“...issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including cryptocurrencies, virtual assets or similar concepts where the concept is accepted by persons as a means of payment of goods or services, a unit of account, a store of value or a commodity.”
This is from the legal definition of “convertible virtual currency activity” in my own regional jurisdiction, of which, it seems Layer 2 tokens fall into, and anyone who creates one is required to conform to a raft of regulatory standards.
And I happen to live in one of the world's most crypto-friendly territories.
I’ve been here on Hive for a year (with a little hiatus) but I’m still definitely learning the ropes in many regards. A lot of what I learn is through osmosis and inference. Sadly though, this isn’t always sufficient for the more in-depth or technical subjects - as I found out this week when I contemplated creating a layer-2 Hive Token for a fun project.
Creating community tokens
I live on a small island and I thought that creating a Hive community that catered for my local offline community would be a cool way to on-board more users to Hive. And the addition of a tribe or community token seemed like a fun idea.
Here on the island, people are very patriotic and there might well be an appetite for an associated layer-2 token. Beyond the simple use of Hive-community rewards, the project could utilize the many Hive apps that plug into a token’s functionality, therefore allowing the opportunity for off-world applications such as commerce or events tie-ins.
Potentially dangerous legal waters
However, a little research seemed to put one or two spanners into the works. What exactly are the legalities of creating a crypto-token here on Hive? By creating one, am I then responsible for complying with various legal standards, such as setting up legal entities, having audited accounts, checking the authenticity of everyone who takes a stake in the token, etc.
I could not find much in the way of information here on Hive, but on Ecosia and elsewhere, I found lots of alarming info implying that starting token-creation was really in the realm of corporate entities, with all the legal protections that these provide.
One prominent crypto-law YouTuber stated that if you create a token you really ought to be a registered business, with the appropriate licences and legal mechanisms in order to comply with financial regulations.
So will the authorities come knocking?
Wow! This is a far cry from the proverbial crypto-hobbyist who might create a project or community for a bit of fun.
Here on Hive, I can create a layer-2 token in less than 4 clicks and at a cost of 40 Hive. Whilst I would be thinking of it as a tool to encourage user-interest in a very modest online community, the law might see it as an unregulated public offering. So where does the truth lie?
Suggestions appreciated
Obviously, different laws apply to different regions, but in general I worry that amateur coders and crypto-hobbyists may be opening themselves up to legal difficulties in certain circumstances.
What started out as a bit of fun on Monday, looked by Friday like an idea that was hanging in tatters. As of now, I have no idea where I stand, and I'd rather not open myself up to legal liabilities just for the sake of a hobby-project. I'm still hoping I may have misinterpreted this.
If anyone here on Hive has any idea about the legalities of tokens (generally) and whether it’s something individuals (who are not large-scale start-ups) should steer clear of, I’d welcome your comments below.
If, for instance, I created my community, with it’s associated token, then went onto Twitter or out into the real-world and encouraged people to come on over and join would I not be seen to be pushing an unregulated “investment opportunity” or be seen to be a currency distributor?
Perhaps I'm over-thinking this. Perhaps I need only worry if I were trying to court large-scale investors and garner large-scale adoption with elaborate IPOs. Or maybe the law doesn't make a distinction and I'd be playing with fire without first taking costly legal advice.
Conclusion
So I guess what I learned on Hive this week is that, whilst there are some easy and fun toys to mess around with, some of the functionality open to us here on is potentially more serious than I first thought.
Thanks to anyone with anyone willing to share their knowledge :)
It's probably worth noting, that those of us who live in countries where the "Common Law" legal system is the norm (i.e. UK, US, Australia, Canada, etc.) are subject to statutes documented by governments, however, without legal cases actually being brought before the judicial courts - we don't really know how your specific case would be judged.
It feels to me, as someone with no legal training, but having a professional interest in regulation and compliance that we are in a bit of "no-mans land" here. Practically both written statutes and case law needs to be dragged into the 21st century - the laws are there for good reasons (protecting retail investors, preventing money laundering, crime prevention, etc.) but they appear to be wholly inadequate for the era of Web3.
Hive and the wider ecosystem probably do need some form of control similar to Know Your Customer (KYC) and Anti-Money Laundering (AML) but it would need to be implemented in the same autonomous and distributed way that the rest of Web3 is constructed - not some lumbering process that requires corporations to be set up, staffed and audited against some arbitrary standards.
My viewpoint comes as someone who has worked in technology in the financial services sector, even the adoption of Agile and DevOps is an uphill struggle with a regulatory ecosystem that doesn't have the capacity to adapt quickly to changing approaches.
Thanks for the detailed reply. Yes, we do seem to be in a bit of a legal no-man's land at the moment. Whilst I have one or two ideas for fun projects, I'm not comfortable just yet in exposing myself to too much risk.
Without legal precedents it's difficult to know how to proceed, and I suppose I'd rather not end up being the unlucky one who is forced to partake in that first legal precedent!
I live in one of the more crypto-friendly places, but even here, the government are as we speak drawing up legislation on Know Your Customer (KYC) and Anti-Money Laundering (AML) with regard to tokens.
So I if I want to move forward I shall have to tread carefully!
A wise move, I also suggest you let your voice be heard. What you are wanting to do is build a community around Web3 and crypto, which is a worthy goal - one I would hope your MP/Representative would at least recognise as being positive. Would be worth an e-mail to see if you can get an opportunity to state your case.
Legislation shouldn't be at the cost of innovation, that's how progress stagnates - which isn't in anyone's interest.
Yes, I might consider that. I have several friends that work in government. I tend to think that asking for permission from a regulatory body for something of this nature might result in a flat 'no', but it might be worth sounding out opinion in a more informal way first.
Or rather their legal background is unnecessarily overcomplicated in certain countries. Some governments and many banks are fighting against cryptocurrency, so this overcomplication is at least partially intentional.
Yes, I wish I knew where we stood. And without getting expensive legal advice that might well be out of date before long I'm reluctant to dive in as a token-creator. It's still an attractive idea, but is it worth the risk for a hobby or side-project?
I can keep an eye on my colleagues articles as I work for a Regtech company here in the U.K. who are exploring the landscape with blockchain matters and form a consensus.