San Marino -- Securities Classification Regulatory Overview

San Marino has established a dedicated legal framework for Distributed Ledger Technology (DLT) assets, distinguishing itself from the broader European Union approach (like MiCA, which San Marino is not bound by, though it often aligns with European standards). The core legislation is designed to foster innovation while ensuring investor protection and market integrity.

The primary regulatory body is the Central Bank of the Republic of San Marino (Banca Centrale della Repubblica di San Marino - BCSM).

Legal Test for Securities Classification (Functional Approach)

San Marino does not explicitly use the U.S. Howey Test. Instead, its framework adopts a functional approach rooted in existing financial legislation, adapted for DLT assets. The key legislation is Delegated Decree No. 86 of 17 June 2020 (Decreto Delegato 86/2020) concerning the regulation of DLT assets and service providers, subsequently amended and consolidated by Delegated Decree No. 154 of 20 September 2021 (Decreto Delegato 154/2021).

Under this framework, tokens are classified primarily based on their economic function and the rights they grant. The DLT Law broadly defines "DLT Assets" and then categorizes them:

1. DLT Financial Instruments (Security Tokens): These are tokens that represent or embody existing financial instruments or confer rights economically equivalent to them. This category includes:

   • Transferable securities (e.g., shares, bonds, debentures, units in collective investment undertakings).
   • Money market instruments.
   • Units in collective investment undertakings.
   • Derivatives and other instruments that grant the holder rights to profits, dividends, interest, repayment of principal, or other financial returns.
   • Any token that, due to its characteristics or underlying rights, is primarily intended for investment purposes and is expected to yield a financial return.

2. DLT Utility Tokens: Tokens that grant access to a good or service, and whose primary purpose is not investment or financial gain.

3. DLT Payment Tokens (Cryptocurrencies): Tokens primarily intended to function as a medium of exchange, unit of account, or store of value, without conferring rights typically associated with financial instruments (e.g., Bitcoin, Ethereum, primarily used as currency).

The "Test": The "test" for determining if a token is a security is essentially:

• Does the token represent a traditional financial instrument? (e.g., tokenized shares of a company).
• Does the token confer rights that are economically equivalent to a financial instrument? (e.g., a right to a share of profits, dividends, or interest payments, making it an investment contract).
• Is its primary purpose to be an investment vehicle with an expectation of financial return?

If the answer to any of these questions is yes, it's likely classified as a DLT Financial Instrument (security token).

Which Tokens are Considered Securities

Based on the functional approach:

• Equity Tokens: Tokens representing ownership in a company (e.g., tokenized shares), entitling holders to voting rights, dividends, or a share of profits.
• Debt Tokens: Tokens representing a debt obligation (e.g., tokenized bonds), entitling holders to interest payments and principal repayment.
• Revenue Share Tokens: Tokens that entitle holders to a share of future revenues or profits from a project or company, even if not explicitly equity or debt.
• Fund Tokens: Tokens representing units or shares in an investment fund.
• Derivative Tokens: Tokens whose value is derived from an underlying asset, index, or rate, providing exposure to financial markets.

Not typically considered securities (unless their function changes):

• Pure Utility Tokens: Tokens granting access to a specific platform, service, or product within an ecosystem (e.g., a gaming token used only for in-game purchases), where the primary driver for purchase is consumption, not investment.
• Payment Tokens: Cryptocurrencies like Bitcoin or Litecoin, whose primary function is as a medium of exchange or store of value, without conferring specific financial instrument rights.

However, the line can blur, and the BCSM has the power to assess each token on a case-by-case basis based on its specific characteristics and the rights it confers.

Registration/Exemption Requirements for Token Issuers

For DLT Financial Instruments (security tokens):

1. "Qualified Operator" (QO) Status: Any entity that intends to issue DLT Financial Instruments, offer related services (e.g., custody, trading platforms, brokerage), or manage DLT assets on behalf of third parties, must first be authorized and supervised by the BCSM as a "Qualified Operator."
   • The authorization process is stringent, requiring a detailed business plan, robust governance, risk management policies, anti-money laundering (AML) and counter-terrorist financing (CTF) compliance, fit and proper assessments for management, and adequate technological infrastructure.
2. Prospectus Requirements: Issuance of DLT Financial Instruments to the public is generally subject to prospectus requirements, similar to traditional securities offerings. This means providing detailed information to potential investors about the issuer, the token, the underlying project, and associated risks.
   • Exemptions: Similar to traditional securities law, exemptions from prospectus requirements may apply for:
     • Small offerings below a certain threshold.
     • Offerings made exclusively to qualified investors.
     • Offerings to a limited number of persons.
     • Offerings where the total consideration is below a specified amount.
     • The issuer must still comply with other QO obligations and investor protection rules.
3. Ongoing Obligations: QOs issuing DLT Financial Instruments are subject to ongoing supervisory obligations, including reporting to the BCSM, maintaining adequate capital, robust cybersecurity measures, continuous compliance with AML/CTF, and safeguarding investor assets.

Secondary Trading Rules

Secondary trading of DLT Financial Instruments is also strictly regulated:

• Authorized Platforms: Secondary trading must occur on DLT trading platforms that are themselves authorized as Qualified Operators by the BCSM. These platforms are subject to stringent rules regarding market integrity, transparency, order execution, and investor protection.
• Market Abuse: Rules against market abuse (insider trading, market manipulation) apply to DLT Financial Instruments, mirroring those for traditional securities markets.
• Custody: Custody services for DLT assets, especially financial instruments, must be provided by authorized Qualified Operators who meet specific security, segregation, and operational requirements.

Enforcement Examples

San Marino's DLT framework is relatively new (dating back to 2020/2021), and as a small jurisdiction, specific public enforcement actions against crypto entities for security token violations are not as widely publicized as in larger markets.

However, the BCSM has clear enforcement powers under the DLT Law and general financial legislation. Enforcement would typically focus on:

1. Unauthorized Activity: Operating as a "Qualified Operator" (e.g., issuing DLT Financial Instruments, providing custody or trading services) without proper BCSM authorization.
2. Non-Compliance with Prospectus Requirements: Offering DLT Financial Instruments to the public without a valid prospectus or applicable exemption.
3. AML/CTF Violations: Failure to implement adequate AML/CTF controls by authorized QOs.
4. Investor Protection Breaches: Failure to adhere to rules designed to protect investors, including transparency, fair dealing, and conflict of interest management.
5. Market Abuse: Engaging in activities like insider trading or market manipulation involving DLT Financial Instruments.

Consequences of Non-Compliance: The BCSM can impose administrative sanctions, including fines, suspension of activities, revocation of licenses, and referral for criminal prosecution in serious cases. The focus is often on proactive supervision and preventing unauthorized or non-compliant activities from occurring in the first place through the rigorous authorization process.

Specific Legislation and Regulatory Guidance URLs

• Decreto Delegato 86 del 17 giugno 2020 (Delegated Decree 86/2020 - Original DLT Law):
  • https://www.bcsm.sm/site/home/normativa/normativa-settoriale-e-circolari-di-vigilanza/decreti-delegati.html (You'll need to navigate or search for DD 86/2020 on the BCSM site)
• Decreto Delegato 154 del 20 settembre 2021 (Delegated Decree 154/2021 - Amending and consolidating):
  • https://www.bcsm.sm/site/home/normativa/normativa-settoriale-e-circolari-di-vigilanza/decreti-delegati.html (Search for DD 154/2021 on the BCSM site)
• BCSM General Regulatory Framework for DLT: The BCSM website is the primary source for updated circulars and regulations regarding DLT assets and Qualified Operators.
  • https://www.bcsm.sm/site/home/normativa.html (Navigate to "Normativa Settoriale e Circolari di Vigilanza" and then "Decreti Delegati" or "Circolari")

It's important to consult the official, most up-to-date versions of these decrees and any subsequent circulars or regulations issued by the BCSM for the precise and current legal requirements. These are often available in Italian, with unofficial English translations sometimes provided by legal firms.