Cryptoassets, of which a token is a type, are digital representations of value or rights that can be transferred and stored electronically using distributed ledger technology or similar technologies. There are three types of tokens: payment or e-money tokens, which serve as a medium of exchange or a store of value; investment tokens, which perform functions analogous to securities; and utility tokens, which provide access to services or products, somewhat similar to vouchers. There are also hybrid tokens, for example, combining the features of cryptocurrencies and real-world assets. These tokens operate by embodying the value of a specific real-world asset and combining it with the flexibility and efficiency of cryptocurrencies. The goal is to provide access to blockchain technology while simultaneously providing a solid link to the underlying tangible asset.

Tokenization is the process of converting data or assets (e.g., property ownership) into a digital token, which is a unique string of characters typically stored in distributed ledger technology (DLT), electronic systems or databases for recording information not maintained by a single, specific entity. DLT allows us to store and use data, both decentralized (i.e., stored in multiple locations) and distributed (i.e., stored on interconnected computers). In this way, computers create a network in which each network participant directly shares its resources (computing power, data, or network bandwidth) with all other network members without the need for any central node. Nodes in a network creating a distributed database are equal in terms of access rights to network resources. One of the main reasons for the development of these technologies is the desire to make it easier for the issuer to raise capital. Tokens do not have to represent the entire asset to which they are assigned. They can, for example, represent a fraction of a share, and the cost is then correspondingly lower, allowing a larger number of people with smaller wallets to access trading in such items.

Share tokenization

One of the main assets subjected to the tokenization process are shares.

To begin this process, a licensed financial institution purchases and holds actual shares of listed or unlisted companies on your behalf. Tokens can also be issued by the company as a representation of its own newly issued shares or those acquired from a shareholder.

Digital tokens are then created electronically, representing the held shares, usually on a one-to-one basis, but as mentioned, a token can also represent a portion of the shares. Another important difference is the relationship between the resulting token and a real share. Some tokens may be merely derivative instruments, as they only reflect the share price, excluding equity rights such as dividend rights, participation and voting rights at the general meeting, and other rights provided for shareholders by the Polish Commercial Companies Code. Others, on the other hand, may bear a significant resemblance to real equity instruments, as their acquisition also grants equity rights, although the actual holder of the shares is still the token issuer.

The next stage is selling to investors. This is where another advantage of using cryptoassets becomes apparent. Automated token trading via smart contracts on specialized decentralized financial platforms increases the speed and liquidity of sales. Furthermore, the platforms are available 24/7, at least five days a week, unlike stock exchanges, which are open only on business days and during specific business hours.

Legal status of tokenized shares in Poland

The European Union currently has a pilot regulation, Regulation 2022/858, on a pilot scheme for distributed ledger technology-based market infrastructures. DLT-based market infrastructure is a generic term that encompasses all three types of activities introduced by the regulation:

1) a multilateral trading platform or, according to the Polish terminology, an alternative trading system, based on DLT; which associates many declarations of readiness to buy and sell financial instruments by third parties

2) a settlement system based on DLT – links between at least three institutions, excluding an indirect participant, within which common rules for clearing or executing their settlement orders apply to these participants,

3) a trading and settlement system based on DLT – a system combining the functionalities of the two above systems.

Currently, the system only accepts stocks whose market capitalization or uncertain market capitalization is less than five hundred million euros.

However, no institution in Poland has joined this system. Furthermore, no applications for authorization to operate the aforementioned infrastructure have been submitted to the Polish Financial Supervision Authority (KNF), the national financial market regulator. Therefore, trading in tokens on the regulated market, i.e., the Warsaw Stock Exchange, is impossible, both legally and factually, because the WSE lacks the appropriate IT infrastructure.

The situation is different in the case of unlisted companies, i.e., joint-stock companies that are not public, and a relatively new type of capital company, the simple joint-stock company. The Commercial Companies Code explicitly mandates an electronic form of the shareholder register. In the case of a private joint-stock company, the existing share register should be replaced. The law explicitly mentions the use of distributed database technology, such as blockchain, as possible solutions. Storing share tokens as entries in a shareholder register maintained using blockchain technology is permitted. This is another step in line with the global trend of digitization. The legislator intended this to facilitate the dematerialization of shares outside the scope of stock exchange regulations, i.e., the securities depository. The register is not maintained by the company itself. According to the law, it must be prepared and updated by: a notary or an entity authorized to maintain a securities account under Article 4 of the Act on Trading in Financial Instruments, i.e.: a brokerage house; a bank conducting brokerage activities; a custodian bank; a state-owned bank conducting brokerage activities; A foreign investment firm or other foreign legal entity with an active branch in the Republic of Poland; the National Depository for Securities; and the National Bank of Poland. This specific and comprehensive list is dictated by the fact that these entities are subject to the supervision of relevant administrative or administrative bodies, which provides a certain guarantee of their reliability regarding the security and integrity of the data contained in the register. This is based on an agreement that the company is obliged to conclude with such an entity. However, this register, in itself, does not enable trading in such tokenized shares, as access is limited only to shareholders and the managing entity, such as a notary or brokerage house. A separate platform is required for this. Tokens representing shares and granting the holder (incorporating) equity rights meet the definition of a security under Directive 2014/65/MIFID II and the Polish act implementing it. For this reason, the provisions of Regulation 2023/1114 MICA on crypto-asset markets do not apply to them. Instead, they are subject to the provisions of the Act on Trading in Financial Instruments and European regulations governing the capital market, which imposes, for example, the obligation to submit a prospectus, unless exemptions provided for in this act apply. It is worth noting that the European Securities and Markets Authority has confirmed in its current guidelines that issuance technology, such as blockchain, does not change the legal classification. However, it is also important to remember that the severely limited oversight by the Polish Financial Supervision Authority and the lack of extensive regulations regarding asset trading in private companies pose significant risks associated with trading in tokens and other crypto-assets. The lack of a company listing on the stock exchange makes it difficult to obtain reliable information about the company’s condition and, therefore, make informed investment decisions.

Tokenized shares and taxes

Tokens that represent shares are treated as financial instruments under tax law, so they are subject to the same taxation as classic instruments such as shares.

Under personal income tax (PIT), income is generated upon the sale of a financial instrument, in this case a token representing a share, or upon the exercise of a right under a derivative instrument, such as an equity token exposing the holder solely to the share price. The tax base is the difference between the cost of obtaining the income and the final income. The cost of obtaining the income will be the price paid for the token, while the income will be the price obtained from its sale. Pursuant to Article 30b of the Personal Income Tax Act, the tax rate on such income is 19%.

Corporate income tax (CIT) applies to capital gains and income from other sources. However, the issuance of tokens and their purchase by investors should be treated as a contribution to share capital if the company issues both shares and tokens. Such an inflow of funds is exempt from CIT under Article 12, Section 4, Item 4 of the CIT Act. If the token issuer is the entity that purchased the shares and issued the associated tokens, the income will be treated as capital gains under Article 7b, Section 1, Item 3, Letter a. Income, calculated similarly to personal income tax, will be taxed at a 19% rate for all taxpayers, as the preferential 9% rate for small taxpayers and entities during the first year of operation does not apply to capital gains.

Financial instruments, and therefore tokenized shares, are not goods within the meaning of the Value Added Tax (VAT) Act. Only services related to financial instruments could be subject to taxation. However, the law generally excludes the financial market, including the insurance market, from VAT. Article 43, paragraph 1, item 41 states: “Services related to financial instruments, referred to in the Act of 29 July 2005 on Trading in Financial Instruments (Journal of Laws of 2024, items 722 and 1863, and of 2025, item 146), are exempt from tax, excluding the storage and management of these instruments, as well as intermediation services in this regard.” In the case of tokens linked to shares, a tax liability could only arise in relation to the storage of actual shares by the token issuer.

Artykuł Cryptoassets and tokenization in Poland, including shares tokenization pochodzi z serwisu KIELTYKA GLADKOWSKI LEGAL | CROSS BORDER POLISH LAW FIRM RANKED IN THE LEGAL 500 EMEA SINCE 2019.

As the market for cryptocurrencies and crypto-assets is growing at a frenetic pace, last year there were many discussions in the European Union about the rules and regulations related to them. On September 24, 2020 the European Commission has issued an important project affecting the Market of Crypto-assets in the European Union, namely the Proposal for the REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937.

What is the purpose of the proposal?

Due to the growing popularity of cryptocurrencies, there has occurred a need for increased regulatory scrutiny. There are different approaches to cryptocurrencies around the world regarding government regulations. The regulations in the new draft are designed to protect consumers from cyber-attacks, theft or malfunction on cryptocurrency exchanges. What is surprising – despite the emphasis on increased scrutiny and protection, the regulation does not mention a requirement for mandatory insurance against, for example, loss of assets due to fraud or cyber-attack.

Key assumptions of the project

The preamble of the document describes the assumptions and objectives of the project. First and foremost, this proposal is part of the EU’s “Digital Finance” package designed to support the potential of digital finance to innovate and compete while mitigating risk. The strategy is likely to significantly impact the operation of the crypto market in the EU. The proposal is in line with the Commission’s priorities to adapt Europe to the digital age. The digital finance package includes a new strategy for the EU financial sector. The aim of the previously mentioned strategy is to ensure that the EU drives the digital revolution and that innovative European companies play a leading role in it.

in addition, the package also includes a proposal for a distributed ledger technology-based market infrastructure pilot scheme, a proposal for digital operational resilience, and a proposal to clarify or amend certain related EU financial services legislation.

Key to the strategy is to ensure that the EU’s financial services regulatory framework is conducive to innovation and does not hinder the use of new technologies.

Since the publication of the Commission’s Fintech Action plan, in March 2018, the Commission has been examining the opportunities and challenges raised by crypto-assets. In 2017, there was a big jump in the market capitalization of cryptocurrencies. As a result, Executive Vice President Valdis Dombrovskis, in a letter to the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), urged them to renew their warnings to investors. The 2018 Action Plan included, among other things, mandating the EBA and ESMA to assess the applicability and adequacy of the existing EU regulatory framework for financial services to cryptocurrencies. EBA and ESMA highlighted that – apart from EU legislation to combat money laundering and terrorist financing – most cryptocurrencies fall outside the scope of EU financial services legislation. Consequently, they are not subject to legislation on, for example, consumer and investor protection.

Another reason why there is a need for regulation is that individual member states are introducing regulations on cryptocurrency-related issues, leading to market fragmentation.

Experts say regulation over-regulates stablecoins

Recently, a new subset of crypto assets has entered the market – the so-called ‘stablecoins’. They constitute the main focus of the regulation alongside cryptocurrency exchanges. Their value is tied to another asset, such as gold or another cryptocurrency. Their creation was intended to overcome the volatility of cryptocurrency prices. This is usually due to the fact that there is no solid mechanism to determine their true value. One of the purposes for which stablecoins are used is for owners to convert profits into stablecoins in the short term with the intention of investing in other cryptocurrencies when opportunities arise, rather than converting profits into fiat money and transferring it to their bank account. Besides, stablecoins are invested in cryptocurrency exchanges or decentralized financial applications to return interest and profit respectively. Cryptocurrency exchanges are a safe and attractive alternative to traditional savings methods offered by legacy finance. Customers are not forced to lock up their funds for a couple of years, and the annual interest can be much higher.

European Commission President Ursula von der Leyen emphasized the need for “a common approach with Member States to cryptocurrencies to ensure that we understand how to take full advantage of the opportunities they present and address the new risks they may pose”. In December 2019, the Commission and the Council jointly declared that they “are committed to establishing a framework that takes advantage of the potential opportunities that certain cryptocurrencies may offer”.

Four main objectives

The first objective of the proposal is to provide legal certainty. Given the speed at which cryptocurrency markets are developing, a robust legal framework that sets out the regulatory treatment of all cryptocurrencies that are not covered by existing financial services legislation is essential.

The second goal is to foster innovation. Promoting the development of cryptocurrencies and the wider use of DLT technology is not possible without the introduction of a clear set of rules to support innovation and fair competition.

The third objective is to put in place an adequate level of consumer and investor protection and market integrity. Crypto assets not covered by current financial services regulations carry many of the same risks as more familiar financial instruments.

The fourth goal is to ensure financial stability. While some cryptocurrencies are quite limited in scope and application, others, such as the emerging category of “stablecoins,” have potential. They have the opportunity to become widely accepted and potentially systemic. The proposal includes safeguards to address potential threats to financial stability and orderly monetary policy. It could arise from “stable coins.”

The proposal was drafted in accordance with existing policy provisions in this policy area. The proposal includes assurances that the existing provisions do not constitute obstacles to the deployment of innovative technologies. The regulations in the proposal are supported by long-term horizontal market monitoring and much international political work, for example, in such fora as the Financial Stability.

Consistency with other Union policies

President von der Leyen’s mission letter to Vice President Dombrovskis calls for a common approach to cryptocurrencies with member states to ensure Europe can make the most of the opportunities they present and counter the new threats they may pose.

This proposal supports a holistic approach to blockchain and DLT technologies that aims to put Europe at the forefront of blockchain technology innovation and deployment. It is closely linked to the Commission’s broader policy on blockchain technology. The work has included the creation of a European Blockchain Observatory and Forum and a European Blockchain Partnership. It brings together all member states at a political level, as well as the public-private partnership envisaged with the International Association for Trusted Blockchain Applications (https://inatba.org/ ).

This proposal is also consistent with the Union’s policy to create a capital markets union (CMU). It responds to the final report of the High Level Forum, which highlighted the under-exploited potential of cryptocurrencies and called on the Commission to provide legal certainty and establish clear rules for the use of cryptocurrencies.

We can also see consistency in the SME strategy adopted on March 10, 2020, which also highlights DLT and cryptocurrencies as innovations that can enable SMEs to engage directly with investors.

Most importantly, the proposal is fully consistent with the recommendation in the Security Union’s strategy to develop a legal framework for cryptocurrencies. It takes into account the impact of new technologies on the way financial assets are emitted.

Legislative path of the regulation

On 15 October 2020, the Parliament’s Committee for Economic and monetary affairs (ECON) appointed Stefan Berger (EPP/Germany) as the rapporteur for this file. The draft report made by him was presented on 25 February 2021. Then the review in the Council Working Party on Financial Services was ongoing. On 22 February 2021, the European Central Bank published its opinion on the file. On 2 March 2021, the European Economic and Social Committee published its opinion on the file.

Is regulation good for crypto?

Regulation could also make the cryptocurrency market less susceptible to manipulation, which could increase the value of cryptocurrencies. In the short term, the regulation may cause the trading value of cryptocurrencies to fluctuate, but in the long term, the regulation, if enforced correctly, is expected to stabilize the market and make it a safer investment.

Summary

Although MiCA will bring a lot of changes to the world of cryptocurrencies, the European Commission has ensured that it will not hinder the development of modern technology in any way. In addition,  MiCA will NOT apply to crypto-assets that qualify as: financial instruments, such as Bitcoin. We can be also sure that the EU will not ban crypto .

Sources:

What the EU’s new MiCA regulation could mean for cryptocurrencies | EUROPP (lse.ac.uk)

EUR-Lex – 52020PC0593 – EN – EUR-Lex (europa.eu)

MiCA – Markets in crypto-assets regulation | Legislative train schedule | European Parliament (europa.eu)

MiCA: A ‘beta version’ of crypto-assets regulation in the EU – CityAM : CityAM

New Crypto Rules in the European Union – Gateway for Mass Adoption, or Excessive Regulation? – RegTrax – Stanford Law School

Can Bitcoin Regulations Make Cryptocurrency Safer? (thebalance.com)

Artykuł The EU’s new MiCA regulation on crypto-assets pochodzi z serwisu KIELTYKA GLADKOWSKI LEGAL | CROSS BORDER POLISH LAW FIRM RANKED IN THE LEGAL 500 EMEA SINCE 2019.