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Financial technology (FinTech)
The Financial Stability Board defines «financial technology» («FinTech») as technological innovation in financial services that can lead to new business models, applications, processes, or products, and with a disruptive impact on the provision of financial services. This comprehensive definition seems to encompass a wide diversity of entities. In material terms, the concept of providing financial services presents some subjectivity, which raises multiple questions about the importance and nature of the technological innovation considered necessary to classify an entity as «FinTech». The emergence of FinTechs after the «financial crisis of 2007-2008» is largely due to widespread dissatisfaction with the centralized intermediation systems used by investment firms and banking institutions traditional . The advances in telecommunications and technological tools have contributed to the development of the provision of financial services. The ongoing technological revolution, which includes increasingly advanced cell phones and artificial intelligence, is strengthening and challenging established economic players. FinTechs are looking for alternative ways to provide financial services and products, similar or superior to those offered within the scope of traditional finance («TradFi»). often offer advantages in terms of price, efficiency or personal convenience. Although the term «FinTech» is currently used broadly to describe a wide range of financial entities, including banks, the vast majority of FinTechs are made up of payment institutions or e-money institutions.
Decentralized application (DApp) & decentralized finance (DeFi)
The Financial Action Task Force - FATF, which aims to develop and promote national and international policies for preventing money laundering («AML») and combating the financing of terrorism («CFT»), defines «decentralized application» (DApp») as a software program that works through a decentralized network that uses a blockchain protocol. «Decentralized finance» («DeFi») are defined as DApps that offer financial services related to virtual assets but, in principle, without officially constitute a virtual asset service provider («VASP»). In short, DeFi is an ecosystem of DApps offering financial services on decentralized peer-to-peer networks , which eliminates the need for a central authority. This concept gained some notoriety in 2020 and is, usually, characterized as a combination of open, permissionless and highly interoperable protocols, DeFi operates mostly through blockchain in order to transparently replicate traditional financial services. This ecosystem allows financial services to be provided in multiple jurisdictions and involves various participants, intermediaries and end users, all facilitated by a purely technological infrastructure that guarantees interactions between the different agents. DeFi currently encompasses several categories of applications. Among the main applications are «stablecoins», «lending», «decentralized brokers» («DEXes»), «automated market makers» («AMM»), derivatives, or payments. Most DeFi services/ applications are not covered by MiCAR.
Distributed ledger technology (DLT)
The blockchain «conquered» the peer-to-peer transactions that characterize Bitcoin and, although Bitcoin was the first example of the application of blockchain technology, the initial idea had already been created in 1991 with the origin of distributed ledger technology («DLT»). Stuart Haber & W. Scott Stornetta proposed a structure for recording the date and time of the creation of intellectual property, as a digital document, with the aim of fixing property rights with the creator before it can be copied by others. In this sense, blockchain represents only one type of DLT and its definition remains remarkably difficult. Its complex and cross-cutting nature, made up of several individual and interconnected elements, constitute a huge obstacle to explaining it and, consequently, regulating it. As such, the European legislator decided to divide the legal definition of DLT into four related definitions. These definitions result from the pilot regime for market infrastructures based on distributed ledger technology (and from MiCAR). Specifically, the concept of DLT is defined and divided as follows: (i) «distributed ledger technology» or «DLT», means a technology that enables the operation and use of distributed ledgers; (ii) «distributed ledger», means an information repository that keeps records of transactions and that is shared across, and synchronised between, a set of DLT network nodes using a consensus mechanism; (iii) «consensus mechanism», means the rules and procedures by which an agreement is reached, among DLT network nodes, that a transaction is validated; and iv) «DLT network node», means a device or process that is part of a network and that holds a complete or partial replica of records of all transactions on a distributed ledger. In the spirit of the principle of technological neutrality, no reference is made to blockchain as a subcategory of the broad notion of DLT.
Blockchain
The literature has defined «blockchain» as a type of technology (or network) for the distributed (or decentralized) and electronic recording, processing and storage of data, which allows the distribution and verification of digital information representing value or rights, structured in blocks of data encrypted via cryptographic methods with «hash» functions, without copying them (i.e. without backup) and in an automatic, permanent, transparent, instantaneous and tamper-proof way. The aim is to stop relying on people, i.e. intermediaries, but rather on mathematics, with a scope of application that goes far beyond the issuing of crypto-assets. It is therefore not unreasonable to draw a parallel between the phenomenon of blockchain technology and the phenomenon of the «Transmission Control Protocol and Internet Protocol» («TCP/ IP»), i.e. the communication technology that «created» the internet, an essential tool in the day-to-day lives of human beings and companies. It is fair to assume that, between the 1970s and 1980s, only a minority of people imagined the enormous social and economic transformation that would take place after the implementation and application of the internet. It is in this sense that the parallel between TCP/ IP technologies and blockchain can be drawn, not only in terms of technological potential, but above all in terms of the potential for transforming society and human and business relations. However, it should be noted that blockchain is not an alternative to TCP/ IP (at least, for now, as it has the functionalities to do so), but a technology that builds on network protocols such as TCP/ IP. While peer-to-peer (P2P) networks based on TCP/ IP were designed to transfer information about assets, blockchain networks actually transfer the values of those assets, and without backing them up. By allowing information and digital representations of value to be distributed rather than copied, the backbone of a new type of internet has been created. Over the last few years, it has been argued that these technological innovations could affect the financial markets and the very structure of companies in such a profound way that only the revolution created by the American Securities Act of 1933 and Securities Exchange Act of 1934 can rival . The The European Commission itself has admitted that the potential scope of application of blockchain is quite vast and should be closely monitored, as it offers «considerable potential to promote simplicity and efficiency through the creation of new infrastructures and processes».
Decentralized autonomous organization (DAO) & cyber organization (CybOrg or BORG)
Initially applied to the functioning of traditional cryptocurrencies such as Bitcoin, Ether or Litecoin, subsequent blockchain technology projects have explored and expanded different cryptographic mechanisms and methods, covering digital representations of different types of values. However, these projects go beyond the «tokenization», as the latest types of digital representation of values include functions that allow the creation of new organizational structures of DeFi based on DApps, namely «decentralized autonomous organizations» («DAOs») and, more recently, the «cyber organizations» («CybOrgs» or «BORGs»). These structures require a very low level of human intervention and, logically, also have a very high level of autonomy. To achieve these levels, they operate through automated smart contracts or even artificial intelligence. Despite the growth of the DeFi sector, as well as the increase in cases of use of DAOs or even BORGs, there is still a lack of globally approved legal definitions. Currently, the member countries of the Organization for Economic Cooperation and Development - OECD do not have a universally accepted definition of a DAO and, even at national level, few states present a legal definition. Logically, the understanding of the Financial Action Task Force - FATF for DApps and DeFi projects seems to be also applicable to DAOs and BORGs which, in principle, do not seem to be considered VASPs. Currently, a DAO can be defined as a smart contract or network that forms the basis of an organization, conceived as autonomous, decentralized and profit-oriented, using technology for economic transactions and social interactions.
Tokenization
«Tokenization» is a process of issuing digital representations of assets or rights and, as a rule, results from the operation of blockchain technology and/ or its combination with automated smart contracts. This process has enormous potential to revolutionize the way we exchange information, rights and even money. Tokenization can cover a wide range of digital assets, including tangible assets such as real estate, art, or financial assets (such as stocks or bonds), and intangible assets such as intellectual property and even identity and other personal data. The process of tokenizing tangible or intangible assets can be divided into a few fundamental stages. Initially, in the phase of identifying the assets or rights, the focus lies on ascertaining the feasibility to «tokenize». This stage presents some nuances, specifically in the legal categorization/ classification of the digital asset determined, as well as in the prior assessment of the appropriate legal framework. At this stage, where appropriate, special account must be taken of the particularities associated with the physical counterpart, i.e. the physical asset that will be digitally represented. This is followed by the issuing and custody of the digital assets. As a rule, a rigorous selection of the type of network (private, public, or hybrid) and compliance functions is made, followed by the issuance of the digital representation of the assets or rights, usually through a certain technology platform blockchain. The digital assets are stored and held in custody until the distribution phase. In the distribution phase and, perhaps, trading, the digital assets are transferred to those who are entitled to them, such as investors who, in turn, will have to create digital wallets to receive and store them. Depending on the nature of the asset in question, this process may involve other intermediate stages, and may even involve secondary trading platforms. Finally, the digital asset maintenance phase and the reconciliation of the respective data are crucial to the continuous monitoring of this process. Such monitoring involves multiple responsibilities, such as, for example, regulatory compliance, compliance with tax and accounting obligations, strategic communication of corporate actions, as well as other essential «risk management» aspects to safeguard the proper and sustained functionality of tokenized assets.
Digital asset
The term «digital asset» covers any item created, stored, and transferred in digital format, which has identifying attributes and offers a certain value. To qualify as an asset, the digital file must have the ability to generate value for its owner. In addition, it must be accessible and stored in accessible locations, and it must also be transferable through acquisition, donation or similar means, allowing the transfer of both ownership and the associated value. Over the last few decades, digital assets have evolved beyond traditional media such as text files, images or videos. The increased level of integration of technology into people's personal and professional lives has been followed by an increase in the importance of digital assets. Disruptive innovations such as blockchain technology and Bitcoin have driven the creation of new forms of digital assets such as crypto-assets or other tokenized digital assets that are not considered crypto-assets. In this sense, this definition covers a wide range of digital assets, from basic files such as mere photos or documents, to more complex structures such as crypto-assets. While certain digital assets have a monetary and intangible value, other items are only valuable to the creator or owner. In short, they serve as repositories of information, facilitate learning, store personal memories, facilitate transactions and help companies and governments manage data and store information. Each digital asset represents different values and/ or rights based on its usefulness and/ or application.
Crypto-asset
The constant technological progress and the lack of harmonization of the legal regimes of the few jurisdictions that have tried to legislate on these matters, has increased and amplified the global normative and regulatory gap, as well as the respective doubts in the definition and legal framework of crypto-assets. As a result, and despite the fact that the issuer often genuinely intends to reflect a certain technical principle, these doubts have resulted in the indiscriminate use of designations such as «cryptocurrencies» (the most widely known and used). This scenario intensified with the emergence of «initial coin offerings» («ICOs») and, specifically, when the usefulness of crypto-assets transcended the monetary function. In line with constant technological progress, the object or scope of certain crypto-assets began to constitute their holders in atypical and differentiated legal situations (regardless of the designation given by the issuer). From rights underlying a certain project, product, service, or specific utility related to the platform created by the issuer, to rights to obtain passive remuneration resulting from a certain investment. It is precisely this functional evolution that has resulted in a broadening of the definition (which was initially conceived around the monetary function) and the disregard of the terms «cryptocurrency» or «virtual currency» as broad definitions. Over the last few years, national, and international literature has been using the term «crypto-asset» as a broad definition. Although, depending on the jurisdiction, they have been defined in different ways, in abstract terms, all the definitions have ended up consisting of the same characterizing elements (albeit organized or presented differently). It was in this logic that the term «crypto-asset» was defined in the context of MiCAR, i.e. as broadly as possible, with a view to covering all types of crypto-assets currently not covered by the scope of other EU legislation on financial services. Specifically, MiCAR defines a crypto-asset as a «digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology». Over the last few years, as technology has advanced and progressed, multiple, and distinct functional subcategories of crypto-assets have been identified, both in the literature and in studies and reports published by economic or financial organizations (such as the Financial Action Task Force - FATF). Among the many others that are certainly possible (including subcategorizations of subcategories), of the subcategories that make up the broad, composite and unsystematic notion of crypto-assets, the following stand out: crypto-assets with monetary functions, crypto-assets with utility functions, crypto-assets with investment functions and hybrid crypto-assets. This categorization serves pedagogical purposes, but not only that, as it allows each crypto-asset to be reassigned to one of the legal subcategories under MiCAR and thus determine its legal regime. This is despite the fact that the legal categorization of the concept of crypto-asset under MiCAR differs from the functional categorization that has been constructed over recent years, both in the literature and by the economic and financial supervisory authorities of the various jurisdictions. MiCAR categorizes crypto-assets into three legal subcategories: «e-money tokens» («EMTs»), «asset-referenced tokens» («ARTs»), and all other crypto-assets that, through a negative delimitation, are considered neither EMTs nor ARTs, which includes «utility tokens».
Stablecoin, deposit token & central bank digital currency (CBDC)
Within this functional subcategory and the broad concept of crypto-asset, the «stablecoins» can also be identified. With a general or mainly monetary function, the stablecoin is characterized by the stability of its value, which is determined by reference to one or more assets from the «real world», such as a legal tender like the euro or the dollar. Despite its importance to the crypto-asset market, the European legislator decided to ignore the broad definition of stablecoin and divided this figure into two different subcategories of the broad legal definition of crypto-asset, namely e-money tokens, and asset-referenced tokens. As such, since it is not a rigorous or objective designation, the term «stablecoin» is only referred to in the whereas of MiCAR. Due to its specific nature, in functional terms, and for pedagogical purpose, it is distinguished from the concept of «deposit token». This consists of a kind of commercial bank digital currency, issued via DLT or similar technology by licensed deposit institutions (commercial banks) and intended to be a digital representation of the value of a given deposit. In the long term, it looks set to replace electronic money. Stablecoins can also be distinguished from the concept of «central bank digital currency» («CBDC»), which is a digital representation of a currency that is legal tender in a given jurisdiction, such as the digital euro, the digital dollar, the digital yuan, the digital ruble, or the digital real. It seems that this concept is being developed to replace physical money with digital money in the long term.
Non-fungible token (NFT) & fractional non-fungible token (F-NFT)
It is possible to distinguish between fungible crypto-assets (such as Bitcoin) and unique, non-fungible crypto-assets, or simply non-fungible tokens («NFT»). Fungibility consists of the possibility of exchanging a given crypto-asset for another of the same kind, quality, or quantity. For example, legal tender coins are fungible. Imagine that A lends a €50.00 note to B. From the outset, A knows that he won't get that exact note back, but another one, of the same kind and quality and representing the same quantity, or alternatively, for example, five €10.00 notes, also of the same kind and quality, and which together also represent the same quantity. Thus, as long as the note or notes received by A represent the same value, B's debt is extinguished. With crypto-assets, the principle is the same. A fungible crypto-asset is therefore an asset that can be easily exchanged for others of the same kind, quality, or quantity, and therefore has an intrinsic value that leaves no room for negotiation or dispute. On the other hand, like a work of art, a non-fungible token consists of a digital representation of rights over a specific tangible or intangible asset, and is designed to retain a specific value, each one having a unique «cryptographically» structure, and is not, by its nature, divisible or replaceable. For example, the non-fungible token can be developed in accordance with the token standard «ERC-721», while the fungible crypto-asset can be developed according to the ERC-20" token standard. In addition, it is possible to combine both categories. A single, non-fungible crypto-asset developed according to the ERC-721 standard can be fractionated into multiple fractions (considered fungible by the literature and by most regulators in the various jurisdictions) using the ERC-20. This concept is commonly referred to as a single fractional non-fungible crypto-asset or fractional non-fungible token («Fractional NFT», or «F-NFT»). On the other hand, in functional terms, and for educational purposes only, the non-fungible token is usually divided into non-fungible tokens referenced to tangible assets («hard asset-referenced non-fungible tokens») and non-fungible tokens referenced to intangible assets («soft asset-referenced non-fungible tokens»). While the former can be issued in the form of a digital representation of rights over a particular property (with a financial structure comparable to Real Estate Investment Trusts - «REITs»), the latter confer rights over digital assets such as «digital collectibles», or other types of intangible assets that confer intellectual property rights, such as trademarks, patents, copyrights, or even royalties on broadcasting rights or music rights.