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Book Title Scientific and Technical Revolution: Yesterday, Today and Tomorrow Series Title Chapter Title Tokens: Actual Problems of Determining the Legal Status and Classification Copyright Year 2020 Copyright HolderName Springer Nature Switzerland AG Corresponding Author Family Name Odintsov Particle Given Name Stanislav V. Prefix Suffix Role Division Organization RUDN University Address Moscow, Russia Email [email protected] ORCID http://orcid.org/0000-0002-3403-3519 Author Family Name Koncheva Particle Given Name Valentina A. Prefix Suffix Role Division Organization RUDN University Address Moscow, Russia Email [email protected] ORCID http://orcid.org/0000-0002-9919-388X Author Family Name Trubina Particle Given Name Marina V. Prefix Suffix Role Division Organization “Ingosstrakh” Address Moscow, Russia Email [email protected]

Abstract The subject of the study in this article is the tokens used today as part of the “blockchain” systems, as well as the relevant analysis of their legal regulation. Blockchain technology is one of the most promising areas in the field of digital economy, which continues to constantly and actively develop. The use of tokens as a means of payment in blockchain systems is becoming increasingly relevant. However, it should be noted that in this area, practice has significantly outstripped legal regulation. In the current civil (commercial) law relatively recently began to develop provisions defining the features of the turnover of the so-called digital assets, and this regulation is not deployed. This regulation is introduced today rather cautiously: among the objects of civil rights there are normative formulations of the tangent of digital rights, and this legislative regulation is not detailed. So far, the existing regulation regarding digital rights is not sufficient. Despite the active development of practice, legal theory (doctrine) does not even contain the uniform concept of a token. In this case, it is useful to refer to foreign experience and legislative practice. The article considers the examples of foreign legal regulation, the authors pay attention that the unity of legal understanding, approach to this legal instrument is necessary for sustainable practice. The article discusses the types of tokens, as well as some features of their use as a means of payment. The authors as a result of research and practical proposal draw attention to the need for an internationally unified concept of the use of tokens. Keywords Blockchain - The blockchain platforms (ecosystems) - Token - Digital rights - Digital assets - Crypto-currencies JEL Code K11 - K22 - K24 - G10 - G30 Tokens: Actual Problems of Determining the Legal Status and Classiﬁcation

Author Proof Stanislav V. Odintsov1(&) , Valentina A. Koncheva1 , and Marina V. Trubina2

1 RUDN University, Moscow, Russia {odintsov_sv,koncheva_va}@pfur.ru 2 “Ingosstrakh”, Moscow, Russia [email protected]

Abstract. The subject of the study in this article is the tokens used today as part of the “blockchain” systems, as well as the relevant analysis of their legal regulation. Blockchain technology is one of the most promising areas in the field of digital economy, which continues to constantly and actively develop. The use of tokens as a means of payment in blockchain systems is becoming increasingly relevant. However, it should be noted that in this area, practice has significantly outstripped legal regulation. AQ1 In the current civil (commercial) law relatively recently began to develop provisions defining the features of the turnover of the so-called digital assets, and this regulation is not deployed. This regulation is introduced today rather cautiously: among the objects of civil rights there are normative formulations of the tangent of digital rights, and this legislative regulation is not detailed. So far, the existing regulation regarding digital rights is not sufficient. Despite the active development of practice, legal theory (doctrine) does not even contain the uniform concept of a token. In this case, it is useful to refer to foreign experience and legislative practice. The article considers the examples of foreign legal regulation, the authors pay attention that the unity of legal understanding, approach to this legal instrument is necessary for sustainable practice. The article discusses the types of tokens, as well as some features of their use as a means of payment. The authors as a result of research and practical proposal draw attention to the need for an internationally unified concept of the use of tokens.

Keywords: Blockchain Á The blockchain platforms (ecosystems) Á Token Á Digital rights Á Digital assets Á Crypto-currencies

JEL Code: K11 Á K22 Á K24 Á G10 Á G30

1 Introduction

Tokens represent the major functional essence relevant to the blockchain platforms – systematically new technologies which will deﬁnitely determine the main development vector of the post-industrial era; it certainly leads to the doctrinal rationale and the detailing of legal regulation in order to liquidation of collisions arising from their

inconsistent application by its members in the practice of commerce. Blockchain technologies are being actively implemented now, and they will continuously penetrate all facets of everyday life and economy over the next few decades, thus, it is vital to analyze trends and development prospects right away (Koncheva et al. 2019, pp. 787–

Author Proof 790). The introduction of new technologies will improve the operation of the infrastructure, increase its safety, reliability and efficiency (Dudin et al. 2019, pp. 1704– 1713). For instance, some kind of vouchers of retail chains, bonuses (points), which are received by loyal customers of the firms for implementing certain transactions currently in use, which can be easily transferred into the traditional (not digital) money are actually fiat, i.e. a type of the token’s functions.

2 Methodology

The integrated consideration of the relevant attempts of the normative and doctrinal determination of status and classification of tokens, including the analysis of the problems, which arise from the absence of the integrated approach within the tokenization of the global economy including: the realization of investment projects for the attracting of “traditional” money by ICO and STO, the use of fiat money, the definition of tokens, represented via tokens the objects of civil (commercial) turnover—research of all these and other legal aspects in different jurisdictions are possible only the use of the comparative legal analysis. At the same time, it is significant to pay attention to the views of the experts in various fields on this matter, studies of trends, research on the problems of application and development of the blockchain technologies, which potentially provide an opportunity to create and maintain the stable secure digital architecture for storage of personal data.

3 Results

It is impossible to deny the fact that tokenization is steadily integrating into more and more areas of civil (commercial) turnover, while tokens themselves possess the char- acteristics of a full-fledged object of rights or digitally represent certain objects of rights. But, unfortunately, at the present time it must be stated that there is no integrated approach in identifying tokens normatively, even, for example, within the European Union. According to this, in different jurisdictions the are various ways of normative definitions of the token’s legal status: the part of the information about blockchain system/a form of currency (Liechtenstein), currency (the commonwealth of Australia), property or financial asset (Singapore), currency/an instrument for mutual payments (German, Luxembourg, Japan), foreign currency/“private” money (the UK), a financial instrument (Poland), the security (New Zealand), property (Sweden), the goods (Mexico), the digital goods/the securities (Hong Kong), a medium of exchange (the USA). One of the most interesting (from the standpoint of the juridical technique and Tokens: Actual Problems of Determining the Legal Status and Classification 3

elaboration) normative legal acts is the one, which is one of the latest in this sphere— the law of the Principality of Liechtenstein of 2019 (Token and Trustworthy Tech- nology Service Provider Act, TVTG) (Token and Trustworthy Technology Service Provider Act, TVTG) (Token and Trustworthy Technology Service Provider Act, ﬁ

Author Proof TVTG 2019). The absence of the uni ed concept of the nature of tokens and of tokenization lead to the problem that different legal systems have their own specific normative definition and doctrinal interpretation of the concept of tokenization and the legal nature of tokens. In any case, it is necessary to proceed with the fact that tokens definitely represent a special (digital) method of recording rights on the objects of the civil (commercial) turnover, and the process of tokenization of assets will gain momentum. Thus, in order to optimize a turnover of assets, including constant process of globalization of financial markets, it is significant for its members to have a standard normative concept of tokens, unified by the relevant international legal act.

4 Discussion

The key advantage of the blockchain platform’s functioning (is currently referred to as “ecosystems”) is the possibility to generate tokens. It should be stated at once that not all the tokens can be called coin or crypto-currency, at the same time one token may contain several different crypto- currencies. Moreover, for example, such a blockchain platform as Corda does not imply the necessity of the tokens’ presence, in other words they can be inside the system, but at the same time not to be its binding component (Corda 2019). There is no doubt that certain tokens can vary signiﬁcantly depending on the type of the relevant blockchain platform, on which base they are generated and applied. Generally, the use of tokens has the number of very positive features such as the minimization of transaction costs, the high level of safety and privacy, which are based on decentralization and applying the means of cryptographic protection. From an economic perspective the importance and value of tokens lies in the fact that tokens can represent a standard (recorded in the relevant system) unit of an asset, thus it appears to be a digital asset itself, as well as digital representation of a certain asset (an item, property rights, intangible assets, the results of the work or service provision, the achievements of intellectual activity, including the means of individualization). On the basis of the technology of the decentralized distrusted registries (databases) and according to the introductory functions which are laid down in the system by the relevant blockchain platform, tokens can be classiﬁed and divided into some notional groups in this way: The group of “programmatic” tokens, which provide an owner the right of access to the system in accordance with the requirements of multifactorial authentication secured by crypto; as a result, they have the possibility to operate exclusively within the relevant system, including the option to determine the system functionality and to create, modify, complement the software products of this system. Because of this technical functionality the “programmatic” (license) tokens, token coinage do not have any value out of the relevant system and can not be the objects of 4 S. V. Odintsov et al.

merchandise trade, the using of them does not have an opportunity to get into the real economy, thus it allows not to consider them as the category (subdivision) of the civil law (Gongalo et al. 2019, pp. 179–192). Second group of “installed” or “utility” tokens (which sometimes are called “ap- ” “ ”

Author Proof pcoins ) is very similar to the group of programmatic tokens. Appcoins are tokens which are the part of the core of blockchain, they are strictly connected with this chain and their absence have influence on functioning of the entire blockchain – platform. The main use of “installed” tokens is reward to miners and obviation of spam in transactions and infinite cycle of crypto-tasks performing. The most popular “installed” tokens are: – BTC blockchain of Bitcoin, the architecture of which is functionating on the base of “proof of work” (PoW is a proof of performing of crypto- task), that is an algorithm of achieving of consensus in the blockchain which are used for proof of transactions and creating of new blocks. Miners compete with each other for completion of transactions and BTC rewards. – ETN blockchain- platform Ethereum which is based on the principle of “proof of strake” (PoS), according to which, instead of performing of crypto – task, transactions are valued by “freezing” of some number of coins (tokens) of miners as a security until notional validity of relevant transactions is agreed. After agreement on validity the network of transaction is added to the blockchain but coins are steel kept “frozen” for a certain period of time in order to secure the network from attack. Miners get their coins (tokens), including a small amount of fee for recording of transaction into blockchain, right after “unfreezing” of the tokens. – GNT blockchain – platforms Golem, based on Ethereum ecosystem, is decentralized p2p network system, which trades computing power. Money cashflow is achieved by providing with computing power of servers for leasing, based on the principle of «infrastructure as a service» (IaaS) or «platform as a service» (PaaS). (Golem 2019). Thus, the “installed” tokens can have the quality of the money equivalent of the notional value thereby they can be acquired and disposed, but they do not imply the existence of a security asset or liability by its nature. The group of “payment” tokens is formed by the criteria of possibility to use this type of tokens as a mean of payment (for goods and services) and based on presence of the aforementioned quality of the money equivalent of the notional value. In addition to the already mentioned tokens, the most well-known blockchain ecosystems of Bitcoin and Ethereum, this group also includes quite popular XRP and NXT tokens of the Ripple and NXT blockchain platform, respectively, as well as SC (Siacoin) tokens - a decentralized blockchain of the Sia platform that provides cloud storage service (Sia 2019), and KICK tokens, acting as the domestic currency of the crowdfunding blockchain platform of the Kickico (Kickico 2019). From the standpoint of civil law payment tokens can be classified as money, due to the payment nature of this type of tokens, nevertheless not conventional form of money but a special kind of non-cash money with sings of fiduciary nature. It should be noted that the use of the term “coins” or “crypto-currency” is correct regarding to this particular type of token. Tokens: Actual Problems of Determining the Legal Status and Classification 5

A group of so-called “secured” tokens has several subgroups, namely: – a subgroup of “credit”/“borrowed” tokens that fix the rights of claim for the return of money or generic things, which, by legal nature, brings these tokens closer to the contractual nature of the loan, as well as bills and bonds. Author Proof Examples of “credit” tokens are: Steem Dollar (SBD or SD), issued as part of the Steemit (Steemit 2019) blockchain platform and Tether token, partially secured by USD, which is released on the Omni Layer platform (which is a unified add-on for the Bitcoin ecosystem) (Tether 2019); – a subgroup of “investment”/“corporate” tokens which can be used in order to fix investments of money or crypto-currencies in relevant investment projects. From the standpoint of the civil and corporate (shareholders) laws, unlike “credit”/”borrowed” tokens, which have fixed profitability and does not depend on the results of the activity, this type of tokens represent the digital analog of non-documentary record of participation in joint stake capital. In addition to the rights on dividends, the owners of “investment” tokens enjoy rights of participating in a corporate management. The crypto-currency investment fund TaaS (Token-as-a-Service) (Token-as-a- Service (Taas) 2019), which is also called “crypto-currency Bloomberg” may be an example of this type of tokens as well as the Digix blockchain platform tokens DGD and DGX (Digix 2019) representing 1 g of gold which use the advantages of the Ethereum ecosystem but based on the principles of “proof of asset” (PoA) and Steem Power (VEST), issued by the blockchain platform Steemit, which was mentioned above. – subgroup of tokens “representing right on other objects”/”tokens certificates” which provide to their owner an opportunity to fix their rights on assets (movable/immovable), the results of work or service, securities, share in a joint- stake capital or other tangible and intangible objects. This type token serve as a virtual sign of property which is an object of legally relevant actions. For instance, the Royal Mint Gold project’s “bullion” tokens, represent the relevant rights of the owners of the tokens on the certain amount precious metal which phys- ically secured in a storage (The Royal Mint 2019). “Colored” token (or “colored”, “painted” coin) is a term which is sometime used to describe the connection of tokens with some specific block of information about a relevant object (Gongalo et al. 2019, pp. 179–192). Classification of tokens can be recognized as a one of the most difficult and vital legal challenge due to the complex combination of tokens’ economical and legal functions. The flexibility of ecosystem of blockchain technologies, which allows to mix various kinds of obligations, makes the tokens a unique financial instrument. Moreover, a special kind of “hybrid” tokens can be highlighted. ZRcoin is an example of unique tokens which combines three functions: options, certificate and loan obligations. The owners of the tokens can get repayment at any time, returning the investment funds in addiction with the profit from value growth, or exchange the tokens into zirconia (as a main asset), or exchange into shares of the company which produce this production (Zrcoin 2019). 6 S. V. Odintsov et al.

Tokens of Sia, Digix, Steemit blockchain platforms, which could be, for instance, “installed” in the beginning, then could become “payment” or “credit” or gain the characteristic of token certiﬁcates (which represent the ownership of certain asset and providing with some corporate rights in this blockchain system). ﬁ

Author Proof From the standpoint of the nancial and economic approach to the process of tokenization there are: «inflationary» -its extent and timing of the emission require financial analysis and calculation. This group includes “investment”/“corporative”, “credit”/“borrowing” and “payment” tokens; – «stagnation» tokens, the cost of which may suffer a certain volatility, moreover, it is directly depend on the costs of the relevant assets, which the tokens’ owners represent. Consequently, this group, expect for the tokens, which “reinforce the rights on the other subjects”, may also include the fiduciary money of a certain ecosystem, those which are called «coins» or «crypto-currency», i.e. “payment” tokens; – «deflation» tokens. As well as “inflation” tokens, they are produced in a limited certain number of tokens, but, in contrast to the latter, may be exposed to “burning”; for example, by means of its repayment for some sort of values within the relevant blockchain platform. As a result, the certain tokens’ number is continuously decreasing while its cost is at least fixed or oppositely should increase. “App coins” and certain “Payment” tokens should be considered as a part of this group primarily.

5 Conclusion

In rare instances tokens can serve the clear objective purpose and, as already mentioned, owing to the characteristic of the universal combination of its functions, the classification of tokens is rather complicate in most cases, that is why more frequently the most appropriate option is classifying tokens as “hybrid” The generalized doctrinal approach to the tokens’ classification as well as the legal and regulatory classification, formulated by the Office (service) of Oversight of the Swiss financial markets, optimally echoes the mentioned above; according to it, there are: – “grocery” tokens, which are used for the payments of variable services or values, provided by the online-platform; – “secured” tokens - the rights to the traditional objects of the civil law digitalized one the blockchain system; – “payment” tokens, used as a mean of payment; – “hybrid” tokens. Furthermore, the issue concerning the question “Can tokens be considered as the objects of the civil (commercial) law?” is still under the discussion. The difficulty and complexity of the perception of the tokens’ legal status is exacerbated by the fact that the tokens may involve several different objects (assets). So, there is a concept “the model of a token-container”, in which tokens are served as a kind of a “container” for all kinds of rights, whether the tokens are stock, real estate or Tokens: Actual Problems of Determining the Legal Status and Classification 7

license rights. Nevertheless, there is no similar issue observed when determining the legal status of venture as a property complex or, for instance, the status of the “ac- customed” property complex of the mutual investment fund; the same applied to the pool of assets, which settlor transfers trustee on the grounds of trust deed within the law ﬁ

Author Proof institution of the duciary property.

References

Koncheva, V.A., Odintsov, S.V., Khmelnitski, L.: Blockchain in HR. In: International Scientific and Practical Digital Economy Conferences (ISCDE 2019). Atlantis Press (2019) Dudin, M.N., Frolova, E.E., Protopopova, O.V., Mamedov, A.A., Odintsov, S.V.: Study of innovative technologies in the energy industry: nontraditional and renewable energy sources. Entrepreneursh. Sustain. Issues 6(4), 1704–1713 (2019) Token and Trustworthy Technology Service Provider Act. TVTG (2019). https://www.regierung. li/media/medienarchiv/950_6_04_11_2019_TVTG_english.pdf?t=1. Accessed 01 Dec 2019 Corda: official site (2019). https://www.corda.net/. Accessed 02 Dec 2019 Gongalo, B.M., Novoselova, L.A.: Is there a place for “digital rights” in the system of civil law objects? Perm Bull Law (2019) AQ2 Golem: official site (2019). https://golem.network/. Accessed 02 Dec 2019 Sia: official site (2019). https://sia.tech/. Accessed 02 Dec 2019 Kickico: official site (2019). https://www.kickico.com/. Accessed 02 Dec 2019 Steemit: official site (2019). https://steemit.com/. Accessed 02 Dec 2019 Tether: official site (2019). https://tether.to. Accessed 02 Dec 2019 Token-as-a-Service (Taas): official site (2019). https://taas.fund/. Accessed 02 Dec 2019 Digix: official site (2019). https://digix.global/. Accessed 02 Dec 2019 The Royal Mint: official site (2019). https://www.royalmint.com/invest/. Accessed 02 Dec 2019 Zrcoin: official site (2019). https://zrcoin.io/. Accessed 02 Dec 2019 Author Query Form Author Proof Book ID : 472157_1_En Chapter No : 126

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