A cryptoasset, in accordance with the definition of the Proposal for a community Regulation on cryptoasset markets of 24th September 2020 (COM 2020/593 final, referred to as “Mica”), is a digital representation of a value or rights which may be transferred and stored electronically, via decentralised registry technology (blockchain) or similar technology.
A technological blockchain platform of cryptoassets constitutes a digital service constructed with decentralised registry technology (blockchain), and at the same time an instrument of legal interrelation between subjects which operate and are served by this instrument, with the object of creating, transmitting or trading digital assets. Ultimately, it is a great market place of a virtual nature wherein digital assets are created, stored and exchanged, in a secure and rapid manner, through the execution of smart contracts, all in terms of decentralised registry technology. For example, we may take a digital platform dedicated to the minting and trading of digital creations (Non-fungible tokens or NFTs) such as Opensea or KnownOrigin. The Platform acts as a generator of added internet value in assets not only for exposing them to the tension of supply and demand as on a traditional trading floor, but for their enormous potential for growth and volume derived from their own characteristic notes; universality, speed, simplicity and security. An artistic NFR does not require exhibition space, maintenance or security measures, given that its creation and storage only exists at a virtual level and its security is guaranteed by the decentralised nodes system.
Reality seems to indicate that the market is tending to develop on the basis of two fundamental vectors:
(i) the agility and automation of the transactions (which generates a constant increase in the volume of creation and exchange of value); and
(ii) the abstractification of the assets/rights (what we would call “process of tokenisation”).
Both of these trends require models or systems built with technology which enables universal access and the performance of mass transactions, in a quick and simple way, in a secure environment, which facilitates the user with sufficient proof of the transaction that has been carried out. These objectives may be achieved with blockchain technology applied to platforms for the creation, exchange and trading of cryptoassets.
The provider of the blockchain platform service (“Platform”) renders services to third parties for the creation and transmission of cryptoassets, the creation of cryptocontracts (also known as smart contracts), as well as their storage and registration. However, additionally, they generate a secure space, as they facilitate elements of proof of the transactions performed, without -as currently unheard of- alteration or adulteration of the transactions, both in terms of the object and conditions of the contracts, as well as the parties thereto; the latter implying a function of “notarisation” embedded in the process of each operation which is conducted in the environment of the Platform, in such a way that this guarantee fuels the use of the Platform as a consequence of the feeling of confidence which it generates and which is necessary for any type of market and any economic transaction.
Within the Platform, the operations are carried out upon the prior digitalisation of the identities of the parties (operators and the Platform), in such a way that their external participants maintain a legal relationship with the latter, pursuant to which the terms and conditions of access and registration of cryptoassets are adhered to, as well as the conditions of exchange or transmission thereof. In exchange for the service, the Platform receives a percentage based upon the amount of the sale (or value of the transfer, in the case of swaps) and/or some handling fees. On the other hand, the user parties of the Platform interact among themselves via transaction agreements, or other agreements, such as for example the creation of aliquots of the ownership of a cryptoasset, which in turn are negotiable on the market through the Platform.
We have said that digital Platforms may act as renderers of automated creation, storage, registration and handling services for cryptoassets; these assets have the form of a token or utility, which constitute a digital transfer of goods, whether they be tangible or intangible (security tokens), or rights (utility tokens). For example, with regard to the first type, we may think of the “tokenisation” of real estate property rights and, as for the second type, credit rights. In turn the technology makes it possible to atomise the aliquots on assets and rights and manage their transferability efficiently, whatever their size and functionality, which in turn allows access to the market for operators with a modest financial capacity, who would otherwise not be able to do so.
However, the operative functioning of the Platform requires the assistance of an external third party to the blockchain, that is to say a provider of secure and accurate information, called “oracle”, which provides the necessary external data for the activation of the cryptocontract; the oracle acts as the connecting link between the blockchains of the Platform (and the cryptocontract which operates in the blockchain environment) and the data of the real world to which it does not have access, via consultations carried out through Application Programming Interfaces (API). Ultimately, the oracles bring data to the users, which in turn activate the execution of the cryptocontracts. The oracles can be of various types:
- software (transmission of Internet data)
- hardware (transmission of barcode data, sensors or data scanners);
- centralised (single data source);
- decentralised (origin in multiple oracles);
- incoming (they collect information from a scanner and relay it to the blockchain);
- outgoing (the oracle sends information from the cryptocontract to the real world);
- humans (people who perform the functions of the above oracles).
The data of the oracle are sent to the smart contract, which upon being integrated into the contract itself, and verifying the occurrence of a condition foreseen in the contract (suspensory or resolutive condition) the execution thereof is triggered. For example, let us consider an agricultural insurance policy which provides for a certain compensation if there is torrential rainfall in excess of 60 litres per hour. The data regarding the rainfall shall be collected by a weather station and shall be sent to the cryptocontract by the oracle, which, upon recognising the existence of the precondition, verifies the source of the compensation and authorises the payment thereof as established in the policy. The same may be said regarding a purchase operation of a certain cryptoasset whose value is linked to the price of metal on a traditional market; the price data will act as an activator of the purchase and sale contract, based upon the value of the metal facilitated by the oracle.
Regarding the normative regulation of the Platforms for the trade of cryptoassets, according to the Proposal for Regulation Mica (2019) on cryptoasset markets, they are those in which “multiple third parties that purchase and sell interests related to cryptoassets may interact in such a way that results in a contract, either by exchanging one cryptoasset for another or a cryptoasset for fiat currency that is legal tender”.
The object of the trade are the assets with digital elements, which is a concept which includes any digital content or service incorporated into assets with digital elements or which have a digital asset interconnected with them (EU Directive 2019/771). The trade of assets with digital elements on trading Platforms is subject to the operating regulations which must be drafted by the Platform and which in substance, must include the following:
a) Preventive control measures: include the requirements and procedure of approval of cryptoassets admitted to trading, also establishing exclusions a priori, if applicable (article 5 and Annex I of the Mica Regulation).
b) Objective criteria to allow equitable and open access to the Platform for those who want to operate therein.
c) Functioning requirements: they must guarantee fair and orderly trading, as well as guaranteeing access, liquidity and information and establishing procedures for guaranteeing the efficient settling of the operations.
Anonymity: it is important to emphasise that article 68.1 of Mica provides that cryptoassets, which incorporate a function of anonymisation, shall not be accepted. Cases wherein the holders and their history of operations may be identified by the service provider (Platform) or by the competent authorities are excluded.
It must also be pointed out that Trading Platforms will not be allowed to trade cryptoassets on their own behalf on the Platform which they themselves operate. Therefore, the Platform may issue and trade their cryptoassets, but it may not trade them within the Platform, in order to avoid risks of fraud or the manipulation of transactions in order to make a profit.
The Commission is applying principles of order and control to digital trading floors which operate on the traditional stock markets, albeit with demands for a higher level of information transparency, requiring furthermore that the information be accessible in real time (article 68.6 Mica).
Eduardo Vilá
Vilá Abogados
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10th September 2021
