Disclaimer : This article does not constitute as a legal advice, nor does it or should it replace the advice of a qualified lawyer. The author is not responsible for the wrong application or the misunderstanding of this article. Even if the reader thinks he understands the article, the author is still not responsible for any erroneous application.

I have been involved with writing white paper for blockchain projects for Initial Coin Offerings & Token Generation Events for various jurisdictions now.

I have come out with a framework that anyone can use to craft their own Initial Coin Offerings.

I have found out that most people when they get into trouble with the law where ICOs are concerned, it is mainly because they do not understand or know the basic framework of the laws surrounding coin offering or blockchain assets in general.

Assets and its Governing Principle : Magna Carta

Little known legal principle that business people do not understand how the principle is applied in blockchain assets, technology people do not know or understand at all, and the lawyers are having a hard time understanding digital assets and do not know how to explain to the first 2 groups of people.

In 1215 AD, Magna Carta was first drafted as a document that curtails the rights of the King vs the Barons, who want their rights protected against the King. After alot of misadventure, it became the cornerstone of nearly every democratic nation.

Part of Magna Carta focuses on personal property rights. It is a sacred rights that even the Head of State cannot violate. Magna Carta has become codified in one way or the other in the constitution of commonwealth countries. Even for non commonwealth countries, as long as they are a functioning democracy with a elected parliament basically all functioning democracies codify the personal property rights as a sacred rights that no government can circumvent.

Therefore, it has been observed in all democratic countries, there has been no outlawing of Bitcoins or any other digital currencies. Mostly because these governments are restricted in that they cannot restrict personal property rights. This is the red line that they cannot cross.

However, all democratic governments can choose to regulate the ownership of personal property without crossing the red line of affecting or violating personal property rights. The act of regulation would of course entail the various Know Your Customer (KYC) and Anti Money Laundering (AML) that are adopted on varying degrees in different jurisdiction.

There are contention as to whether digital assets can be considered as asset in the traditional sense that requires and therefore legitimizes the use of Magna Carta (or its related principles especially where it deals with personal property rights) in its protection. There are people who argue that digital assets like Bitcoin are intangible and not physical and therefore does not afford the same protection under Magna Carta (or its related principles).

However, as far as the exercise of the law, one does not need to go far. After all, a lot of jurisdictions require the supporting of the defense from precedences in the court of law. There are ample cases in which intellectual property is being judged in numerous court of laws in numerous jurisdictions – bulk of the intellectual property in question is hardly physical in nature at all.

We got to understand the nature of intellectual property as it is formless and intangible and in most cases they are not physical. A book’s copyright is not encoded in the physical asset that contains the content – the content is the intellectual property, the content is not a physical asset (though being put on a book as a medium), yet the content is protected under the law as intellectual property rights.

The content exists independently of the physical form that holds it. Long story short, the physicality of an asset is not a necessary condition to judge whether a non physical asset is excluded under the rights endowed by Magna Carta (or its related principles in various jurisdiction).

As far as the Constitution of most countries are concerned they cannot interfere with personal property rights and they certainly cannot interfere with what form of property the free market and free acting citizens deem to be valuable. The government can interfere if there is material misrepresentation of the asset in question – fraudulent representations, but they cannot interfere if there is no material misrepresentation.

The other influences government can have on asset ownership is when this asset is almost interchangeable with money. While the government cannot cross the red line where personal property rights are concerned, they do however have laws on money (more properly handled in the next section) and its transference.  In America, this set of laws is listed under Fincen. So far the Americans that have been jailed for Bitcoin are all convicted under Fincen related offences. Mainly not knowing who the asset has been transferred to.

Securities as an Asset Class

From the principle standpoint, Magna Carta also extends the personal property rights to Securities (Securities are like shares and bonds) as well. There is however a marked difference between Securities as an Asset class as compared to any other asset classes like Chairs, Tables, Bananas, Rice, etc. The nature of the difference is so huge is that now regulatory actions by various jurisdiction are on whether an issued blockchain token has securities features.

Securities are the only asset class that can be created out of human volition. Created out of thin air. Securities regulated under the respective Companies Act (or its equivalent in different jurisdictions, like in Australia it is called Corporations Act) can issue new shares or new bonds just via a General Meeting. Merely a voting process is required to create papers out of thin air and can be sold in the capital markets for money. It is as near as you can get from nothing to something.

The rest of the asset class require “work”, “raw materials” before they can be made into existence. For example, a chair, which requires wood and workmanship. A banana, requires the seed, the deployment of farmland and also time to farm and harvest it. The rest of the asset class are regulated by God / Nature, and needs no further human regulation via government intervention.

To understand how serious this is, one has to go back to history to understand why major jurisdictions want to regulate this.

In the 18th century France, King Louis XIV’s long reign and huge expenses on war has bankrupted the whole country.

When the crown was passed over from King Louis XIV to King Louis XV, the French crown owned the french massive amount of money.

The King engaged the assistance of John Law, who basically printed a lot of shares for the Mississippi Company. They then told the people that their debt can be repaid via the shares certificate of this company.

It was told to the French people that the The Mississippi Company had a monopoly on trade and mineral wealth. French people were told also that the Mississippi Company was granted a trade monopoly of the West Indies and North America by the French government.

The French people, without knowing further, thought that this Mississippi Company had a lot of value. They agreed to have their debt repaid by having it paid by shares in this company. 

In August 1717, John Law basically helped King Louis XV to repay all the debt incurred by his predecessor in massive war expenses. The debt was completely paid for via printing of shares certificate. An action that did not cost King Louis XV or John Law anything – the action was effectively free of charge.

With the stroke of the pen, the royal debt was settled.

King Louis XV was so happy that royal titles were slapped on John Law. John Law was conferred the title of Duke of Orleans, and also the regent for the young King Louis XV.

This was actually not the end.

Even after the debt is repaid, the Mississippi Company continued to print new shares and selling them to innocent French people. The price per share rose from an initial 0.01 livres to a dizzying height of 15,000 livres. The share price increased by a whooping 1,500,000 times when compared to its initial share price.

Eventually as more french found out that the Mississippi Company did not really have that much business activity or profits to justify its value, the share price plummeted from a dizzying height of 15,000 livres to be completely worthless.

This action is not without its opportunity cost. Fast forward a few more decades, France never allowed any innovative finance to take place, setting itself to be very backward in financial & capital structuring for the whole country’s growth. It remained in relative poverty and in less than a 100 years, the French Royalty was removed and decapitated in a violent revolution and Napoleon became King of France. The birth of french nationalism.

Earlier in the European history, there was another case of Securities laws affecting the rise and fall of Empires.

Before the year of 1588, Spain was in control of the seas. Unfortunately, in the year of 1588, it waged a war against England. Long story short, Spain suffered great damages, and a lot of sailors died. During the years from 1588 till 1600, basically the Spanish fleet reduced in power and number.

During these years, various European countries were competing against the main players in the seafaring. With Spain beaten, it provided a space of expansion, and the Dutch way of competing was via the capital market.

In the year of 1602, the Dutch were the first to leverage on the listed stock market to build its fleet of ships for massive expansion. It issued shares to shareholders and in exchange, they raised the money they needed to build big numbers of ships.

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In the 17th and 18th centuries the Dutch East India Company was the largest commercial enterprise in the world, with a fleet of more than a hundred ships, thousands of employees, dozens of offices in Asia, and six establishments in the Netherlands. The ships launched by Dutch East India Company far superseded all the other European fleets.

The main difference was how it raised its funding. Compared to the rest of the European countries which basically raised their funding through their Kings & Queens. Granting that the Kings and Queens were comparatively more well off compared to the rest of the citizens, the countries with no stock exchange could not raise any part of the needed capital from its citizens. Dutch East India Company had the means of raising funding from the public – It had access to more capital compared to those countries with no stock exchanges.

Before this financial innovation of stock market is invented, the major means of how countries raised the funding for international competition was to impose tax on its citizens or maybe via the private balance sheet of the Kings & Queens. This means of fund raising was not only limited and it was damaging on the country’s morale when taxation was high – the French revolution was partially caused by excessive taxation, creating a domino effect of massive wars and changes on the European continent. Took down the Hasburg Empire and setting the seed for World War I and World War II.

Now we shall turn our attention to United Kingdom. It was only 200 years after the Dutch that they had a stock exchange. United Kingdom not only created a stock market but it also liberalized the easy incorporation of Company. That allowed many small enterprises to be setup and some small fund raising could be done. Compared to the rest of Europe, they did not liberalize that part fast enough and lost the global competition to the United Kingdom.

At the head of the industrial revolution, the steam engine was invented. As a means of production, it was a fabulous innovation which attracted funding. United Kingdom made it easier for small companies to raise funding. Of course this reason was merely one small reason among the many factors why United Kingdom became the Kingdom the sun never set.

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The steam engine enterprises were formed to create products that everyone needed. United Kingdom’s manufacturing capabilities was so strong that it was manufacturing cotton for its own soldiers and ironically also for enemy soldiers. The production capacity was so large that it produced weapons to compete globally for military conquests.

United Kingdom became even more powerful than the Dutch. It became a global superpower all the way till 20th century’s World War II. 300 years of global domination rooting from legislating how capital markets may function in its own country – allowing small companies to raise money not just from the public stock market but from private individuals as well.

During the 1830s, British ships were approaching and eyeing China. Just before the Opium War (1839–1842) was fought, Emperor Dao Guang of China was reputed to have said that England was a small country. He was thinking how could United Kingdom be compared with a great empire like China? Emperor Dao Guang even thought that it was an insult fighting such a small country.

However, it was this small country that defeated China during the Opium War. With a relatively small fleet and obviously technologically more advanced canons, it brought China to its knees.

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What Emperor Dao Guang did not know about this small country, was that United Kingdom was leveraging on the capital market for capital to fight the war against China. At that point of time, China’s capital market was non existent. By leveraging on the capital market and utilizing more citizens’ wealth than China, it was able to rise from a small size and toppled a big country like China.

In 1842, the Treaty of Nanking was signed to end the first Opium War. The Treaty of Nanking was very insulting and disadvantageous to China. Hong Kong was ceded to United Kingdom – a testimony to the power of the capital market, a dwarf who used the capital market brought a giant down to its knees. The irony is that Hong Kong during the United Kingdom governing it, became the symbol of capital market in Asia. Hangseng remains one of the major stock markets in the whole world till this date.

United Kingdom’s global domination lasted till World War II. During World War II, Germany greatly weakened United Kingdom in Europe and Africa. Japan greatly weakened United Kingdom in Asia. After World War II, United Kingdom slowly faded away. While remaining as one of the major powers in the world, it no longer possesses the power possessed previously by the Empire the sun never set.

This was after 200 years of global domination. Partially from how it legislates how capital market may function in their own countries. By leveraging on the capital market, countries grew from a relative backwater to powerful countries conquering the most parts of the world via their publicly funded companies. When they did not leverage on the capital market, they faded into the insignificant corners of our global world history.

Laws about Securities had in the past few hundred years have changed. Mainly to avoid the pitfalls of Securities being dishonestly issued, or even if honestly issued there are implications to the country and society in general. Under-disclosed / undisclosed details about a business can also cause citizens to invest excessively to their own detriment. It is with this in mind that we would be creating a holistic framework of how blockchain tokens would be seen under the historical trend and how the law would look at them.


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