Key points
- The distinction between a utility token and a security token determines whether a token falls under the rules governing financial securities and the transparency obligations that come with them.
- A token that confers rights close to those of a traditional security, such as dividends, voting rights or repayment, may constitute a financial instrument and then fall outside the scope of MiCA (Markets in Crypto-Assets Regulation, Regulation (EU) 2023/1114).
- The analysis rests on the definition in the French Monetary and Financial Code and on the economic reality of the rights, which a mere contractual statement is not enough to rule out.
- The Howey test, which comes from US law, is not enshrined in EU law: classification is assessed against the list of financial instruments in the MiFID II Directive.
- Structuring the issuance as a utility token, with no right to profits, no governance rights and no guaranteed return, reduces the risk of reclassification.
- Any promotion focused on financial performance must be avoided, and the token’s value must be limited to its functional utility within the ecosystem.
Asset tokenisation is transforming the financial sector in France and Europe. Project owners, developers and investors are seeking a sound legal framework for their digital tokens in order to limit the risks of a possible legal reclassification or tax reclassification of their assets. The distinction between utility tokens and security tokens, also referred to as financial securities, is of fundamental importance. To comply with the regulatory framework, you need to look closely at the relevant legal criteria and at the practical means of anticipating any unwanted tax reclassification or financial reclassification.
What criteria determine whether a token is a financial security?
French and European authorities apply precise criteria to classify a token as a financial security or a financial instrument. The legal regime aims above all to protect investors through strict rules on public offers and transparency, while ensuring market integrity.
The analysis rests mainly on the definition in the French Monetary and Financial Code: under Article L. 211-1 of the French Monetary and Financial Code (CMF) (in French), financial instruments are financial securities (equity securities issued by joint-stock companies, debt securities, units or shares in collective investment undertakings) and financial contracts. If a digital asset confers rights similar to those of a traditional security – a right to dividends, voting rights, repayment of a debt –, legal reclassification as a security token becomes a possibility. Regulation (EU) 2023/1114 (MiCA) does not apply to crypto-assets that qualify as financial instruments (Article 2(4)).
How do the rights attached to a token affect its classification?
A utility token gives access to a specific service or functionality, without conferring any right over the issuer or any remuneration linked to its results. By contrast, once a digital token grants its holder income, a share of profits or a say in the governance of the project, the legal framework tends to align with the one applicable to financial securities.
In this context, it may be worth consulting a professional such as an ICO lawyer (in French) to structure the necessary steps and limit the risk of legal reclassification.
Some project owners try to draw a clear line between utility tokens and security tokens through the way their documentation is drafted, but the substantive analysis of the rights remains central. A mere contractual statement is not enough to rule out tax reclassification or regulatory reclassification if the economic reality reveals a function comparable to that of a financial instrument.
Which tests are used in the European Union for this analysis?
The Howey test, which comes from US case law, is not enshrined in EU law. It seeks to determine whether the purchaser makes an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. Under European law, classification is assessed against the categories of financial instruments listed in Annex I, Section C, of Directive 2014/65/EU (MiFID II): transferable securities, money-market instruments, units in collective investment undertakings and derivative contracts. Article 2(5) of the MiCA Regulation requires ESMA (the European Securities and Markets Authority, AEMF in French) to issue guidelines on the conditions and criteria for classifying crypto-assets as financial instruments.
The authorities also examine the structure of the token issuance and the communication made to the public to assess whether the transaction constitutes an offer of financial securities requiring a prospectus approved by the AMF (French financial markets authority) or its European equivalent.
What steps limit the risk of legal reclassification?
Limiting the risk of legal reclassification requires a rigorous analysis of the real nature of the tokens offered. Legal input should be built in from the design of the business model to prevent an unsuitable framework, which could have serious consequences for the project owner.
In practice, several steps must be followed to make the status of the digital assets legally sound, both at issuance and in their subsequent management or use.
How to structure a token issuance so that it stays outside the scope of financial securities?
Opting for a utility token model significantly reduces the likelihood of reclassification. The white paper and the contractual documents must state clearly that the token grants no right to share in profits, no access to governance, and no buy-back commitment or guaranteed return.
Any promotion focused on financial performance or potential appreciation must be avoided. Limiting the token’s value to its functional utility within the ecosystem helps to draw a clear line between a utility token and a security token. Using suitable wording helps reinforce this distinction: speak of an “access key” or a “licence to use”, not of a “share of capital” or “remuneration”.
Why document the purpose of the token rigorously?
Recording precisely in the documentation the purpose and scope of use of the token makes it possible to show a clear intention. Stating expressly that the token may under no circumstances serve as an investment instrument strengthens your position before the competent authorities.
Including statements on the absence of dividends, of staking mechanisms linked to profit-sharing or of financial promises limits ambiguity during a review by the AMF or the tax authorities.
What are the regulatory and tax risks of reclassifying a token?
The legal framework attaches significant consequences to the reclassification of a token as a financial security. Once a digital asset is treated as a financial instrument, it falls outside the scope of the MiCA Regulation and comes under the MiFID II Directive and, in the case of a public offer, Regulation (EU) 2017/1129 on the prospectus. This imposes demanding requirements in terms of compliance, preparation of a prospectus, registration and supervision by the supervisory bodies.
From a tax perspective, tax reclassification changes the nature of the income received by holders. Instead of the capital gains regime for digital assets (crypto-assets) under Article 150 VH bis of the French Tax Code (CGI) (in French), the sums received may be taxed as investment income (revenus de capitaux mobiliers) or as capital gains on securities, with a direct impact on taxation. This situation creates significant uncertainty for issuers and investors.
What options are available if there is doubt about the classification of an asset tokenisation project?
Consulting the AMF at an early stage or requesting a tax ruling (rescrit) from the tax authorities is a preventive step: the tax authorities respond within three months to a written, precise and complete request from a taxpayer acting in good faith (Article L. 80 B of the French Tax Procedure Code (LPF) (in French)). This step leads to a contextual analysis of the project and provides official guidance on the classification applicable under French law.
Obtaining a clear position helps you anticipate future difficulties or disputes, and limit the risk of penalties linked to an irregular offer or a reporting error. Documenting every exchange and every change to the model improves the traceability of the choice made regarding the status of the digital assets.
When should the documentation and the issuance model be updated?
The regulatory context for crypto-assets and asset tokenisation changes regularly. The contractual documentation should be updated systematically whenever a relevant new statute or regulation comes into force, or when new administrative guidance or a court decision clarifies an uncertain technical point.
Building these updates into internal governance protects the issuer as much as the users of tokens already distributed. Relying on active legal monitoring is necessary to maintain the compliance and legal certainty of operations in this constantly changing field.
For assistance: crypto-asset lawyer.
