By Tom Lyons.

There is no doubt that the current discussion around token launches (or ICOs) is the most important in the blockchain community right now. The explosion of ICOs has brought a lot of excitement, but also a great deal of scrutiny, particularly on the regulatory side.

Luka Müller is one of the leading names in blockchain and token generating law in the world (his firm MME Legal is a founding member of the Crypto Valley Association and he serves the CVA as Chair of the Regulatory and Policy Working Group). He says one reason there is so much debate about ICOs at the moment is that we are still not clear about what, legally speaking, cryptotokens really are.                                       

As part of the wider Blockhaus initiative, MME has conducted a comprehensive analysis of the legal aspects of cryptotokens. In it they introduce the concept of the Blockchain Crypto Property or BCP as a basis for a cryptotoken legal framework. The paper has just been released to the global blockchain community (for more, see box bottom of this page) in the hope that it will spur comment and debate in the community.

We sat down and talked to Luka to find out what it is all about.

Luka, you’ve just published what is likely to be seen as a major statement on the legal framework for cryptotokens. What’s the background?

At MME we’ve been working with blockchain projects since 2013. The first major project was the Ethereum Foundation project in 2014, so we’ve seen this technology grow from its early stages. That’s given us a lot of time to gain experience and to think about what we are dealing with here.

The heart of the issue is that digital information on a blockchain is not like any other kind of digital information. Because of its immutable nature, because of cryptography and private keys, information on a blockchain becomes like a thing. Bitcoin works precisely because it is like a physical coin – something you can take out of your pocket and give to someone else – just in digital form. Because of this, information on a blockchain has the characteristics of property as we understand it in the law: it is something that is (immutably) defined, to which you can have exclusive access, which you can transfer and have the transfer publically recorded, etc. We’ve never had anything like it before in the digital world prior to the release of the Bitcoin protocol.

The whole concept of the BCP is based on this realization. The point of our paper is to first differentiate between “normal” digital information and BCPs, and then to examine the legal and risk characteristics of this new kind of property.


Are you proposing regulation as well?

No. And this is very important.

In our paper we take a functional approach to define what we see as three main categories of BCP. The purpose of this functional categorisation is to propose a method and a framework to facilitate multi-jurisdictional legal, regulatory and tax assessments. You can think of it as a protocol for all the participants in the blockchain space – whether regulators, supervisory bodies, blockchain companies, service providers, investors or whoever – to have a common understanding of what these tokens represent.

Once we have this common understanding about the different properties of tokens, then the regulators can make their own decisions about how to write the rules. It’s very possible that different jurisdictions will have different approaches. That’s normal. The point is that these approaches and rules should come out of a single, legally grounded understanding of what each token really is.

And it’s not just regulators that can benefit. In the paper we show how you can use the concept of a BCP to do detailed risk assessments of any token as well. This can be of immense value to investors for instance as well as for regulatory bodies to adopt a risk-based approach in setting rules. We think it could even help token issuers to more clearly think about the kinds of tokens they are creating.

You talk about risk. What is your assessment of the risks in the cryptocurrency space? Will regulators shut down ICOs?

No one doubts that there is fraud in the ICO world – just like there is fraud everywhere else. And certainly when you have a new technology as important as blockchain, it is going to attract the bad actors as well as the good.

But to be really honest, in my experience there are far fewer bad actors than people think. Most of the projects we see – and we see literally hundreds – are being run by well-meaning honest people with a passion for their project. But they are often technologists or idealists. They themselves may not quite understand all the legal and other ramifications of what they are doing.

To me the larger risk in this space is not outright fraud but the less talked about possibility of honest mistakes being made by well-meaning people, or confusion among stakeholders – for example investors – about what they are really dealing with.

One of the things the BCP concept can help with is to provide the tools that allow people to make clear and well-founded analyses of tokens from a legal and risk perspective. That will make it much easier to spot the frauds, but also – if you want to put it that way – to uncover the legal and risk-related “bugs” in a token.

As far as regulation goes, both we at MME and the CVA, along with I think most serious members of the global blockchain community, welcome sensible regulation. In these early days, we also think it makes sense to introduce effective self-regulation into our industry. The CVA has started a project to draft an ICO Code of Conduct just for this reason.

Good regulation is in everyone’s interest. The trick as always is to find the balance between protection and innovation. I am confident that most regulators will do this over time.


Is this paper the last word on the subject?

Quite the contrary! It’s the first. We’ve called this the “Genesis Report” because for us it is a draft. That’s also why we’re releasing this paper not strictly as MME but as part of the Blockhaus initiative, and why we are very happy to be publishing it also through the CVA. That’s appropriate because this is really meant to be something for the community. I hope it spurs debate and that we’ll get a lot of good feedback.

Having the last word on this subject is really beside the point. We do however strongly believe that it is for the good of the community to act as quickly as possible to define a workable legal framework for tokens, based on their functional characteristics as property, and so to get the transparency and certainty around tokens the community needs. That’s what this is about.

The paper Conceptual Framework for Legal & Risk Assessment of Blockchain Crypto Property (BCP) was written by Dr. Luka Müller and Stephan D. Meyer, supported by Christine Gschwend and Peter Henschel.

It has the following aims:

  • It attempts to qualify the digital information on the blockchain in a legal context by answering the question “what is the legal qualification of a token?” The conclusion is that there is a need to introduce a new type of property: the blockchain crypto property or BCP.
  • It employs a functional approach to define three main categories of BCPs (see below). These functional categorisations allow for a structured methodology for making legal, regulatory and tax assessments of different kinds of tokens. This is intended to support a common understanding of BCPs for all the participants in the blockchain space.
  • It demonstrates how the functional approach can be used to carry out detailed risk assessments of each class of BCP. This includes a large number of detailed sample risk reports of different existing tokens.

BCP Classes

The paper defines three classes of BCPs, with sub-classes:

  • BCP Class 1: No counterparty
    • These are native currency tokens (bitcoin), infrastructure tokens (ether), or application tokens (golem).They do not give the holder any rights vis-a-vis a legal person, and have no underlying asset.
  • BCP Class 2: Counterparty
    • These confer a relative right against a legal counterparty. Every contractual and/or participation right can fall under such a classification.
  • BCP Class 3: Co-Ownership
    • These are tokens which have functions and/or rights programmed and/or registered on the blockchain using smart contract systems. Such a token structure allows users to participate in co-owner like structures to co-own for example intellectual property rights.

BCP Risk Assessment

The paper also defines four risk classes, with sub-classes:

  • Functionality & Protocol-Related risks (bugs in the underlying technology, improvements in cryptography rendering protocol vulnerable, network attacks, consensus attacks, etc.)
  • Storage & Access of Private Key-Related Risks (bug-filledgy or hacked wallets, hacked exchanges, lost private keys)
  • Regulation & Money Laundering-Related Risks (regulatory risk of any kind)
  • Market-Related & Counterparty Risks (liquidity risk, insider trading, token loses value, etc.)

Comments from the community are welcome, please get in touch with