All important questions deserve a proper answer

When it comes to managing tokenized financial assets and rights, Token City covers the complete value chain:

• Security Tokens creation. Issuance and tokenization.

Investors can create their Security Tokens in two ways:

• Security Tokens Issuance.

Investing through the Equity Crowdfunding and Crowdlending Platform www.adventurees.com, which is authorized and supervised by the CNMV, investors will be able, automatically and at no cost, to receive the Security Tokens that represent the rights of their investment (credit rights and rights over the capital stock of companies).

• Financial asset tokenization.

Tokenizing existing financial assets such as loans, debt fund portfolios or other types of investments under management. In this case, Token City offers the tokenization service, which includes the economic and legal architecture of the Security Tokens, as well as the programming of the Smart Contracts that regulate their behavior.

• Managing the Security Tokens Blockchain infrastructure

Once created in the Smart Contract, the Security Tokens are sent to the Investor's Wallet or Custodian to allow for absolute control over their financial asset. In parallel, Token City facilitates the technological infrastructure to integrate the blockchain infrastructure in an automated way and monitor tokenized assets. As an example, the system allows for the synchronization of loan repayments with the "burning" of tokens in the Smart Contract, or having complete traceability of the total transactions that are taking place over each Security Token.

• Sale and transmission of Security Tokens

Investors holding Security Tokens can come to Token City to offer their Tokens to prospective buyers. Users can transact Security Tokens in a completely secure way through the platform, since users are offered a system where the payments made are stored in the European payment entity MangoPay, S.A.. Payments are not released to the counterparty until the Security Tokens have successfully reached their recipient.

• Marketplace as a Service (MaaS)

Larger Token City clientes can deploy their own Security Tokens platform under their own brand, using the Token City service and tailoring it to their specific processes and needs.

Token City investors will be able to provide their investments with greater liquidity, agility and efficiency.

In the case of small investors, they will be able to buy and sell Security Tokens in a completely safe and agile way.

Larger investors, funds, managing companies, investment services companies, etc., will be able to enjoy, in addition, a complete and customizable technological infrastructure, which they can tailor to optimize the added value provided to their own clients.

By virtue of the provisions of article 205.2 of the consolidated text of the Spanish Securities Market Law, the following types of clients will in any case be considered a professional client, insofar as they are not an eligible counterparty:

1. Financial entities and other legal entities that, in order to operate in financial markets, must be authorized or regulated by the State, whether or not it is a member of the European Union.
   They include:

1. Credit institutions,
2.  Investment services companies,
3. Insurance or reinsurance entities,
4.  Collective investment institutions and Management Companies of Collective Investment Institutions,
5. Venture capital entities, other closed-end collective investment entities and Management Companies of Collective Investment Entities,
6. Pension funds and their management companies,
7. Securitization funds and their management companies; and
8. Operators that regularly transact with raw materials and with derivatives of raw materials, as well as operators who transact on their own behalf and other institutional investors.

2. States and regional administrations, including public bodies that manage public debt at national and regional level, central banks and international and supranational bodies, such as the World Bank, the International Monetary Fund, the European Central Bank, the European Bank of Investments and others of a similar nature.
3. Entrepreneurs who individually meet at least two of the following conditions:

1. The total of their assets is equal to or greater than 20 million euros.
2. The amount of their annual turnover is equal to or greater than 40 million euros.
3. Their own resources are equal to or greater than 2 million euros.

4. Institutional investors who, not being included in letter a), have as their usual activity investing in securities or other financial instruments.

Together with the previous subjects, in which the "automatic" classification as a professional client applies, those retail clients who request it may be considered professional clients, after expressly waiving said consideration. In addition to submitting the corresponding request, the client must meet at least two of the three following requirements:

1. Having carried out transactions of significant volume in the relevant market of the financial instrument in question or similar financial instruments, with an average frequency of 10 per quarter during the previous four quarters.
2. That the size of their portfolio of financial instruments, made up of cash deposits and financial instruments, is greater than 500,000 euros.
3. Holding or having held, for at least one year, a professional position in the financial sector that requires knowledge of the operations or services provided.

Blockchain, or cryptographically secured “chain of blocks”, is a technology that is rapidly becoming popular due to the enormous advantages it brings to the digital economy, especially in terms of reliability and transparency.

Blockchain technology provides security to the transactions that take place between people or entities, since it allows transactions to be stored in an immutable record (it cannot be manipulated), distributed in multiple independent nodes (it cannot be censored or controlled by one central entity), transparent (it cannot be denied that a certain transaction has actually taken place) and autonomous (the parties can operate directly among themselves for greater privacy and security).

There are many types of tokens, which are usually classified according to their legal nature, their underlying value or the function they fulfill. The better known categories, which are not mutually exclusive, are the following:

• Cryptocurrencies

The Token is a currency. It is used just like money and can be used as a means of payment. Examples of cryptocurrencies are bitcoin or litecoin.

• Utility Tokens

The Token is a digital coupon that provides access to goods, services and/or functionalities.

• Security Tokens 

The Token is a representation of a financial right or asset or, in other words, an electronic title representing financial rights or assets in the real world. Security Tokens are the safest type of token there is. Unlike utility tokens or cryptocurrencies, they are backed by real assets, such as a credit right or company shares.

STOs, or Security Token Offerings, are issues of new Security Tokens that are usually done by companies seeking financing. In exchange for their investment, companies give investors Security Tokens representing rights such as credit rights or share ownership.

STOs have emerged as an evolution of ICOs (Initial Coin Offerings), because of the greater security and guarantee offered to investors by STOs, which are backed by real assets.

The issuance of securities is a regulated activity in most countries. Although the issuance of Security Tokens it is not specifically regulated in Spain, it is understood that if the Security Tokens issued represent financial assets considered securities, the issuance must be under the protection of article 35 of the Spanish Securities Market Law (art 35 LMV):

Article 35. Public offer for the sale or subscription of securities.

1. A public offer for the sale or subscription of securities is any communication to persons in any form or by any means that presents sufficient information about the terms of the offer and the securities being offered, so as to allow an investor to decide the acquisition of or subscription to these securities.

2. The obligation to publish a brochure will not apply to any of the following types of offers, which, consequently for the purposes of this law, will not be considered a public offer:
   1. An offering of securities aimed exclusively at qualified investors.
   2. An offer of securities addressed to less than 150 natural or legal persons by an EU Member State, not including qualified investors.
   3. An offer of securities aimed at investors who acquire securities for a minimum amount of 100,000 euros per investor, for each separate offering.
   4. An offer of securities whose nominal unit value is at least 100,000 euros.
   5. An offer of securities for a total amount in the European Union of less than 5,000,000 euros, which will be calculated over a period of 12 months.

3. In the case of placement of issues contemplated in letters b), c), d) and e) of the previous section, aimed at the general public using any form of advertising communication, it is required the intervention of an entity authorized to provide investment services for the purpose of trading the issued securities. This obligation will not apply to the exercise of the activity duly authorized of "participative financing platforms” [a regulated equity crowdfunding and crowdlending].
   According to what is stated in the previous paragraphs, the conditions of the issue vary depending on the profile of the investors to whom it is directed:
   
   Issuance of securities intended exclusively for qualified investors:
   As reflected in clause 2.a) of art. 35 LMV, the issuance of securities aimed exclusively at qualified or professional investors will not be considered a public offering, therefore it does not require a brochure or specific supervision from the CNMV.
   
   Issuance of securities intended for unqualified investors
   As stated in clauses 2. b), c), d) and e) and clause 3. of art. 35 LMV, the issuance of securities may be directed to unqualified investors, without a brochure or specific supervision of the CNMV, as long as an investment services company is involved or when it is carried out within the activity of duly authorized “participatory financing platforms” (a regulated Equity Crowdfunding and Crowdlending Platform).
   In this sense, and after consultation with the CNMV, “Participative Financing Platforms” are authorized to issue Security Tokens as long as they represent exactly one of the forms of financing indicated in Article 50 of the Spanish Law 5/2015 on the promotion of business financing:

Article 50. Forms of "participatory financing".

a) The issuance or subscription of obligations, common and preferred stock or other securities representing capital, when it does not require and does not have an informative issuance brochure referred to in articles 25 et seq. of the Spanish Law 24/1988, of 28 July on the Stock Market. In this case, the company issuing the securities will be considered to be the promoter. When non-accredited investors participate in the financing as defined in this title, the securities referred to in this section cannot incorporate an implicit derivative.

b) The issuance or subscription of shares in limited liability companies, in which case the limited liability company issuing the shares will be considered to be the promoter. 

c) The requests for loans, including crowdfunded  loans, in which case the borrowing individuals or legal entities will be understood to be the promoter.

For the issuance of Security Tokens through a “Participatory Financing Platform” (a regulated Equity Crowdfunding and Crowdlending Platform), the need for the intervention of an investment services company is excluded, in accordance with the provisions of article 35.3 of the LMV.
Adventurees Capital PFP, S.L., the Participative Financing Platform of Adventurees Group, authorized by the National Securities Market Commission, is the first and only platform in Spain issuing Security Tokens. Token City, also part of Adventurees Group, facilitates the subsequent purchase and sale of the Security Tokens issued through Adventurees Capital PFP S.L. (www.adventurees.com).

At the moment, Adventurees Capital, PFP, S.L. is issuing Security Tokens that exclusively represent credit rights from loans. These loans are “tokenized” in two possible formats:

Standard format, in which 1 Security Token is equivalent to the rights associated with each € 1,000 of the debt principal.

Advanced format, when investors have an additional right to convert their debt into share capital, in which 1 Security Token can be converted into 1 Share of the company.

For the purposes of their subsequent offer by investors on the platform, it is important to note that the Security Tokens issued through Adventurees Capital, PFP, S.L. do not represent negotiable securities or any other type of financial instrument.

Tokenization involves taking an existing financial asset and, using Blockchain technology, creating digital representations of that asset.

(Source: "ICOs and the tokenization of the economy" Work of Rafael del Castillo. Lawyer. Doctor of Law. Thomson Reuters. Aranzadi)

A Smart Contract is the software code that allows for the Tokenization of the financial asset. This code regulates how the Tokens are created, how they operate and how they are destroyed.

The tokenization of financial assets provides investors with numerous advantages in terms of agility, efficiency and liquidity. 

These are some of the advantages described by lawyer and doctor of law, Rafael del Castillo, in his work "ICOs and the tokenization of the economy":

1. It provides a disintermediated system of public and reliable record of transacted Security Tokens, which offers security, guarantees and cost reduction.

2. It provides liquidity to assets that tend to have low liquidity.

3. It democratizes access to all kinds of assets because it allows a group of investors to make their contributions to acquire an asset that would otherwise  be out of reach.

4. It allows a reduction in the risks associated with an investment by enabling diversified investments.

5. It represents a new method to finance all kinds of projects, also allowing partial tokenization of assets.

6. It allows for new models of joint ownership over assets thanks to fractional joint ownership as a result of tokenization.

7. It eliminates temporary and territorial barriers for investors. The ease of access and investment allows any investor from anywhere to access any investment in any local market.

No. The tokenization of financial assets is a purely technological activity, which consists of digitally recording pre-existing rights on the blockchain. Therefore, it does not require any type of license or specific regulation, whatever the legal nature, value or function of the Token to be created.

All types of assets. Although the subsequent activity of buying and selling said tokenized assets may, depending on their legal nature, be subject to the regulations of the stock market, as explained in the following questions.

The way and the extent to which securities market regulations affect the activity of buying and selling Security Tokens depends on:

1. the type of intermediation carried out by the platform;
2. the legal nature of the "cryptoasset"; and,
3. the characteristics of the sale offer.

Type of intermediation carried out by the platform 

In the Q&A document on activities and services of FinTech companies, the CNMV states the following:

Currently there is no specific regulation on so-called “cryptocurrency” trading platforms or other cryptoassets or their activity. However, the CNMV considers that this type of platform should, at a minimum, apply rules on custody or registration, management of conflicts of interest between clients and transparency in the matter of commissions, in addition to AML (anti money laundering) regulations. The CNMV recommends that these platforms voluntarily apply the principles of the securities market regulations relating to the aforementioned matters in order to guarantee their proper function.

The previous paragraph, nonetheless, refers only to a case in which the activity of the platform is focused on "cryptocurrencies" or other "crypto assets" that are not considered financial instruments. To the extent that the assets with respect to which these platforms carry out intermediation or trading activities must be considered financial instruments (in accordance with article 2 of the consolidated text of the Securities Market Law), the Spanish securities market regulation should apply.

Beyond the CNMV's own statement, in which it is recognized that there is no specific regulation on the matter, it is important to take into account that the type of intermediation carried out by Token City is less restrictive, in regulatory terms, than that of a trading platform, or exchange for cryptoassets.

First, because Token City does not provide cryptoassets custody, since they reside in the Custodian or Wallet of each investor. It's the investor who signs to allow the transaction with a third party. Token City does not perform any direct or indirect work in matters of clearing, liquidation or custody of the assets.

Secondly, Token City does not manage users' money. For this purpose it has established a strategic alliance with the European payment entity MangoPay S.A., which facilitates the completion of transactions between users.

Third, Token City does not determine the price of the assets. It's the investors themselves who determine the sale price and negotiate with other users. Token City does not stipulate any specific rule for its users regarding pricing.

Fourth, Token City does not multilaterally gather buying and selling requests. There is no matching of sell orders with purchase orders, either bilaterally or multilaterally. Users will be able to search for offers made and filter by categories, but recommendations that may be considered matchmaking or financial advice will never be made.

Ultimately, and most importantly, investors can offer and purchase their Security Tokens by themselves in a peer-to-peer logic. In this sense, more than a trading platform (exchange) for cryptoassets, Token City is a technology services company that is restricted to providing third parties with the technological infrastructure so that they can formalize their commercial transactions safely, fast and efficiently.

Based on this, Token City's activity falls outside the regulatory requirements that could affect exchanges or regulated markets. However, and in order to guarantee its proper function, Token City voluntarily applies rules on diligent platform management, transparency in terms of information and prices for the use of the service, in addition to AML regulations.

Legal nature of the cryptoasset

In any case, the purchase and sale of all those Security Tokens that do not represent Financial Instruments is outside the scope of application of the securities market regulations.

In this sense, Security Tokens representing credit rights in limited companies, both those issued through Adventurees Capital, PFP, S.L. as those created through the direct tokenization of funds or debt portfolios, do not represent Negotiable Securities or other types of Financial Instruments (in accordance with article 2 of the revised text of the Securities Market Law, which refers to the annex of the regulation itself).

The securities market regulations would be applicable in case of purchase and sale of those Security Tokens that can be considered Negotiable Securities or other types of Financial Instruments.

For this reason, part of the tokenization services provided by Token City is determining the legal nature of the cryptoasset that is to be created, in order to assess whether the securities market regulations apply to it and to what extent.

Characteristics of the offer

In the case of Security Tokens considered Financial Instruments, sale offers must be made under the protection of article 35 of the Securities Market Law (art. 35 LMV).

In accordance with this article, the following offers may be made, without the need for a brochure or specific supervision of the CNMV, among others:

1. Offers aimed exclusively at Qualified Investors.
2. Securities offers for a total amount in the European Union of less than 5,000,000 euros, which will be calculated over a period of 12 months, provided that an Investment Services Company intervenes in the issuance of the Offer.
3. Offer of securities whose nominal unit value is at least 100,000 euros, or aimed at investors who acquire securities for a minimum amount of 100,000 euros per investor, for each separate offering. In this case, as in the previous case, an Investment Services Company must intervene in the issuance of the Offer.

The Spanish Law 10/2010, of April 28, on the prevention of money laundering and terrorist financing (hereinafter, the "LPBCFT"), in accordance with European legislation and other international regulations, establishes a series of obligations to certain natural or legal persons, whose activity is likely to be used for money laundering or terrorist financing.

The purpose of the LPBCFT is to protect the integrity of the financial system and other sectors of economic activity by establishing certain obligations.

Token City is an intermediary for the purposes of Law 34/2002 on Information Society Services, which through its web platform connects users who want to sell or purchase tokenized digital assets on blockchain, and provides escrow accounts for the transmission of the payment, in order to guarantee the reception of the Tokens. This Escrow payment system is enabled on the platform through the services offered by Mango Pay S.A., a regulated Electronic Money Entity that provides escrow account services through API interconnection with the Token City platform.

In this sense, the activities developed by Token City do not coincide with the activities listed in the second article of the LPBCFT that determine which entities are considered obligated subjects. Likewise, the API interconnection with the Electronic Money Entity does not make Token City an obligated subject. The Electronic Money Entity is the obligated subject, without prejudice to the information that must be sent via API to the Electronic Money Entity so that it can comply with its obligations regarding Money Laundering.

However, the activities carried out by Token City are close to or have some kind of relationship with activities that are included in the money laundering regulations. In particular, although the Token City platform only acts as an information society service provider, it facilitates the peer-to-peer transmission of tokenized digital assets on the blockchain.

On the other hand, the new 5th Directive on Money Laundering has included in the list of obliged subjects those platforms that exchange crypto assets for fiat money and those entities that are considered to be a provider of cryptowallets. Token City does not carry out any of these activities, and is therefore not an obligated subject, but according to the Considerations of the 5th Directive, it is the legislator's interest to have control over activities related to cryptoassets due to their intrinsic risk, as well as indicated in the latest proposal made by the European Parliament to regulate the cryptoassets market (MiCA Regulation).

Therefore, even though Token City is not an obligated subject for the purposes of the LPBCFT, Token City's activities are closely related to risky activities in financial matters. It is Token City's decision to adhere to the good practices and due diligence measures for activities related to means of payment established by the SEPBLAC.

In this sense, in order to voluntarily comply with the obligations set forth in the regulation, Token City has developed an "Internal Protocol on the prevention of money laundering and terrorist financing" (PBCFT), by virtue of which all Token City members must, in any case, comply with the following principles:

1. Always act diligently, taking extreme precautions in the event of suspicious transactions and in accordance with good faith;
2. Refrain from initiating business relationships with clients in violation of the Client Admission Policy established in the PBCFT;
3. Notify the Internal Control Body of any operation that may be considered suspicious;
4. Cooperate with the Internal Control Body in all its requests;
5. Maintain confidentiality in relation to the measures adopted in the prevention of money laundering and terrorist financing and, specifically, not disclose to clients or third parties the actions of analysis of operations or communications that take place.

Yes, in order to segment the portfolio of clients and users of the Token City Platform and according to risk management criteria, based on the different profiles and nature of users and in accordance with international standards, logic and good practices, Token City establishes a gradual policy of admission, identification and knowledge of clients, which includes the types of clients whose activities could present a greater risk of being related to money laundering or terrorist financing and that determines the specific actions to be carried out, through the application of due diligence measures and, where appropriate, the application of reinforced and/or additional internal control measures.

All employees, collaborators and the Platform itself must apply and respect the customer admission policy prior to the start of the business relationship or registration on the Platform, as well as the diligence measures assigned to that level of risk that is detailed in the "Internal Protocol on the prevention of money laundering and financing of terrorism."