 40. See also Lindskog, Stefan, , Nordstedts Juridik AB, Stockholm, 2014, s. 70.
14 Chapter 5 Section 2 of the Swedish Central Bank Act (1988:1385).
15 Chapter 2 Section 1 and Chapter 12 Section 1 of the Securities Market Act.
16 See the SFSA's report, 'The Authority's role in relation to innovations', of 1 December 2017: .
17 Council Regulation (EC) No. 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items. The scope of the Dual-Use Items Regulation is set out in Commission Delegated Regulation (EU) 2017/2268 of 26 September 2017 amending Council Regulation (EC) No. 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfers, brokering and transit of dual-use items.
18 Cf. ESMA's statement Reference No. ESMA50-157-828.
19 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
20 COM(2017) 489 final.
21 See the Swedish Central Bank's report, Riksbanken e-kronaprojekt: Rapport 1, dated September 2017: www.riksbank.se/globalassets/media/rapporter/e-krona/2017/rapport_ekrona_uppdaterad_170920_sve.pdf.
22 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.