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The Regulation on Markets in Crypto Assets (MiCAR) is set to reach a significant milestone on 30 June 2024, with the provisions concerning stablecoins coming into effect. This brief explores the recent updates regarding Level 2 and Level 3 measures under MiCAR. MiCAR Overview MiCAR, an EU Level 1 legislative measure, establishes and harmonizes the regulatory framework for issuers and offerors of crypto-assets and crypto-asset service providers (CASPs). This regulation is directly effective across the European Union and fills the regulatory gaps not covered by existing EU financial services regimes. Implementation of MiCAR The implementation of MiCAR involves multiple EU Level 2 and Level 3 legislative measures, including Regulatory Technical Standards (RTS), Implementation Technical Standards (ITS), and Guidelines. Level 2 Measures: MiCAR authorizes the European Commission to issue delegated acts autonomously. Additionally, it mandates the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), sometimes in collaboration with the European Central Bank (ECB), to develop RTS and ITS for subsequent adoption by the European Commission. These standards provide detailed requirements for the effective application of MiCAR. Level 3 Measures: Level 3 measures encompass the development of Guidelines by EBA and ESMA. These Guidelines add clarity and direction to specific aspects of MiCAR. Key Regulatory Bodies and Their Roles European Commission: Empowered to create delegated acts and adopt RTS and ITS developed by EBA and ESMA. European Banking Authority (EBA): Responsible for drafting RTS and ITS, particularly in areas requiring technical expertise and financial oversight. European Securities and Markets Authority (ESMA): Shares responsibility with EBA in developing technical standards and producing Guidelines. European Central Bank (ECB): Collaborates with EBA and ESMA where necessary, particularly on matters impacting financial stability and the broader economic environment. European Commission Delegated Regulations Supplementing MiCAR On 30 May 2024, the European Commission published several Delegated Regulations in the Official Journal, which supplement MiCAR. These regulations specify various operational and procedural aspects for the oversight and regulation of crypto-assets, particularly significant asset-referenced tokens (ARTs) and e-money tokens (EMTs). The regulations will become effective on 19 June 2024. Specific Delegated Regulations Commission Delegated Regulation (EU) 2024/1503: it outlines the fees charged by the European Banking Authority (EBA) to issuers of significant ARTs and EMTs. Commission Delegated Regulation (EU) 2024/1504: it details the procedural rules for the EBA's authority to impose fines or periodic penalty payments on issuers of significant ARTs and EMTs. Commission Delegated Regulation (EU) 2024/1506: it specifies criteria for classifying ARTs and EMTs as significant. The criteria include factors such as market size, transaction volume, and systemic importance. Commission Delegated Regulation (EU) 2024/1507: it outlines the criteria and factors to be considered by the European Securities and Markets Authority (ESMA), the EBA, and competent national authorities (e.g., the Central Bank of Ireland) in relation to their intervention powers. EBA Final Reports On 7 May 2024, the European Banking Authority (EBA) published four final reports detailing regulations for market access by issuers of asset-referenced tokens (ARTs) and those seeking significant influence through qualifying holdings. Final Reports on Market Access 1. RTS on information required for applicants seeking authorisation to offer and trade ARTs: The Regulatory Technical Standards (RTS) specify the information required from applicants seeking authorization to offer and trade ARTs. Notably, the RTS clarify that: Applicants must be legal entities or undertakings established within the EU. The authorization pertains only to public offerings or admissions to trading, not to issuance itself. Only issuers can apply for and be granted authorization. 2. ITS on information required for authorisation application: The Implementing Technical Standards (ITS) provide further details on the information requirements for authorization applications, including standardized forms, templates, and procedural guidelines. 3. RTS on information for assessment of a proposed acquisition of qualifying holdings in issuers of ARTs: These RTS outline the information for assessing proposed acquisitions of qualifying holdings in ART issuers. Required information includes: Identity and background of the acquirer. Financial soundness and past convictions of the acquirer. The acquirer's management body must have good repute, knowledge, skill, and experience. 4. RTS on the approval process for white paper of ARTs issued by credit institutions: These RTS harmonizes the approval process for white papers issued by credit institutions. Governance, Conflicts of Interest, and Remuneration Reports On 6 June 2024, the EBA released three final reports addressing governance, conflicts of interest, and remuneration policies for issuers under MiCAR. 1. Guidelines on the minimum content of the governance arrangements for issuers of ARTs: The guidelines specify the minimum content for governance arrangements, emphasizing proportionality and sound risk management, including risks related to money laundering, fraud, cyber threats, and compliance. 2. RTS on Remuneration Policies: These RTS define the main governance processes and policy elements for the remuneration of significant ART issuers and electronic money institutions. 3. RTS on Conflicts of Interest: The RTS provide detailed policies and procedures for identifying, preventing, managing, and disclosing conflicts of interest, particularly those related to asset reserves. They align with frameworks under Directive 2014/65/EU (MiFID) and Directive 2013/36/EU (CRD), tailored for ART issuers. Prudential Requirements Reports On 13 June 2024, the EBA published six further reports covering own funds, liquidity, and recovery plans. 1. Guidelines on Recovery Plans: These guidelines specify the format and content of recovery plans, including governance, recovery options, and communication strategies. 2. RTS on Liquidity Management: These RTS outline the content and procedures for liquidity management policies, drawing from Basel Standards and adapting them to the crypto-asset context. 3. RTS on Highly Liquid Instruments: These RTS identify financial instruments with minimal market, credit, and concentration risks, incorporating standards from the UCITS Directive and LCR Delegated Regulation. 4. RTS on Liquidity Requirements for Reserve Assets: These standards specify the liquidity requirements for reserve assets, considering international regulatory frameworks and reports on crypto activities. 5. RTS on Own Funds Adjustment Procedure: These RTS detail the procedures and timeframes for adjusting own funds to 3% of the average reserve assets for significant ART issuers, as outlined in MiCAR Articles 43 and 44. 6. RTS on Stress Testing and Own Funds Requirements: These RTS provide criteria for competent authorities to assess the need for issuers to increase own funds, applying to both ART and EMT issuers. Next Steps The EBA’s draft RTS will come into force 20 days after publication in the Official Journal of the European Union. The Guidelines will apply two months after the publication of all translations on the EBA website. ESMA Final Reports on MiCAR Implementation First Final Report on MiCAR (25 March 2024) On 25 March 2024, ESMA released its first final report on MiCAR, focusing on several key areas to ensure comprehensive regulatory oversight and investor protection. The report includes proposals on: 1. CASP Authorisation: The report outlines the information requirements for CASPs seeking authorization to operate within the EU. This includes criteria that CASPs must meet to obtain and maintain their licenses, ensuring they comply with the necessary regulatory standards. 2. Notification by Financial Entities: Financial entities intending to provide crypto-asset services must notify their intent. The report specifies the notification process, ensuring that these entities provide all necessary information to the relevant authorities before commencing operations. 3. Acquisition of Qualifying Holdings: The report details the assessment criteria for the intended acquisition of qualifying holdings in a CASP. This includes evaluating the financial soundness, reputation, and suitability of the acquirer to maintain the integrity and stability of the crypto-asset market. 4. Complaint Handling by CASPs: The report proposes requirements for CASPs to effectively address and resolve complaints from investors and consumers. Second Final Report on MiCAR (31 May 2024) On 31 May 2024, ESMA published its second final report on MiCAR, focusing on rules concerning conflicts of interest for CASPs. This report includes Regulatory Technical Standards (RTS) to provide a clear framework for identifying, managing, and disclosing conflicts of interest. 1. Conflicts of Interest Policies and Procedures: The RTS set forth requirements for the policies and procedures CASPs must implement to identify, prevent, manage, and disclose conflicts of interest. These requirements take into account the scale, nature, and range of crypto-asset services provided by CASPs, ensuring that all potential conflicts are adequately addressed. 2. Disclosure Methodology: The report outlines the methodology for the content of conflict of interest disclosures. This includes specific details on how CASPs should disclose conflicts to ensure transparency and inform investors and stakeholders about potential issues. Prokopiev Law Group provides extensive legal support to ensure your compliance with MiCAR and other global regulations. Our expertise spans key crypto jurisdictions, including the EU, the US, Singapore, and Hong Kong. We are well-versed in navigating complex regulatory landscapes, covering areas such as CASP authorization, conflict of interest management, and liquidity requirements. With our global network of partners, we ensure your project is compliant worldwide. Contact us for tailored advice on developing a legal strategy for your Web3 project. For more information, write to us today. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

How do electronic money (e-money) and electronic money tokens (EMTs) differ, and what are the regulatory frameworks governing them within the European Economic Area (EEA)? Definition and Regulation of E-Money Tokens (EMTs) E-Money Tokens (EMTs): EMTs are a specific type of crypto-asset, their value typically pegged to a single fiat currency such as the Euro or US Dollar. These crypto-assets represent digital value or rights that can be transferred and stored electronically through distributed ledger technology (DLT) or similar systems. DLT operates as a synchronized information repository shared across multiple network nodes. Regulatory Framework: The Markets in Crypto-Assets Regulation EU 2023/1114 (MiCA) outlines stringent conditions for the issuance of EMTs. Key points include: EMTs can only be issued by credit institutions or Electronic Money Institutions (EMIs) regulated by an EEA regulator. MiCA came into effect in June 2023 and will be fully applicable from December 30, 2024. Issuer Obligations Under MiCA: Prudential, Organizational, and Conduct Requirements: Issuers must adhere to specific prudential standards, organizational requirements, and business conduct rules, including: Issuing EMTs at par value. Granting holders redemption rights at par value. Prohibiting the granting of interest on EMTs. White Paper Requirements: Issuers are mandated to publish a white paper with detailed information such as: Issuer details: Name, address, registration date, parent company (if applicable), and potential conflicts of interest. EMT specifics: Name, description, and details of developers. Public offer details: Total number of units offered. Rights and obligations: Redemption rights and complaints handling procedures. Underlying technology. Associated risks and mitigation measures. Significant e-money tokens (EMTs) are subject to higher capital requirements and enhanced oversight by the European Banking Authority (EBA). Significant EMTs are defined as those which can scale up significantly, potentially impacting financial stability, monetary sovereignty, and monetary policy within the EU. The EBA mandates that issuers of significant EMTs hold additional capital reserves. Specifically, significant issuers must maintain capital that is the higher of either €2 million or 3% of the average reserve assets. The EBA monitors these issuers closely, requiring detailed reports on their financial health and risk management practices. Issuers of significant EMTs must also adhere to comprehensive reporting obligations. They need to provide regular updates on their liquidity positions, stress testing results, and compliance with redemption obligations. Definition and Regulation of Electronic Money Electronic Money (E-Money): E-money is defined as electronically or magnetically stored monetary value representing a claim on the issuer. Its characteristics include: Issued upon receipt of funds for the purpose of payment transactions. Accepted by entities other than the issuer. Not excluded by Regulation 5 of the European Communities (Electronic Money) Regulations 2011 (EMI Regulations). Exclusions Under Regulation 5: The EMI Regulations exclude monetary value stored on specific payment instruments with limited use and monetary value used for specific payment transactions by electronic communications service providers. Electronic Money Institutions (EMIs): An EMI is an entity that has been authorized to issue e-money under the EMI Regulations, which is necessary for any e-money issuance within the EEA. Comparative Analysis of E-Money and EMTs Definition: E-Money: Electronically stored monetary value represented by a claim on the issuer. EMTs: Crypto-assets whose value is usually linked to a single fiat currency. Issuers: E-Money: Issued by EMIs upon receipt of funds for making payment transactions. EMTs: Issued by EMIs and/or credit institutions. Legal Regime: E-Money: Governed by the European Communities (Electronic Money) Regulations 2011. EMTs: Governed by MiCA. Status: E-Money: Not necessarily an EMT, but can be depending on how it is transferred and stored. EMTs: All EMTs are also considered e-money. To ensure compliance with the latest regulations and navigate the Web3 legal landscape, please contact Prokopiev Law Group. Our expertise in cryptocurrency law, smart contracts, and regulatory compliance, combined with our extensive global network of partners, guarantees that your business adheres to both local and international standards. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The European Union has enacted a regulation on artificial intelligence (AI) designed to stimulate innovation, ensure the trustworthiness of AI systems, and safeguard fundamental rights (the Regulation or the AI Act). This Regulation provides standardized rules and responsibilities for providers, deployers, and users of AI systems within the EU. It also extends to third-country entities whose AI systems impact the EU market or individuals within the EU. Additionally, the Regulation establishes governance structures, enforcement mechanisms, and penalties for non-compliance at both EU and national levels. Legal Basis and Scope The AI Act is established on the foundation of Articles 16 and 114 of the Treaty on the Functioning of the European Union (TFEU). It aims to improve the internal market by creating a legal framework specifically for the development, market placement, and usage of artificial intelligence (AI) systems within the Union. Uniform Legal Framework AI systems can be deployed across various sectors and regions and easily circulate throughout the Union. Diverging national rules can fragment the internal market and reduce legal certainty for operators. Therefore, the AI Act ensures a consistently high level of protection across the Union, promoting trustworthy AI while preventing obstacles to free circulation, innovation, deployment, and uptake of AI systems. Complementarity with Existing Laws The Regulation complements Union laws on data protection, consumer protection, fundamental rights, employment, and product safety. It does not affect the rights and remedies such acts provide, including compensation for damages and social policy laws related to employment and working conditions. Exclusions AI systems developed solely for scientific research and development are excluded from the Regulation's scope until market placement or service provision. Additionally, AI systems for military defense or national security purposes are excluded. However, if these systems are used for civilian purposes, they must comply with the AI Act. Data Protection Compliance The Regulation complements existing data protection laws, ensuring AI systems processing personal data adhere to the General Data Protection Regulation (GDPR) and other relevant regulations. It does not seek to alter the application of existing Union laws governing personal data processing but rather facilitates the effective implementation and exercise of data subjects' rights and remedies. Third-Country Entities The Regulation applies to AI systems that are not placed on the market within the European Union but whose outputs are utilized within the Union. This includes scenarios where: Contractual Agreements: An operator based in the EU contracts services involving AI systems from an operator established in a third country. The AI system processes data lawfully collected within the EU and transfers the output back to the EU operator for utilization within the Union. Impact on Individuals: The AI Act applies to AI systems used in a third country that produce outputs affecting individuals within the EU, regardless of the system's physical location or the operator's establishment. The Regulation does not apply to public authorities of third countries or international organizations when acting within the framework of cooperation or international agreements concluded at the Union or national level for law enforcement and judicial cooperation. These entities are exempted provided they offer adequate safeguards for the protection of fundamental rights and freedoms. This includes: Bilateral Agreements: Agreements established between Member States and third countries or between the EU, its agencies, and international organizations. Adequate Safeguards: The relevant authorities assess whether these agreements include sufficient safeguards for the protection of fundamental rights and freedoms. Prohibited AI Practices 1. Manipulative Techniques AI systems that employ subliminal components or other manipulative techniques designed to distort human behavior in a manner that causes or is likely to cause significant harm are strictly prohibited. These manipulative techniques include but are not limited to, the use of stimuli beyond human perception to nudge individuals towards specific behaviors, significantly impairing their autonomy, decision-making, and free choice. 2. Exploitation of Vulnerabilities AI systems that exploit the vulnerabilities of specific groups due to their age, disability, or social and economic conditions, resulting in behaviors that materially distort their actions and cause significant harm, are banned. This includes AI systems that exploit individuals' lack of understanding or capacity to resist specific influences, leading to detrimental outcomes. 3. Social Scoring by Public Authorities AI systems utilized by public authorities for social scoring, which leads to discriminatory outcomes or unjustly limits individuals' access to essential services, are prohibited. For example, systems that evaluate or classify individuals based on their social behavior, personal characteristics, or predicted behavior across various contexts, resulting in detrimental treatment unrelated to the original data context. 4. Remote Biometric Identification in Public Spaces for Law Using real-time remote biometric identification systems in publicly accessible spaces for law enforcement purposes is generally prohibited. Exceptions are strictly limited to narrowly defined situations where such use is necessary to achieve a substantial public interest that outweighs the risks. These situations include: Locating or identifying missing persons, including victims of crime. Preventing imminent threats to life or physical safety, such as terrorist attacks. Identifying perpetrators or suspects of serious criminal offenses listed in an annex to the AI Act, where the offense is punishable by a custodial sentence of at least four years. The use of such systems must be subject to prior judicial or independent administrative authorization, except in cases of urgency where obtaining prior authorization is impractical. In such urgent cases, the use must be limited to the minimum necessary duration, and the reasons for not obtaining prior authorization must be documented and submitted for approval as soon as possible. 5. Biometric Categorization and Emotion Recognition AI systems used for biometric categorization, which assign individuals to specific categories based on biometric data, are prohibited if they result in discrimination or harm fundamental rights. Additionally, AI systems intended for emotion recognition in sensitive contexts such as workplaces or educational settings are banned due to their potential for misuse and the significant privacy risks involved. Risk Assessment and Mitigation Providers and deployers of AI systems must conduct risk assessments to ensure their systems do not fall into the prohibited categories. This includes evaluating the potential impact on individuals' autonomy, decision-making, and fundamental rights. Transparency and accountability measures must be in place to ensure compliance with these prohibitions, including maintaining documentation of AI system design, development, and deployment processes, allowing for effective monitoring and enforcement by relevant authorities. High-Risk AI Systems 1. General Criteria for Classification of High-Risk AI Systems An AI system is classified as high-risk if it meets specific conditions relating to safety components and conformity assessments. These conditions are detailed with reference to the Union harmonization legislation listed in Annex I of the Regulation. The legislation includes: Regulation (EC) No 300/2008: Concerning the safety and security of civil aviation. Regulation (EU) No 167/2013: Regarding the approval and market surveillance of agricultural and forestry vehicles. Regulation (EU) No 168/2013: Relating to the approval and market surveillance of two- or three-wheel vehicles and quadricycles. Directive 2014/90/EU: On marine equipment, ensuring the compliance of equipment used on EU ships. Directive (EU) 2016/797: On the interoperability of the rail system within the European Union. Regulation (EU) 2018/858: On the approval and market surveillance of motor vehicles and their trailers, and systems, components, and separate technical units intended for such vehicles. Regulation (EU) 2018/1139: Establishing common rules in the field of civil aviation and establishing a European Union Aviation Safety Agency. Regulation (EU) 2019/2144: On type-approval requirements for motor vehicles and their trailers, and systems, components, and separate technical units intended for such vehicles, with a focus on general safety and the protection of vehicle occupants and vulnerable road users. 2. Additional Criteria In addition to the criteria mentioned above, AI systems listed in Annex III are also classified as high-risk. These systems include those used in: Biometrics: Remote biometric identification systems, biometric categorization, and emotion recognition systems. Critical Infrastructure: AI systems used in the management and operation of critical digital infrastructure, road traffic, and the supply of water, gas, heating, or electricity. Education and Vocational Training: Systems determining access or admission to educational institutions, evaluating learning outcomes, and monitoring prohibited behavior during tests. Employment and Workforce Management: AI systems used for recruitment, selection, monitoring, and performance evaluation of employees. Essential Services and Benefits: Systems used by public authorities for evaluating eligibility for public assistance, creditworthiness, risk assessment in life and health insurance, and emergency response services. 3. Exemptions An AI system will not be considered high-risk if it does not pose a significant risk of harm to the health, safety, or fundamental rights of natural persons, including not materially influencing the outcome of decision-making. This applies under specific conditions: The AI system is intended to perform a narrow procedural task. It is designed to improve the result of a previously completed human activity. It detects decision-making patterns or deviations without replacing or influencing the human assessment. It performs a preparatory task relevant to the assessment purposes listed in Annex III. However, AI systems referred to in Annex III that perform profiling of natural persons are always considered high-risk. Providers who consider their AI systems, listed in Annex III, as not high-risk must document their assessment before placing the system on the market. These providers are subject to the registration obligation set out in Article 49(2). Upon request, they must provide the assessment documentation to national competent authorities. Compliance and Enforcement 1. General Obligations Providers of high-risk AI systems must ensure that their systems comply with the requirements set out in the AI Act before they are placed on the market or put into service. These obligations include: Risk Management System: Providers must establish and implement a risk management system that identifies, analyzes, and mitigates risks associated with the AI system throughout its lifecycle. This includes both pre-market and post-market activities. Quality Management System: Providers must establish a quality management system that ensures the AI system consistently meets the requirements of the Regulation. This system must include documented policies and procedures for design, development, testing, and monitoring. Technical Documentation: Providers must prepare and maintain detailed technical documentation for each AI system. This documentation must include information on the system's design, development, testing, and risk management measures. Conformity Assessment: Providers must ensure that the AI system undergoes the appropriate conformity assessment procedure before it is placed on the market or put into service. This includes ensuring that the system meets all applicable requirements and standards. Post-Market Monitoring: Providers must establish and maintain a post-market monitoring system to continuously assess the AI system's performance and safety. This includes collecting and analyzing data on the system's operation and any incidents or malfunctions. 2. Specific Requirements Providers must also ensure compliance with the following specific requirements for high-risk AI systems: Human Oversight: Providers must design AI systems to enable effective human oversight, ensuring that individuals can intervene in the system's operation and prevent or mitigate potential harm. Accuracy, Robustness, and Cybersecurity: Providers must ensure that the AI system is accurate, robust, and secure. This includes implementing measures to protect the system from cybersecurity threats and ensuring that it can withstand foreseeable operating conditions. Transparency and Traceability: Providers must ensure that the AI system operates transparently, providing clear information on its capabilities, limitations, and decision-making processes. This includes maintaining detailed records to ensure traceability and accountability. Data Governance: Providers must implement data governance measures to ensure the quality and integrity of data used by the AI system. This includes procedures for data collection, storage, and processing, as well as measures to protect data privacy and security. 3. Obligations of Importers Importers must ensure that AI systems they place on the market comply with the requirements of the AI Act. This includes: Verification of Conformity: Importers must verify that the provider has conducted the appropriate conformity assessment procedure and that the AI system meets all applicable requirements. Technical Documentation and Information: Importers must ensure that the provider has prepared the necessary technical documentation and made it available upon request by national authorities. Post-Market Monitoring and Reporting: Importers must monitor the performance of AI systems they place on the market and report any incidents or non-compliance to the relevant national authorities. Contact Information: Importers must include their name, registered trade name or trademark, and contact address on the AI system or its packaging, ensuring that end-users and authorities can easily identify and contact them. Storage and Transport: Importers must ensure that the AI system is stored and transported under conditions that do not affect its compliance with the requirements of the AI Act. 4. Obligations of Distributors Distributors must verify that the AI systems they make available on the market comply with the requirements of the AI Act. This includes: Verification of Compliance: Distributors must verify that the provider and importer have fulfilled their obligations under the Regulation, including the completion of the conformity assessment procedure and the availability of technical documentation. Information to Authorities: Distributors must provide relevant information to national authorities upon request and cooperate with them to ensure compliance with the AI Act. Storage and Transport: AI systems are stored and transported in conditions that do not affect their compliance with the requirements of the Regulation. Post-Market Monitoring: Distributors must participate in post-market monitoring activities and report any incidents or non-compliance to the relevant national authorities. Penalties The Regulation mandates that Member States establish penalties for non-compliance that are effective, proportionate, and dissuasive. Specific measures include: 1. Fines Non-compliance with the prohibition of AI practices referred to in Article 5 shall result in administrative fines of up to 35,000,000 EUR or, if the offender is an undertaking, up to 7% of its total worldwide annual turnover for the preceding financial year, whichever is higher. Non-compliance with other provisions related to operators or notified bodies (excluding those laid down in Article 5) shall be subject to administrative fines of up to 15,000,000 EUR or, if the offender is an undertaking, up to 3% of its total worldwide annual turnover for the preceding financial year, whichever is higher. This includes obligations under: Article 16 (obligations of providers), Article 22 (obligations of authorised representatives), Article 23 (obligations of importers), Article 24 (obligations of distributors), Article 26 (obligations of deployers), Articles 31, 33(1), 33(3), 33(4), or 34 (requirements and obligations of notified bodies), Article 50 (transparency obligations for providers and users). Supplying incorrect, incomplete, or misleading information to notified bodies or national competent authorities in response to a request shall result in administrative fines of up to 7,500,000 EUR or, if the offender is an undertaking, up to 1% of its total worldwide annual turnover for the preceding financial year, whichever is higher. 2. Suspension or Withdrawal In cases of serious non-compliance, Member States may suspend or withdraw AI systems from the market to prevent further infractions and mitigate any ongoing risks. 3. Corrective Actions Providers of non-compliant AI systems may be required to undertake mandatory corrective actions to ensure conformity with the AI Act. This may involve updating system functionalities, revising operational processes, or enhancing data protection measures. Formal Non-Compliance Measures: The market surveillance authority of a Member State may mandate providers to address formal non-compliances such as improper CE marking, incorrect EU declaration of conformity, failure to register in the EU database, lack of an authorized representative, and unavailability of technical documentation. Persistent non-compliance can lead to further restrictions, prohibition, recall, or withdrawal of the high-risk AI system from the market​​. 4. Union AI Testing Support Structures The Commission designates Union AI testing support structures to provide independent technical or scientific advice to market surveillance authorities​​. Remedies The Regulation ensures that individuals and entities affected by non-compliant AI systems have access to appropriate remedies, which include: 1. Complaints Any natural or legal person who believes there has been an infringement of the Regulation can submit reasoned complaints to the relevant market surveillance authority. These complaints must be considered in the course of market surveillance activities and handled according to established procedures​​. 2. Judicial Redress Affected individuals have the right to seek judicial redress for damages caused by non-compliant AI systems. This includes the right to obtain clear and meaningful explanations from the deployer of high-risk AI systems when a decision significantly affects their health, safety, or fundamental rights​​. 3. Right to Explanation Individuals significantly affected by decisions based on high-risk AI systems listed in Annex III, with certain exceptions, are entitled to an explanation of the role of the AI system in the decision-making process and the main elements of the decision taken​​. Protection of Whistleblowers Persons reporting infringements of the Regulation are protected under Directive (EU) 2019/1937, ensuring they are safeguarded when reporting such violations​ European Artificial Intelligence Board The European Artificial Intelligence Board (the Board) is established to support the consistent application of the AI Regulation across the Union. The Board comprises representatives from: National supervisory authorities responsible for the implementation of the Regulation. The European Data Protection Supervisor. The European Commission, which chairs the Board. The Board's primary responsibilities include: Advising and Assisting the Commission: The Board advises and assists the European Commission in matters related to AI regulation, including providing opinions and recommendations. Promoting Cooperation: The Board promotes cooperation between national supervisory authorities to ensure consistent application and enforcement of the AI Act across Member States. Issuing Guidelines and Recommendations: The Board issues guidelines, recommendations, and best practices to facilitate the implementation of the Regulation, ensuring a harmonized approach to AI governance. Facilitating Exchange of Information: The Board facilitates the exchange of information among national authorities, enhancing the effectiveness of supervision and enforcement actions. The Board operates based on internal rules of procedure, which detail its functioning, including decision-making processes and meeting schedules. The rules of procedure are adopted by a simple majority vote of the Board members. The Board may establish subgroups to address specific issues or tasks. These subgroups are composed of Board members or external experts as needed. The establishment of subgroups must be approved by the Board. National Supervisory Authorities Each Member State must designate one or more national supervisory authorities responsible for monitoring the application of the AI Act. The responsibilities of national supervisory authorities include: Monitoring and Enforcement: Ensuring that AI systems placed on the market or put into service in their jurisdiction comply with the Regulation. Investigations and Inspections: Conducting investigations and inspections to verify compliance, including the power to access premises and documents. Handling Complaints: Receiving and handling complaints from individuals and entities regarding potential non-compliance with the AI Act. Imposing Penalties: Imposing administrative penalties and corrective measures for non-compliance, as outlined in the Regulation. National supervisory authorities must operate independently and be free from external influence. Member States must ensure that these authorities have adequate resources, including financial, technical, and human resources, to effectively perform their duties. * * * For more information on how the AI Regulation can ensure compliance and foster innovation within the web3 landscape, please reach out to us. Prokopiev Law Group, with its broad global network of partners, ensures your compliance worldwide. Popular legal inquiries in the web3 sector include regulatory compliance for decentralized finance (DeFi), NFT marketplaces, and blockchain gaming platforms. Our team is well-equipped to address these complexities and provide tailored legal solutions to navigate the evolving regulatory environment of web3 technologies. Contact us to ensure your web3 projects align with current legal standards and maximize their potential within the global market. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The EDPS has issued Orientations on generative AI and personal data protection to provide guidance to EU institutions, bodies, offices, and agencies (EUIs) on processing personal data using generative AI systems. These guidelines aim to ensure compliance with Regulation (EU) 2018/1725 (EUDPR). Although the Regulation does not explicitly mention AI, it is essential to interpret and apply data protection principles to safeguard individuals' fundamental rights and freedoms. Definition of Generative AI Generative AI, a subset of artificial intelligence, uses machine learning models to produce various outputs such as text, images, and audio. These models, known as foundation models, serve as the core architecture for more specialized models fine-tuned for specific tasks. Foundation models are trained on extensive datasets, including publicly available information, and can handle complex structures like language, images, and audio. Large language models (LLMs) are specific foundation models trained on vast amounts of text data to generate natural language responses. Applications of generative AI include code generation, virtual assistants, content creation, language translation, speech recognition, medical diagnosis, and scientific research tools. Use of Generative AI by EUIs EUIs can develop, deploy, and use generative AI systems for public services, provided they comply with applicable legal requirements and ensure respect for fundamental rights and freedoms. The Regulation applies fully to personal data processing activities involving generative AI, irrespective of the technologies used. EUIs may use generative AI solutions developed internally or procured from external providers. In such cases, they must determine the specific roles (controller, processor, joint controllership) for processing operations and their implications under the Regulation. Transparency, ethical development, and adherence to a risk-based approach are essential to ensure trustworthy AI. Identifying Personal Data Processing in Generative AI Systems Personal data processing can occur at various stages in the lifecycle of a generative AI system, including dataset creation, training, inference, and user interactions. Developers or providers must ensure that personal data is not processed, mainly if anonymized or synthetic data is used. The EDPS cautions against web scraping for data collection, as it may violate data protection principles. Role of Data Protection Officers (DPOs) Article 45 of the Regulation outlines the tasks of DPOs, including advising on data protection obligations, monitoring internal compliance, and acting as a contact point for data subjects and the EDPS. In the context of generative AI, DPOs must understand the system's lifecycle, including data processing mechanisms, decision-making processes, and the impact on individuals' rights. They should also advise on Data Protection Impact Assessments (DPIAs) and ensure transparency and documentation of processing activities. Conducting DPIAs for Generative AI Systems A DPIA is required before processing operations that likely involve high risks to individuals' rights and freedoms, particularly when using new technologies like generative AI. The DPIA should assess risks, document mitigation actions, and ensure data protection compliance by design and default principles. Controllers must consult the EDPS if reasonable measures cannot mitigate risks. Lawfulness of Personal Data Processing The processing of personal data in generative AI systems must be based on one of the lawful grounds listed in the Regulation. For special categories of data, an exception under the Regulation must apply. Legal grounds include performing tasks in the public interest or complying with legal obligations. Consent may be used but must meet specific legal requirements. EUIs must ensure that providers comply with data protection principles, especially when using legitimate interest as a legal basis. Principle of Data Minimization Data minimization requires that personal data processing is limited to what is necessary for the purposes. This principle applies throughout the lifecycle of the AI system. EUIs must use high-quality, well-curated datasets and implement technical procedures to minimize data use. Data Accuracy Data controllers must implement measures to ensure data accuracy, including verifying dataset content, regular monitoring, and human oversight. Contractual assurances from third-party providers on data accuracy procedures are necessary. Despite efforts, generative AI systems may still produce inaccurate results, necessitating careful data accuracy assessment. Informing Individuals about Data Processing EUIs must provide clear and comprehensive information to individuals about personal data processing in generative AI systems. This includes details about data sources, processing activities, and the logic of automated decisions. Transparency policies help mitigate risks and ensure compliance. Data protection notices should be regularly updated to reflect changes in data processing activities. Automated Decision-Making Generative AI systems may involve automated decision-making, requiring compliance with Article 24 of the Regulation. EUIs must ensure safeguards for individuals, including the right to human intervention, to express their views, and to contest decisions. The use of AI in decision-making must be carefully considered to avoid unfair, unethical, or discriminatory outcomes. Ensuring Fair Processing and Avoiding Bias Bias in generative AI systems can arise from training data, algorithms, or developers. Biases can lead to unfair processing and discrimination, affecting individuals' rights and freedoms. EUIs must ensure datasets are representative and implement accountability mechanisms to monitor and correct biases. Regular testing and validation help identify and mitigate bias. Exercising Individual Rights Generative AI systems present challenges for exercising individual rights, such as access, rectification, erasure, and objection. Proper dataset management and traceability support the exercise of these rights. Data minimization techniques can mitigate risks associated with managing individual rights. EUIs must implement measures to ensure the effective exercise of individual rights throughout the AI system lifecycle. Data Security Generative AI systems may pose unique security risks, requiring specific controls and continuous monitoring. EUIs must implement technical and organizational measures to ensure data security, including regular risk assessments and updates. Security measures should address known vulnerabilities and evolving threats. Conclusion The EDPS Orientations provide a framework for EUIs to develop, deploy, and use generative AI systems while ensuring compliance with data protection principles under the Regulation. Adherence to data protection by design and by default, transparency, accountability, and continuous monitoring are essential to safeguard individuals' rights and freedoms. Prokopiev Law Group is well-equipped to ensure your compliance with evolving Web3 regulations, leveraging our extensive global network of partners. We offer expert guidance on issues such as decentralized finance (DeFi) regulations, NFT legal frameworks, smart contract governance, and cross-border crypto-asset reporting standards. Please contact us for comprehensive advice on navigating the complex regulatory landscape of Web3, including matters like the FATF Travel Rule, MiCA in the EU, and on-chain dispute resolution mechanisms. Our expertise spans worldwide jurisdictions, ensuring compliance wherever your operations are based. Please write to us for tailored solutions to your Web3 legal needs. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

A web3 venture involves following a complex set of crypto-marketing rules globally. Founders are often not fully prepared for the regulatory challenges. These guidelines will help mitigate common issues and avoid major risks. This document is not legal advice and does not cover all aspects, but it clearly explains the main rules to follow. Our previous article covered one side of crypto marketing. This document offers more detailed material to guide your marketing efforts further. General Recommendations Ensure that all information provided is honest and easy to understand. Avoid using complex language; instead, present information in a straightforward manner. Tailor your messages to suit the knowledge level of your audience. Provide enough information for informed decision-making, and never hide critical details. Explain Risks Clearly Always present a balanced view of risks and potential returns. When discussing returns, include the associated risks. Do not downplay the risks of dealing with cryptoassets, as transparency is crucial. Avoid Exaggeration Refrain from making unrealistic claims. All assertions must be backed by verifiable evidence to maintain credibility and trustworthiness. Include All Fee Information Clearly state all costs, fees, and charges. If there are complex fee structures, provide detailed information to ensure complete transparency. Use Accurate and Current Information Ensure that all facts, figures, and statements are up-to-date and correct. Avoid using misleading graphics or images, and always include a publication date with any piece of information. Use of Terms like "Guaranteed" or "Secure" These terms should only be used if they are accurate and verified. Provide all necessary information to explain these terms clearly to avoid any misunderstandings. Highlight Informational Nature Always clarify that the information provided is for informational purposes. Make it clear that users should perform their research or consult with a financial advisor before making any decisions. Avoiding Financial Terminology When a project involves financial activities, investment implications, or similar elements, and a project is uncertain about the appropriate jurisdiction for licensing or registration, it is crucial to avoid language that could trigger the application of financial or securities laws. To ensure compliance, avoid the following terms and phrases: Investment Advice Avoid terms like "investment advice," "investment strategy," or "investment recommendations." Instead, use "informational service" or "educational content." This ensures the information is understood to be for informational purposes only. Financial Planning Refrain from using terms like "financial planning," "wealth management," or "financial strategy." Use phrases like "general financial education" or "financial literacy content" to avoid the implications of personalized financial planning. Securities Implications Do not use language that suggests the offering of securities, such as "equity," "shares," or "dividends." Instead, describe your offerings as "digital assets" or "utility tokens," if applicable, making it clear that they do not confer ownership or profit-sharing rights. Guaranteed Returns Avoid statements that imply guaranteed returns or risk-free investments, such as "guaranteed profit," "risk-free investment," or "secure returns." Use disclaimers and emphasize risks. Personalized Recommendations Do not provide specific actions for individual users, such as "you should invest in this" or "this is the best option for you." Offer general information applicable to a broad audience, like "explore various options based on general criteria" or "consider different strategies based on risk tolerance." Financial Terminology in Marketing Ensure that marketing materials do not include terms that could be interpreted as financial promises or advice. Avoid phrases like "maximize your investment" or "secure your financial future." Stick to neutral language focusing on education and information. Inducements Avoid creating inducements when communicating with users. Inducements are steps that persuade or encourage someone to engage in specific activities. Refrain from using high-pressure sales tactics that force users into making quick decisions, such as, "Hurry, invest now, or miss out forever!" Always consider whether your message significantly encourages clients. When in doubt, avoid language that directly invites or strongly persuades someone without appropriate disclaimers. Promoted Materials Clearly label all promotional content with "Sponsored" or "Advertisement" to inform viewers of the endorsement's nature. Influencers Influencers should always disclose paid relationships or conflicts of interest. They must ensure that endorsements are truthful and not misleading. They should disclose that the endorsement is part of a paid partnership. Profit and Value Statements Do not state that a native token will share any profits or upside. Avoid discussing how a native token could increase in value. Do not promise profits. Discourage Speculative Behavior Do not encourage "buy low, sell high" behavior. Do not promise any value growth, even indirectly. Stick to Facts Only share objective, factual information when a user inquires. Use neutral, informative language. Avoid speculative statements or any language that could be interpreted as promoting an investment. Conclusion Adhering to these marketing guidelines will help crypto entrepreneurs navigate the complex regulatory environment and foster trust with their audience. Of course, these guidelines are not exhaustive and cover only several core aspects, but they can still be helpful as basic rules to adhere to. Always remember to consult with legal and financial professionals for comprehensive compliance and to stay updated with the evolving regulations in the crypto space. Prokopiev Law Group has a broad global network of partners, ensuring your compliance worldwide. For more information, write to us, and we'll assist you in staying ahead in the dynamic world of Web3 and crypto regulations. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The European Union (EU) has enacted the AI Act, a comprehensive regulation governing artificial intelligence (AI) systems. The Council of the EU approved the AI Act on May 21, 2024, and will affect businesses within the EU and those outside the EU with customers in the EU. Scope of Application The AI Act applies to: Businesses in the 27 EU Member States. Businesses in Norway, Iceland, and Liechtenstein under the European Economic Area (EEA) arrangements. Non-EU businesses, including those in the UK and USA, with customers in the EU. Any business where the outputs of the AI system are used within the EEA. Definition of AI System According to Article 3 of the AI Act, an "AI system" is defined as a machine-based system operating with varying levels of autonomy, potentially exhibiting adaptiveness after deployment. These systems generate outputs such as predictions, content, recommendations, or decisions influencing physical or virtual environments. Implementation Timeline Late June/Early July 2024: AI Act Becomes Law The AI Act will be published in the Official Journal and become a binding law 20 days after publication. Businesses must begin compliance preparations immediately upon publication. Late 2024: Prohibitions Effective six months post-enactment, prohibitions will cover AI applications posing unacceptable risks to health, safety, or fundamental rights, as outlined in Article 5. Prohibited uses include: AI systems employing subliminal or manipulative techniques causing significant harm. AI exploiting vulnerabilities such as age or disability, leading to significant harm. Social scoring based on personal characteristics, resulting in unjustified detrimental treatment. Unconsented expansion of facial-recognition databases. Emotion-inference systems in workplaces or educational settings (exceptions apply). Biometric categorization inferring sensitive characteristics (exceptions for law enforcement). Predictive policing based solely on profiling. Real-time remote facial recognition in public spaces (exceptions apply). Non-compliance penalties include fines of up to €35 million or 7% of worldwide turnover (Article 99(3)). Summer 2025: General-Purpose AI Regime Providers of general-purpose AI models must meet transparency obligations regarding training data and copyright. Additional obligations apply to AI models with "systemic risk," designated by the European Commission, including model evaluation, risk mitigation, incident reporting, cybersecurity, and energy consumption monitoring. Non-compliance penalties are up to €15 million or 3% of worldwide turnover (Article 101). Summer 2026: High-Risk AI Regime High-risk AI includes systems subject to EU product safety regulations (Annex I) and specifically classified high-risk AI (Annex III). Obligations include continuous risk management, technical documentation, transparency, human oversight, accuracy, robustness, and cybersecurity. Data governance for training, validation, and testing must ensure relevance, representativeness, and minimal errors. Penalties for non-compliance are up to €15 million or 3% of worldwide turnover (Article 99(4)). Summer 2026: Low-Risk Transparency Obligations Certain AI systems not classified as high-risk must ensure transparency, informing users when interacting with AI systems or outputs. This applies to chatbots, emotion recognition, biometric categorization, and AI-generated content. Penalties for non-compliance are up to €15 million or 3% of worldwide turnover (Article 99(4)). Summer 2027: High-Risk Systems under Product Safety Regulation For AI integrated into products subject to Annex I regulations, the high-risk regime will apply, with compliance requirements and penalties mirroring those for Annex III systems. For further information on ensuring compliance with the AI Act and other emerging regulations, contact Prokopiev Law Group. With our broad global network of partners, we guarantee comprehensive compliance solutions worldwide. Our expertise extends to current widespread Web3 legal concerns, including decentralized finance (DeFi) regulations, smart contract enforceability, and data privacy in blockchain applications. Please write to us to navigate these legal complexities effectively. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Introduction to SAFT The Simple Agreement for Future Tokens (SAFT) is a contractual mechanism designed for the issuance of digital tokens in the future, typically used by blockchain projects to raise funds from investors. It acknowledges the purchase of tokens that will be delivered at a later date, usually linked to a token generation event (TGE). Legal Provisions to Strengthen SAFT Definitions and Interpretations: Define all terms and relevant blockchain terminologies such as "Tokens," "Blockchain," "Blockchain Address," "Token Generation Event," and "Vesting Period" to avoid ambiguity. Token Issuance and Delivery Conditions: Specify the conditions under which tokens will be issued, including any prerequisites such as payment completion and compliance checks. Define the consequences of failing to meet these conditions, including the potential for the agreement to be voided. Clearly state the deadlines for token delivery and the actions to be taken if tokens are not delivered by the specified date, including any rights of the purchaser to terminate the agreement. Specific Rights and Limitations on Tokens: Tokens may be defined not as securities but as functional digital units that allow interaction within a protocol. The token classification influences their regulatory and legal treatment. The SAFT should specify conditions under which tokens may be considered securities and detail the restrictions on their transferability. This includes the conditions under which tokens can be sold, resold, or transferred, potentially subject to registration or exemption under securities laws. Vesting and Cliff Periods: Include vesting schedules that specify when the tokens will become available to the purchaser post the Token Generation Event (TGE). Outline any cliff periods during which tokens do not vest, specifying the duration and the conditions under which tokens begin to vest post-cliff. Rights and Obligations of Parties: Clarify the rights and obligations of both the issuer and the purchaser, particularly relating to the issuance, handling, and potential return of tokens. Ensure that the agreement specifies the issuer's and purchaser's limitations, especially regarding the transfer and sale of tokens. Limitation of Liability and Indemnities: Include clauses that limit the company's liability for issues not within its control, such as blockchain malfunctions or cybersecurity breaches. Delineate indemnification provisions, protecting the company against breaches of the agreement by the purchaser. Confidentiality and Data Protection: Incorporate confidentiality clauses to protect the sensitive information of all parties involved. Comply with data protection laws, specifying how personal data will be handled, stored, and protected under the agreement. Termination and Survival: Define specific conditions under which either party can terminate the agreement. Ensure that key provisions such as confidentiality, liability, and indemnity survive the termination of the agreement. Representations and Warranties: The company should make representations about its legal authority to enter into the SAFT, the non-infringement of third-party rights, and compliance with relevant laws. The purchaser must represent their eligibility as an accredited or qualified investor and confirm their token purchase's legal and regulatory permissibility. Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) Compliance Outline the procedures for verifying purchasers' identities through KYC (Know Your Customer) and KYB (Know Your Business) checks to comply with AML and CFT regulations. Specify requirements for proof of identity, address, source of funds, and checks against sanctions and politically exposed persons (PEPs). Jurisdiction and Dispute Resolution: State the governing law and jurisdiction for the agreement, providing guidelines on how disputes will be resolved. Include arbitration or mediation provisions before or instead pursuing litigation, specifying the rules and location. Digital Signature and Electronic Delivery Confirm that digital signatures are recognized as valid and binding, equivalent to traditional handwritten signatures. Detail the process for electronic delivery of notices and other communications, ensuring they are considered received when delivered electronically. Risk Disclosures for SAFT The SAFT should highlight critical risks such as irreversible token loss from private key misplacement, financial jeopardy from cyber threats, and token malfunctions due to blockchain failures. Market risks include limited liquidity due to lack of secondary market support and significant price volatility from market and regulatory changes. Regulatory uncertainties could lead to adverse legal and tax implications, requiring investor diligence. Investment risks are heightened by the lack of insurance, potential issuer dissolution, and possible underperformance due to inadequate protocol development. Legal provisions should mandate investor acknowledgment of these risks, include disclaimers about the speculative nature of tokens, and require affirmations of understanding related to regulatory and tax responsibilities. *** For expertly crafted SAFT templates that address all legalities look no further than Prokopiev Law Group. Engage with our tailored legal services to ensure your token issuance complies with current regulatory frameworks and secure your future. Contact Prokopiev Law Group today to receive your personalized SAFT template, tailored to meet the unique needs of your blockchain project. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

In March 2024, the UK's financial watchdog, the Financial Conduct Authority (FCA) issued a press release, which is giving out new Guidance (“Guidance” or “Guidelines”) for financial services promotion. These new Guidelines aim to prevent scams and ensure people are making informed decisions about their finances. It applies to all online financial promotion, including the increasingly popular world of memes, TikTok and YouTube videos, and even Livestreams. The comprehensive nature of the Guidance, which supersedes the previous guidance (FG15/4: Social media and customer communications), is designed to ensure all parties involved in promoting financial products or services online are aware of their responsibilities. This includes authorized firms, social media influencers, and even affiliate marketers. Trade bodies representing these groups are also expected to be familiar with the updated guidelines. All financial promotions must empower consumers to make informed decisions. This means firms need to consider the target audience, the advertised product's complexity, and potential areas of confusion that might arise. The Guidance extends its reach beyond authorized firms to encompass unauthorized persons as well. Social media influencers who promote financial products or services are now responsible for ensuring their communications comply with FCA rules. This may involve obtaining approval from authorized firms for their promotional content. The FCA also clarifies that even communications on "private" social media channels like Discord or Telegram can be considered financial promotions if they encourage investment activity. This broadens the scope of the FCA's regulations and requires firms to be mindful of their communications across all platforms. Here are the key takeaways from the FCA's updated guidance, broken down by the relevant sections of the Guidance: Standalone compliance Each element of a financial promotion, be it a social media post, email, or banner ad, must comply with FCA rules. Promotions for intricate financial products might require additional information or disclaimers to ensure consumer understanding. Firms can use hyperlinks or separate pages for this purpose, but the initial promotion itself must still be clear and informative. For promotions displayed across multiple frames (like Instagram stories), the FCA will assess the overall message and ensure a balanced presentation of both benefits and risks. The level of detail required in a promotion will depend on the target audience's needs, the type of decision involved, and any potential for confusion. Prominence There are existing FCA regulations on what information needs to be displayed prominently in financial promotions, and these apply equally to social media as any other channel. Make sure you understand the relevant rules for your products. When promoting on social media, information required to be prominent should be easy to find and understand. This could involve factors like size, position, font style, or even using visuals like graphs or audio-visuals. Don't overwhelm consumers with excessive information. This can be especially problematic on social media, where attention spans are shorter. Consider user testing to see if your promotion is clear and easy to understand. Burying risk information in captions or relying solely on visuals isn't enough. Risks should be presented prominently, following the FCA's Handbook rules. FCA discourages hiding important information behind click-throughs or other user actions. If truncation (like "...see more") cuts off key details, you'll need to find a way to display as much as possible. If displaying all information prominently is impossible, consider including it in an accompanying image (but only if the platform allows displaying images alongside text). The FCA reminds firms of their duty to ensure consumer understanding. If a promotion relies on obscured or truncated information on social media, it might not be compliant with FCA regulations. Suitability of social media for financial promotions Financial promotions must be fair, clear, and not misleading. This means highlighting both potential benefits and relevant risks to inform consumers. Not all financial products are suited for social media promotion. Complex products with intricate features or high risks might be difficult for consumers to understand in a limited format. Consider the platform's limitations. Social media with character restrictions might not be ideal for explaining intricate financial products. Social media can be a good tool to direct potential customers towards other channels with more detailed information. Consider using "image advertising" to promote your firm generally, without referencing specific products. The FCA advises debt counseling firms to carefully evaluate if social media is an appropriate platform for promoting their services due to the complexity of debt solutions. Promotions for debt solutions should be balanced and highlight both the potential benefits and drawbacks, including risks and costs. Promotions for Buy-Now-Pay-Later (BNPL) products must clearly communicate the associated risks, such as the unregulated nature of the agreements, potential debt burden, consequences of missed payments, and fees. Even seemingly lighthearted content like memes can be considered financial promotions and fall under FCA regulations, especially in the cryptoasset sector. High‑risk investments (HRIs) Firms promoting investment products must be familiar with the specific marketing restrictions outlined in the FCA's Conduct of Business Sourcebook (COBS) for the products they advertise. Certain HRIs, like non-mainstream pooled investments and speculative illiquid securities, are banned from mass promotion to retail investors on social media. While some HRIs like crowdfunding, cryptoassets, and CFDs can be marketed to retail investors, they are subject to specific restrictions. Firms need to ensure their promotions comply with these rules, including prominent risk warnings and bans on investment incentives. Prescribed risk warnings Risk warnings for HRIs and high-cost short-term credit (HCSTC) must be displayed prominently and at the same time as the promotion itself, not buried later or hidden in less noticeable areas. Research shows consumers are more likely to understand risk warnings if they are concise and clear. Avoid burying them amongst other promotional elements. When a full risk warning is required, firms cannot hide it behind a click-through or another user action. This applies particularly to platforms that truncate text, where the full warning must be visible without needing to click "see more...". If FCA rules allow a shortened warning, ensure the entire shortened phrase is displayed clearly and the full warning is easily accessible through a click-through. Don't drown out risk warnings with flashy visuals or highlight only the benefits of a product. The promotion needs to be fair and clear, presenting both sides of the coin. The FCA offers examples of prominent risk warnings on various social media platforms. Consulting these case studies can help firms ensure compliance. Fortunately, the FCA Guidance includes various of useful tables and illustrative examples of compliant and non-compliant promotions, offering firms a clear side-by-side comparison to ensure their social media marketing hits the right note. For instance, see the Table 1 below for illustrative examples of prominent risk warnings across various social media channels: Compliance with the regime for unregulated non‑UK based entities The FCA guidance clarifies the rules for overseas entities promoting financial products on social media that might reach UK consumers: Even if a financial promotion originates outside the UK, it can be subject to FCA regulations if it's accessible to UK consumers. Unauthorized overseas firms have several options to comply with FCA rules: Getting their promotions approved by a UK authorized person. Geo-blocking UK users from accessing their promotions. Modifying their content to avoid inviting UK consumers to invest. Implementing controls to prevent UK consumers from engaging with the promotion. Simply stating a promotion is "not for UK consumers" is unlikely to be sufficient for compliance. When authorized and unauthorized entities within a group share social media channels, extra caution is needed. The FCA has seen cases where UK consumers interacted with what they believed to be a UK-regulated firm, but were actually connected to an unregulated overseas entity. Groups with both authorized and unauthorized entities using shared social media channels need to: Ensure unauthorized entities' promotions comply with FCA rules. Have safeguards in place to prevent UK consumers from being directed to unregulated overseas websites. Consider having the UK authorized entity approve all social media promotions. As an alternative, firms can create separate social media accounts specifically for UK consumers. These accounts must be actively managed and not simply empty shells. Unregulated Activity: If unauthorized overseas entities provide financial services to UK consumers, they may be in breach of separate FCA regulations prohibiting unauthorized regulated activity. The Consumer Duty The Duty applies to all social media communications and financial promotions, even if there's no direct customer relationship. Meeting basic standards for fair and clear communication is no longer enough. Firms must actively support informed decision-making by consumers. Marketing strategies should consider the target audience and the specific social media platform being used. Testing for clarity and understanding among the target market is encouraged. Confining promotions to a limited target market on social media can be challenging. Simply disclaiming "for professionals only" might not be sufficient. Firms need to ensure they can effectively control who sees the promotion to avoid unintended exposure to unsuitable consumers. The FCA warns against bombarding consumers with repeated promotions, especially those exploiting behavioral biases of vulnerable audiences. Regularly reviewing and adapting social media marketing strategies is crucial, especially as platforms evolve and new features emerge. The FCA offers its own research (OP23, OP26) on consumer behavior to help firms understand how to best promote financial products. Firms should also consider the FCA's sector-specific reviews, such as marketing expectations for high-cost lenders, when formulating their social media marketing strategies. Recipients sharing or forwarding communications, Unsolicited promotions, and Approval and record‑keeping Firms remain responsible for breaches in their original communication, even if others share or forward it on social media. Sharing promotions with a limited target market can be difficult on social media. Firms should consider if it's the right platform for such products. If a firm shares a customer's social media post promoting a financial product, the firm is responsible for compliance, even if they didn't create the original content. The FCA reminds firms of existing rules regarding unsolicited promotions (cold calling) and electronic marketing communications (PECR). Following a customer's social media profile does not constitute an established client relationship for exemption from these rules. Understanding the distinction between real-time and non-real-time promotions is crucial, as different FCA rules apply. Social media promotions (e.g., tweets) are generally considered non-real-time. Firms must have a system for approving social media communications by qualified senior personnel, as required by the Senior Management Arrangements sourcebook (SYSC). Adequate records of these communications must also be maintained (SYSC 9) to protect consumers and address potential complaints. Social media platforms themselves should not be relied upon for record-keeping due to potential content deletion. Influencers and Financial Promotions Even if a financial promotion is approved by an authorized person, the FCA can still take action if influencers promote it in a non-compliant way. The FCA recognizes various influencer models: Celebrity influencers with large followings, but no financial expertise, may be promoting financial products without necessarily understanding the intricacies. "Finfluencers," who may not be FCA-authorized to provide financial advice but offer recommendations on social media, require special attention due to the high level of trust consumers place in them. Online forums and discussion groups can also be used to promote financial products or services, and the FCA is aware of their potential for misuse. The FCA emphasizes that any influencer can be held responsible for communicating illegal financial promotions regardless of their follower count. The FCA has partnered with the Advertising Standards Authority (ASA) to create an infographic specifically to help influencers understand their obligations when promoting financial products or services. This resource encourages influencers to carefully consider if they are a suitable fit for the product and educates them about the potential legal risks of promoting financial products illegally. Social Media Platforms and Financial Promotions Firms and influencers must comply with both FCA regulations and the specific advertising policies of each social media platform they use. Social media platforms have a role to play in preventing illegal financial promotions. This includes removing such content when identified and considering the suitability of their platform for promoting complex financial products. The Online Safety Act places additional duties on social media platforms to proactively mitigate the risks of illegal content, including illegal financial promotions. The FCA is working with Ofcom (the Office of Communications), the regulator overseeing the Act, to ensure a smooth alignment between the Online Safety Act and financial promotion legislation. *** The Financial Conduct Authority's recent Guidance ensures that every entity involved in online financial promotions, including influencers and social media platforms, adheres to stringent rules to protect consumers. As digital interactions deepen, staying compliant is crucial for your business. At Prokopiev Law Group, we leverage a broad global network of partners to ensure your compliance worldwide, keeping you ahead in the rapidly evolving financial promotion landscape. If you require detailed information or guidance on navigating these regulations, write to us today. Prokopiev Law Group delivers dynamic legal solutions tailored to the digital and blockchain sectors. Our services span from DAO legal support and Web3 terms of service to crypto token sale legal advice and NDA for blockchain teams. We excel in protecting intellectual property in the Web3 space, ensuring crypto source code protection, and managing trademark registration in blockchain. Our legal team is adept in formulating litigation strategies for crypto startups, devising robust tax strategies for blockchain projects, and enforcing compliance with token sale regulations. We also offer advanced advisory in insider trading policies for crypto businesses, Web3 legal risks management, and blockchain data protection laws. Whether it's decentralized finance consulting, NFT rights protection, smart contract analysis, or comprehensive blockchain compliance audits, Prokopiev Law Group is your premier partner for navigating the intricate legalities of the digital world. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Introduction The Abu Dhabi Global Market (ADGM), a finance-focused free zone within the Emirate of Abu Dhabi, administers a distinct and comprehensive regulatory framework for crypto-asset activities. Established by the Financial Services Regulatory Authority (FSRA), this framework governs the operations of entities engaging in crypto-asset spot transactions from within ADGM since June 2018. Regulatory Framework Overview Entities wishing to undertake regulated crypto-asset services must comply with regulatory requirements, including Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) rules, Know Your Customer (KYC) regulations, market surveillance protocols, and specific licensing mandates. Central to this regulatory approach is acquiring a Financial Services Permit (FSP), compulsory for conducting Regulated Activities concerning Virtual Assets in or from ADGM. Application Process for Financial Services Permit The process for obtaining an FSP is structured into five principal stages: Due Diligence and Initial Discussions: Prospective entities engage in preliminary discussions with FSRA teams. This stage involves explaining their business models, demonstrating compliance with established regulations, and providing technological demonstrations. Formal Application Submission: Entities submit a detailed Virtual Asset Application Form, requisite supporting documentation, a comprehensive launch plan, and the associated fees. FSRA commences a formal review after receiving these submissions. In Principle Approval (IPA): This approval is granted after reviewing the application and supporting documents, contingent on the applicant's adherence to all regulations. Certain conditions must be fulfilled before receiving final approval. Final Approval: Final approval is granted conditional upon satisfactory completion of operational testing and capabilities, as well as third-party system verifications if necessary. Operational Launch Testing: This is particularly crucial for Multilateral Trading Facilities (MTFs) and Virtual Asset Custodians; this phase involves operational testing to ensure compliance with FSRA's standards, potentially including third-party system verifications. Corporate Establishment and Location Requirements To be eligible for an FSP, an entity must establish a corporate presence within ADGM. The regulatory requirements stipulate that an Authorized Person, Recognized Body, or Applicant must have their head office and registered office within ADGM to conduct any Regulated Activities or Activities under a Recognition Order. Applicants can be either a Body Corporate or a Partnership, depending on the nature of the Regulated Activities envisaged. Specific Eligibility for Regulated Activities Different types of Regulated Activities under the Virtual Asset Framework demand specific organizational forms: Entities aiming to effect or carry out Contracts of Insurance must be incorporated as a Body Corporate. Those engaging in Accepting Deposits may be either a Body Corporate or a Partnership. Entities acting as the Trustee of an Investment Trust must be a Body Corporate. Virtual Assets Definition and Regulatory Treatment In line with the Financial Action Task Force's guidelines, FSRA defines a "Virtual Asset" within the Financial Services and Markets Regulations (FSMR) as a digital representation of value that can be traded digitally, which functions as a medium of exchange, a unit of account, or a store of value. However, it does not have legal tender status in any jurisdiction. Furthermore, Virtual Assets are neither issued nor guaranteed by any jurisdiction and are recognized solely by agreement within the respective user community, distinguishing them from Fiat Currency and E-money. Digital Securities are recognized under paragraph 58(2)(b) of FSMR as securities encompassing digital/virtual tokens exhibiting characteristics akin to shares, debentures, and units in a collective investment fund. Entities engaging in services related to Digital Securities, such as managing investments or providing advice, require a Financial Services Permission (FSP) and are subject to market intermediaries and market operators' regulations within ADGM. Conversely, Virtual Assets are classified as commodities, and although they are not deemed Specified Investments under the FSMR, market intermediaries handling these assets, such as brokers and custodians, must obtain FSRA approval and an FSP. Regulatory Approach The FSRA's regulatory approach delineates the treatment of different categories of digital assets: Derivatives and Collective Investment Funds of Virtual Assets and Digital Securities are regulated as Specified Investments under the FSMR. Utility Tokens, which are for access to a specific product or service using a DLT platform but do not exhibit the features of a regulated investment, are treated as commodities. Fiat Tokens are digital representations of Fiat Currency. If used as a payment instrument, they are regulated under the FSMR and considered Providing Money Services. Risks and Mitigations The FSRA outlines risk areas and mitigation strategies within the Virtual Asset Framework: AML/CFT/Tax: Compliance with the AML Rulebook is mandatory for all Authorized Persons, alongside reporting obligations under FATCA and Common Reporting Standards. Consumer Protection: The risks associated with Virtual Assets must be transparently disclosed to consumers, and they must be monitored and updated regularly. Technology Governance: Authorized Persons must ensure robust governance over virtual asset wallets, private keys, origin and destination of funds, security, and risk management systems. 'Exchange-Type' Activities: MTFs using Virtual Assets are mandated to establish market surveillance, fair and orderly trading, settlement processes, transaction recording, a rulebook(s), transparency, and public disclosure mechanisms. Custody: Providers holding or controlling Virtual Assets or client money (e.g., fiat currencies) must comply with Safe Custody and COBS (Client Order Book Systems) under the FSMR. Activities involving Virtual Assets that are subject to regulation include: Operating a Multilateral Trading Facility (MTF) Acting as a Virtual Asset Custodian Dealing in or Arranging transactions in Virtual Assets Managing and Advising on investments in Virtual Assets Entities performing these functions must adhere to the corresponding regulations and obtain the necessary FSRA approvals. Capital and Fee Structure In adherence to the Abu Dhabi Global Market (ADGM) regulations, entities engaging in Virtual Asset activities are subject to specific capital and fee requirements reflecting the substantial supervisory resources needed for these operations. Capital Requirements Pursuant to COBS Rule 17.3 and MIR Rule 3.2.1, an Authorised Person dealing with Virtual Assets must maintain regulatory capital in fiat currency. This must equate to at least 12 months' operational expenses for an entity operating a Multilateral Trading Facility (MTF) for Virtual Assets. Other Authorised Persons conducting regulated activities related to Virtual Assets must hold capital equivalent to 6 months' operational expenses. Suppose an Authorised Person engages in other regulated activities unrelated to Virtual Assets. In that case, the FSRA enforces the higher capital requirements from those mandated by the Prudential – Investment, Insurance Intermediation, and Banking Rules (PRU). Fee Requirements Fees are imposed on entities within the ADGM performing Virtual Asset services, including authorization and annual supervision fees. The structure is as follows: General Virtual Asset service providers must pay an initial authorization fee of USD 20,000 and an annual supervision fee of USD 15,000. Entities operating an MTF for Virtual Assets are subject to an authorization fee of USD 125,000 and an annual supervision fee of USD 60,000. A sliding-scale trading levy applies to MTFs handling Virtual Assets, determined by the transactions' Average Daily Value (ADV). The fees for entities conducting multiple regulated activities are cumulative and adjust according to the specific combination of services provided. Mandatory Appointments The General Rulebook (GEN) mandates that every Authorised Person appoint approved individuals to essential roles, including a Senior Executive Officer, Finance Officer, Compliance Officer, and Money Laundering Reporting Officer, all of whom must reside in the U.A.E. Additionally, any Directors of a Body Corporate with headquarters and registered offices within ADGM must be registered as Licensed Directors. Accounting and Auditing Requirements The GEN Rulebook requires that: Financial statements are prepared annually for each Authorized Person and Recognized Body. The Regulator must be notified of Auditor appointments, terminations, or resignations in the prescribed form. Appropriate steps must be taken to ensure the selected Auditor possesses the necessary qualifications to audit the entity's business. Multilateral Trading Facilities (MTFs) Defined under the FSMR and related guidance, an MTF is a system that consolidates buying and selling interests for investments in a non-discretionary manner, resulting in a contractual agreement. Entities operating an MTF or an Organised Trading Facility must adhere to stringent regulations, including the maintenance of non-discretionary rules and engagement in activities that result in legally binding contracts for financial instruments, Virtual Assets, or spot commodities. PRU Categorization The PRU Rulebook categorizes Authorized Persons to determine applicable provisions. Authorized Persons are permitted to conduct regulated activities of a lower category if authorized under their Financial Services Permission. Categories of Authorised Persons In the regulatory framework established by the Financial Services Regulatory Authority (FSRA) within the Abu Dhabi Global Market (ADGM), Authorised Persons are classified into distinct categories based on the regulated activities they are authorized to conduct. The classification is as follows: Category 1: Activities include Accepting Deposits and Managing a Profit-Sharing Investment Account, which is PLS (Profit and Loss Sharing). Category 2: Providing Credit and Dealing in Investments as Principal. Category 3: Split into three subcategories (3A, 3B, and 3C), this includes various activities such as Dealing in Investments as an Agent, Managing Assets, Providing Custody, and Operating a Multilateral Trading Facility. Category 4: Encompasses Arranging Credit, Advising on Investments or Credit, Insurance Intermediation, and other specific activities not included in the higher categories. Category 5: This category is reserved for those conducting non-mainstream regulated activities, such as Operating a Private Financing Platform. Capital Requirements The FSRA mandates base capital requirements for Authorised Persons operating within the ADGM, applicable across all categories as a fundamental component of their financial adequacy. Base capital requirements vary according to the category of Authorised Persons as follows: Category 1: USD 10 million Category 2: USD 2 million Category 3A: USD 500,000, unless the Authorised Person is dealing in investments as a principal involving OTC Leveraged Products with Retail Clients, in which case the base capital requirement is USD 2 million. Category 3B: USD 4 million Category 3C: USD 250,000, which may increase to USD 150,000 or USD 500,000 based on the type of fund managed or the provision of Financing Platforms and holding Client Assets. Maintenance and Notification of Capital Resources Authorized Persons in Category 3B, 3C, or 4 must always maintain capital resources that meet or exceed the capital requirement. If capital resources fall below 120% of the Capital Requirements, the regulator must be notified proactively. Capital Calculation for Categories 3B, 3C, and 4 The capital requirement for these categories is calculated as the higher of the base capital requirement or the Expenditure Based Capital Minimum. The latter is informed by the actual expenses and provides a real-time reflection of the capital adequacy relative to the entity's operational volume. Regulated Activity of Providing Money Services For entities engaged in the regulated activity of Providing Money Services, capital requirements are to be calculated as the greatest of: The base capital requirement, The Expenditure Based Capital Minimum, or A Variable Capital Requirement applicable to specific activities within the Money Services domain. Variable Capital Requirement Calculation for Money Remitters Money Remitters must calculate their Variable Capital Requirement based on a percentage of their monthly payment volume, with the following tiered structure: 1.25% of the first USD 10 million 0.5% of the next USD 90 million 0.25% of the subsequent USD 150 million 0.125% of any further payment volume The monthly payment volume is determined by the annual funds remitted, averaged per month, or by a combination of actual and projected figures for newer entities. Variable Capital Requirement for Payment Account Providers Payment Account Providers calculate their Variable Capital Requirement using a similar tiered percentage structure of their monthly payment volume, with rates of: 2.5% of the first USD 10 million 1% of the next USD 90 million 0.5% of the subsequent USD 150 million 0.25% of any additional volume Guidance for Variable Capital Calculation The FSRA provides guidance on calculating the Variable Capital Requirement, emphasizing a tranche-based approach. Payment volumes are segmented, and different percentage factors are applied to each tranche to determine the cumulative Variable Capital Requirement. Substantive Operational Presence in ADGM The FSRA stipulates that an Authorised Person conducting regulated activities in relation to Virtual Assets must have a substantive operational presence within the Abu Dhabi Global Market (ADGM). Central to this requirement is the establishment of the 'mind and management' of the Authorised Person within ADGM to ensure effective control and oversight. Specific Requirements for Multilateral Trading Facilities For Multilateral Trading Facilities (MTFs) engaging with Virtual Assets, the FSRA mandates a physical presence within ADGM. This contains involvement in the MTF's operations, including but not limited to: Control over the order book Management of the matching engine Adherence to established rulebook(s) Ensuring the facilitation of fair and orderly markets Implementing settlement procedures Monitoring and prevention of market abuse in line with the Market Infrastructure Rules (MIR) and the Conduct of Business Sourcebook (COBS) Chapter 8 For start-up MTFs, complete regulatory oversight by the FSRA is required over their entire order book and matching engine functionalities. Existing virtual asset exchanges with components of their order book or matching engine located outside of ADGM must delineate the aspects that will fall under FSRA's jurisdiction as part of their application to become authorized MTFs within ADGM. Exclusive Operation of Markets within ADGM The FSRA asserts that within ADGM's jurisdiction, only authorized MTFs may conduct market operations that involve the matching of orders or aid in price discovery for Accepted Virtual Assets. The scope and degree of FSRA's regulatory oversight are designed to be comprehensive and may differ significantly from other global regulatory bodies. Trading Pairs on MTFs In the trading environment of MTFs, the FSRA permits trading pairs that consist exclusively of: Exchanges between Fiat Currency (or its equivalent value) and Accepted Virtual Assets Exchanges between Accepted Virtual Assets and Fiat Currency (or its equivalent value) Trades involving one Accepted Virtual Asset for another Links Guidance – Regulation of Virtual Asset Activities in ADGM Other necessary documents to analyze: Conduct of Business Rulebook (COBS) Fees Rules (FEES) General Rulebook (GEN) FINANCIAL SERVICES AND MARKETS REGULATIONS 2015 Code of Market Conduct (CMC) Market Infrastructure Rulebook (MIR) The description of the application process Presentation of ADGM about Regulated activities, fees and key requirements (including virtual assets), namely about virtual assets *** Prokopiev Law Group is adept at navigating the complex requirements for crypto licensing, ensuring comprehensive compliance for your operations globally. Our network of partners amplifies our capability to facilitate your adherence to international standards. For entities seeking to engage in crypto-asset activities within the Abu Dhabi Global Market (ADGM) and require authoritative guidance on acquiring a Financial Services Permit (FSP), Prokopiev Law Group stands ready to assist. Our global partnership encompasses all facets of regulatory compliance, from capital requirements to the establishment of a substantive operational presence and effective governance structures. Whether your focus is on Multilateral Trading Facilities (MTFs), Virtual Asset Custodianship, or other regulated activities within the dynamic sphere of Virtual Assets, we ensure that your business is fortified against regulatory uncertainties. Connect with Prokopiev Law Group for tailored solutions that align with the Financial Services Regulatory Authority (FSRA) mandates. Let us be the cornerstone of your successful compliance journey in the burgeoning realm of crypto licensing, both within the ADGM and on a global scale. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Token listings on centralized exchanges represent a significant milestone for blockchain projects, offering them enhanced visibility, liquidity, and credibility within the digital asset ecosystem. This process, however, is more than merely a business decision but a complex legal endeavor that necessitates thorough compliance with existing regulations and legal frameworks. While major exchanges often do not publicly disclose specific criteria for listing or delisting tokens, insights can be gleaned from their public communications and our legal experience within the crypto space. General Criteria for Token Listings on Centralized Exchanges The basic criteria used by major exchanges are the following: Project Commitment and Development Activity: A strong commitment from the project team, evidenced by ongoing development efforts, regular updates, and clear communication with the community. This includes maintaining an active GitHub repository, publishing development roadmaps, and engaging with users on social media platforms. Utility and Offering: The token must present a clear use case or solve a particular problem within the crypto or traditional ecosystems. Long-term viability is often tied to the token's ability to address real-world issues and provide tangible benefits to its users. Community Engagement and User Network: An engaged community indicates a project's health and potential for success. Active involvement in community-building activities, such as airdrops, IDOs, and regular interactive sessions, is crucial. Liquidity and Market Presence: High liquidity levels ensure that tokens can be easily traded, a key factor for exchanges. Security Measures:  Security protocols to protect against hacks and ensure the safety of network operations. This includes regular audits of smart contracts, network monitoring, and implementing best practices in cybersecurity. Regulatory Compliance and Ethical Conduct: Adherence to regulatory requirements, including AML/KYC norms, and a clear stance against unethical practices. Exchanges conduct due diligence to avoid association with projects involved in fraudulent or negligent activities. Integration and Compatibility: Compatibility with the exchange's native ecosystem and standards can significantly increase the chances of listing. Projects are encouraged to integrate exchange-specific tokens to enhance their appeal. Proactive Post-Application Engagement: Continuation of project development and community engagement after the application for listing has been submitted. When applying for token listings on centralized exchanges, projects must also prepare beyond basic listing criteria, focusing on showcasing their project's strengths and compliance with exchange standards. This involves preparing a clear project pitch and providing legal documentation to confirm the token's compliance with regulations. Projects should clearly define the problem they aim to solve, their target market, user base, and a detailed project history and future roadmap. It is important to be ready to describe the token's utility, why it's necessary for the project, and how the project stands out from competitors. Sharing project metrics, community engagement efforts, and development progress is also essential. Projects must demonstrate their commitment to security through audits, detail the team's expertise, and provide financial details, including market capitalization, token supply, and funding usage. General Delisting Practices Centralized exchanges maintain the integrity and quality of their trading environment by ensuring that all listed tokens and trading pairs continuously meet high performance, security, and compliance standards. Below are general practices and considerations surrounding delisting process. Periodic Review and Continuous Compliance: The primary factor for maintaining a token's listing status is its continuous adherence to the exchange's listing criteria post-approval. Exchanges conduct regular evaluations to ascertain whether listed tokens still comply with the required standards, including development progress, team commitment, and market performance. Handling of Negative Developments: Exchanges closely monitor any negative changes or incidents affecting listed projects, such as deviations from the project's original plans, security breaches, or significant team changes. The project team's response to such incidents, including measures taken to prevent future occurrences, is critically assessed. User Feedback and Complaints: A large volume of complaints or negative feedback regarding a particular token can trigger an in-depth investigation to re-evaluate the token's compliance with the exchange's standards. Market Performance: Poor liquidity and trading volume are significant factors that may lead to the delisting of spot/margin trading pairs. While delisting trading pairs does not directly affect the token's listing status, it reflects on the token's market performance and could influence further review outcomes. Regulatory Compliance: Changes in regulatory requirements or failure to comply with applicable laws can prompt exchanges to delist tokens to protect users and adhere to legal standards. Legal Considerations for Token Listing Among the general criteria for a token listing on a centralized exchange, legal considerations stand out as critical elements that must be taken into account. Jurisdiction and Entity Type: Centralized exchanges favor projects registered in jurisdictions with Virtual Asset Service Provider (VASP) legislation, holding the necessary legal registration, authorization, or license. For projects without a specific license, registration in countries lacking crypto-specific laws may be beneficial. In such cases, demonstrating adherence to general Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) compliance frameworks could suffice for listing purposes. Ownership Structure: Projects should be prepared to disclose their ownership structure fully. This includes detailing the founders, major stakeholders, and beneficial owners. Exchanges scrutinize this information to assess the project's transparency and legal integrity, ensuring there are no hidden risks or associations with illicit activities. Token Legal Status and Utility: A project must establish a well-defined legal status for its token, necessitating the support of legal opinions to verify compliance with applicable laws. The significance of the token's role, its utility within the project, and its essential nature contribute fundamentally to its legal standing. These legal assessments should detail the token's designation as either a security, utility, governance, hybrid, or other type within the regulatory environments of key exchanges and intended markets. Tokenomics and Regulatory Framework. The token sale strategy must be regulated appropriately, including ICOs, IEOs, or other distribution models. Projects must articulate their tokenomics clearly, demonstrating how tokens are distributed, used, and valued within the ecosystem. This includes outlining any regulatory frameworks applied to the token sale and ongoing operations. Regulatory Compliance: Projects must ensure compliance with global regulatory standards, focusing on securities regulations, AML/CFT rules and regulations, data protection, and privacy laws. A reputable compliance officer plays a vital role in maintaining these standards, and both the CEO and compliance officer should be prepared to undergo KYC processes with the exchange. Clear Marketing Practices. Marketing materials, including the whitepaper and website content, must comply with regulatory requirements and avoid promoting the token as an investment. Projects should steer clear of shilling, ensure community integrity, and avoid making unrealistic promises to potential token holders. Policies. Having well-drafted internal policies is essential. This includes at least AML/CFT and KYC procedures, terms of use, and privacy policies. Continuity and Resilience. Projects must establish a corporate, management, and operational model that ensures continuity of operations, regardless of adverse events. Exchanges favor resilient projects with plans for long-term viability and the ability to withstand market volatility and other challenges. In conclusion, the pathway to token listing on a centralized exchange is paved with a series of legal considerations that projects must meticulously steer. By addressing the above legal considerations with diligence and precision, projects can significantly enhance their prospects for listing. *** Prokopiev Law Group positions itself as an ally for blockchain projects aiming for successful exchange listings. Our law firm specializes in guiding projects through the application process, conducting due diligence, and leveraging global partnerships to secure token legal opinions essential for meeting exchange and regulatory standards. With a team well-versed in the nuances of blockchain law, Prokopiev Law Group offers a suite of services tailored to the unique needs of each project. These services encompass: Jurisdictional Analysis and Entity Formation: Advising on the optimal jurisdiction for project registration and facilitating the legal establishment of entities, ensuring alignment with Virtual Asset Service Provider (VASP) legislation and other regulatory frameworks. Ownership Structure Clarification: Assisting projects in structuring and disclosing their ownership in a manner that meets transparency requirements and exchange scrutiny. Token Legal Status Consultation: Providing legal opinions on the token's classification, addressing securities laws, and ensuring compliance in target markets. Regulatory Strategy: Developing compliance strategies that cover AML/CFT obligations, data protection, privacy laws, and more, underscored by the appointment of reputable compliance officers. Marketing and Communication Compliance: Reviewing marketing materials, whitepapers, and website content to ensure they are free from investment solicitations and compliant with legal standards in project jurisdictions. Tokenomics and Sale Regulation: Advising on token sale strategies, distribution models, and the regulatory implications of ICOs, IEOs, and other fundraising mechanisms. Policy Development: Drafting detailed internal policies, including AML/CFT, KYC procedures, terms of use, and privacy policies, to fortify projects against regulatory risks. Operational Resilience Planning: Consulting on corporate, management, and operational frameworks that ensure project continuity and resilience against adverse events. By partnering with Prokopiev Law Group, blockchain projects can confidently address the legal aspects of token listings, from initial planning to post-listing compliance. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Blockchain technology has introduced a revolutionary asset management and investment approach, notably through tokenizing real-world assets (RWAs). Tokenized RWAs on the blockchain represent a diverse array of physical and traditional financial assets, including but not limited to cash, commodities, equities, and bonds. This process transforms how these assets are accessed, exchanged, and managed, leveraging blockchain technology to offer opportunities in financial services and various non-financial applications. Key Terms Tokenization: This refers to converting rights to an asset into a digital token on a blockchain. This involves fragmenting the asset into tradable shares or tokens, each representing a fractional ownership or interest in the asset. Real-World Assets (RWAs): These are tangible or intangible assets outside the digital realm, such as real estate, art, or commodities. Smart Contracts: Automated, self-executing contracts with the terms directly written into code on a blockchain, facilitating, verifying, or enforcing the negotiation or performance of a contract. Tokenizing an asset involves a multi-step process: Asset Identification and Valuation: The first steps involve identifying the asset to be tokenized, which could range from real estate and fine art to commodities or intellectual property. An asset valuation is then conducted, followed by a decision on fractionally representing the asset in digital tokens. Legal and Regulatory Compliance: Ensuring adherence to relevant laws and regulations may involve forming legal entities like Special Purpose Vehicles (SPVs) to streamline tokenization while complying with legal norms. An SPV is established for specific financial objectives, including asset management, risk mitigation, or investment facilitation. Smart Contract Creation: The next step is the creation of blockchain-based smart contracts. These contracts detail the procedures for token creation, management, and trading. Smart contracts are instrumental in automating processes and ensuring execution per agreed terms. Blockchain Platform Selection: Platforms like Ethereum are often preferred for their smart contract capabilities and robust developer community, but other blockchain systems with tokenization features can also be considered. Token Creation: This stage involves the generation of digital tokens that signify ownership or rights over the physical asset. Each token typically represents a fraction of the asset's value; it can be fungible or non-fungible. These tokens are developed on the selected blockchain, adhering to established standards such as ERC-20 or ERC721 for Ethereum-based tokens. Ownership Ledger: Blockchain technology provides a transparent and immutable ledger to record token ownership. This ledger tracks all transactions involving the tokens, including purchases, sales, and transfers. Custody Solutions: Robust custody solutions are essential for the physical assets underlying the tokens. This may involve physical security for tangible assets or secure digital storage solutions for intangible assets. Off-chain Data Integration: Ensuring the integrity and transparency of the tokenized assets necessitates incorporating reliable off-chain data. This is typically achieved through decentralized oracle networks, which securely feed external, real-world information to the blockchain, thereby maintaining the accuracy and transparency of the tokenized assets. Exchange and Marketplace Integration: A vital component is establishing a marketplace or platform for buying, selling, and trading these tokenized assets. Integration with cryptocurrency exchanges is often employed to facilitate easy access and trading for investors. Enhancing Accessibility and Liquidity: Tokenizing physical assets boosts their accessibility and liquidity. Unlike traditional markets with stringent trading hours and high entry barriers, these tokenized assets can be traded continuously, offering greater flexibility and accessibility to investors. Legal Challenges in RWAs Tokenization Despite the technological advancements, tokenizing RWAs presents several legal challenges: Regulatory Compliance: Adhering to diverse regulatory frameworks, especially when dealing with security tokens subject to securities laws. Tokenized assets might be subject to the laws of multiple jurisdictions, mainly if traded internationally. Custody and Ownership: Ensuring secure custody of the physical assets and clear legal ownership represented by the tokens. The transfer of tokens must adhere to property transfer laws. Smart Contract Integrity: Mitigating risks associated with potential bugs or vulnerabilities in smart contract code. Market Liquidity and Demand: Ensuring sufficient market demand and liquidity for the tokenized asset to thrive. Asset Valuation and Due Diligence: Establishing a clear and accurate valuation of the RWA to be tokenized, which involves due diligence to ensure the asset's legitimacy and worth. Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance: Token issuers must ensure compliance with AML and KYC regulations to prevent illicit activities. Data Privacy and Security: Compliance with data protection laws, like GDPR, is essential, especially since blockchain transactions are transparent and immutable. Taxation: The tax implications of tokenizing and trading RWAs can vary by jurisdiction. Benefits of Tokenizing Real-World Assets Tokenized RWAs offer multiple advantages: Expanded Market Liquidity: Tokenization significantly improves the liquidity of real-world assets, facilitating more accessible and faster trading on a global scale through blockchain networks. This process transforms traditionally less liquid assets into more freely tradable forms. Improved Transparency and Risk Management: The representation of assets on the blockchain ensures a higher degree of transparency. A proper application may allow for more effective auditing and asset tracking, contributing to reduced systemic risks in financial systems. Enhanced Accessibility and Inclusivity: Tokenization democratizes access to various asset classes, enabling a more extensive range of investors to participate. It allows fractional ownership, making it feasible for smaller investors to engage in markets traditionally dominated by larger entities. RWAs Tokenization and DeFi DeFi protocols are increasingly integrating traditional credit markets, such as equity and debt financing, into their frameworks, tapping into a market that drives trillions of dollars and forms the backbone of the global economy. DeFi opens a gateway to a range of opportunities by converting various assets into digital tokens on a blockchain. This includes the utilization of RWAs as unique collateral or investment avenues, the creation of market efficiencies, and access to a level of liquidity that remains elusive in conventional financial markets. Tokenization enables businesses to leverage the DeFi ecosystem for capital acquisition, offering a lower barrier to entry and novel financing mechanisms, which are particularly beneficial for emerging markets. The DeFi ecosystem itself reaps significant advantages. These include new avenues for investment yield, access to diverse off-chain markets, and an expanded customer base that extends into traditional finance. Examples of RWAs Tokenization Financial Assets Within the financial domain, tokenizing assets such as bonds, stocks, and shares heralds a new era of asset fractionalization. This process democratically opens investment opportunities to a global investor base, enhancing the liquidity and tradability of financial instruments. Tokenized financial assets enjoy the advantages of decentralized trading platforms — efficiency, reduced costs, and improved security. Investment Funds The burgeoning interest in tokenization from private equity and treasury funds is reshaping the investment landscape. Tokenization offers a comprehensive lifecycle for fractionalized investments, from inception to maturity. For fund managers, this equates to augmented distribution control and operational efficiency, while investors gain from lower entry barriers and improved liquidity. The legal considerations here are multifaceted, involving structuring to conform to collective investment schemes regulations and guaranteeing transparent and compliant distribution channels. Payment Settlement Tokenization also revolutionizes the payment settlement process. Delivery-versus-payment (DvP) models in token-based transactions can now bypass traditional clearing and settlement facilities, leveraging smart contracts for real-time settlement. This shift promises reduced costs and enhanced efficiency. Still, it must navigate the complex legalities of payment systems regulation, ensuring smart contracts fulfill the roles of traditional intermediaries within the legal framework. Real Estate In the real estate sector, tokenization is simplifying a historically intricate process. Real estate tokenization brings about a drastic reduction in transaction costs and intermediary elimination and opens the market to a broader investment audience. The legal terrain here is particularly challenging, requiring a legal basis for token structures, compliance with property law, and a framework for ownership and transfer rights in the digital space. Central Bank Digital Currencies (CBDCs) A significant development in asset tokenization is the advent of Central Bank Digital Currencies (CBDCs). Unlike digital fiat visible in electronic bank accounts, CBDCs are unique in being issued on blockchain networks. This enables the traceability of each token throughout its lifecycle and allows for real-time tracking of CBDC holdings. Several nations, including major economies, are actively exploring CBDC implementation. While CBDCs hold promise for enhancing transparency and combating fraud, they also raise significant concerns regarding privacy and potential increases in governmental monitoring capabilities. Fundraising Through Security Token Offerings (STOs) In fundraising, blockchain tokens have improved the ability of projects and businesses to secure capital. The emergence of smart contracts on platforms like Ethereum has facilitated direct public fundraising through initial coin offerings (ICO). However, the regulatory stance on ICOs has shifted, with market regulators scrutinizing and frequently categorizing them as unregistered securities, thereby ushering in a period of legal and financial uncertainty for such fundraising methods. Security Token Offerings (STOs) emerge as a solution, aiming to reconcile the nature of ICOs with the stringent regulatory environment of initial public offerings (IPOs). STOs allow entities, ranging from startups to large corporations, to issue digital securities directly to the public without intermediaries. These offerings must adhere to a regulated process, including publishing a detailed prospectus and obtaining approval from market regulators. Precious Metals Traditionally dominated by instruments like ETFs, futures, and options, the precious metals market is experiencing a liquidity transformation through tokenization. Digital tokens representing these metals, akin to those existing for gold, enable enhanced liquidity and facilitate instantaneous trade settlements via smart contracts. Supply Chain In the supply chain sector, tokenization is a game-changer, enhancing the traceability and authenticity of products. Blockchain tokens can verify the responsible and licensed origin, including the second-hand sale status. Art Market By representing unique art pieces through numerous digital tokens, blockchain technology democratizes ownership, enabling a broader investor base to partake in the art market. Intangible Assets Blockchain tokenization offers enhanced protection for intangible assets such as copyrights, trademarks, and patents. By capitalizing on the immutable nature of blockchain, these assets can become tamper-proof and easily verifiable in real time. Converting a copyright or patent into a non-fungible token (NFT) can secure its authenticity and prevent unauthorized use or duplication. Conclusion The tokenization of RWAs represents a significant shift in asset management and investment. While it offers notable benefits like increased liquidity, transparency, and accessibility, it also poses unique legal challenges, including regulatory compliance, asset custody, and market viability. Prokopiev Law Group provides clear-cut legal services for businesses involved in the tokenization of real-world assets (RWAs). Understanding the challenges of regulatory compliance, asset protection, and the need for seamless cross-border transactions, we offer informed guidance within this complex domain. Our firm taps into an extensive network of legal professionals across multiple jurisdictions to assist clients in various aspects of asset tokenization, from the initial stages of asset selection and smart contract development to navigating the final stages of token issuance and exchange integration. We focus on ensuring that our clients' tokenization strategies are not only innovative but also adhere to the current legal frameworks. For enterprises venturing into the realms of DeFi, STOs, or the broader digital asset market, Prokopiev Law Group is equipped to address the legal intricacies with precision and professionalism. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Web3 is characterized by decentralization, blockchain technologies, AI, and a new paradigm of user interaction and data management. It presents exceptional legal challenges and considerations. While certain fundamental legal principles remain consistent with those of the Web2 era, Web3 introduces specific nuances. It necessitates a refined approach in drafting Terms of Service (ToS) that are legally sound and tailored to the distinctive challenges of the emerging digital and legal landscape. Main Elements of Terms of Service Regardless of whether you're dealing with Web2 or Web3, certain core components should be integrated into any ToS: Introduction and Effective Date: In the ToS, it should be mentioned that they are effective as of a particular date and introduce the terms governing the use of services. User Agreement and Acceptance: Users signify acceptance of the ToS (e.g., by clicking "I agree"). It may include acceptance of linked policies such as the Privacy Policy. Description of Services: Comprehensive detailing of services provided, including any limitations or conditions, and description of site/app's service. Conditions for a particular service, such as age requirements and location-based restrictions, can be specified. User Responsibilities and Conduct: Specifies acceptable and prohibited behaviors; includes service use guidelines and a detailed Rules of Conduct section. Privacy Policy: Elaborates on data collection, use, protection measures, and the use of cookies. User Accounts: If accounts are allowed, details that users ensure data accuracy and are responsible for their account information, including passwords. Intellectual Property Rights: Clarity on content ownership, encompassing user-generated content and service-provided content. User-Generated Content (if applicable): Sets the rules regarding user-contributed content on a platform. Payments and Billing: Outlines the pricing, billing structure, and payment method conditions. If applicable, it may include policies on sales finality and conditions under which refunds are not offered. Dispute Resolution and Governing Law: Guidelines for dispute resolution, jurisdiction, and applicable law, including international use and compliance requirements. Limitation of Liability and Disclaimer: This may include statements limiting liability, disclaimers, and an "AS IS" and "AS AVAILABLE" disclaimer. Addresses liability provisions such as errors in content, personal injury, property damage, and lost profits. Includes information on risk allocation and user liability. Indemnification: Indemnify the company against losses caused by users. Modification and Termination of Service: Details the rights to modify, change, suspend, or terminate service, with or without notice. Includes conditions under which user accounts may be suspended or terminated. Termination and Suspension: Explicit account suspension or termination conditions. Shipping Policy (if applicable): Explains shipping processes and policies for physical goods. Warranty/Guarantee Information: Where applicable, details on warranties or guarantees offered. Third-Party Links: Addresses legal considerations regarding third-party links. Contact Information: Provides up-to-date contact information for legal, support, or dispute resolution inquiries. International Use and Compliance: Specifies particular terms following user area laws; includes statements about users' compliance with their local rules. Modification of Site and Terms: Rights to modify, change, add to, terminate, or suspend any site or ToS part at any time. Identification of the Business: Clear identification of the business operating the website/app. Withdrawal Right (if applicable): Details on the existence of a withdrawal right. Safety Information (where applicable): Includes instructions for proper use and safety information. Web3 Specific Considerations for Terms of Service When drafting ToS for Web3 projects, certain additional elements become pertinent: Decentralization and User Control: Addressing how decentralization impacts user control and responsibility, particularly regarding data and transactions. Smart Contracts: Explanation of smart contracts' role and legal status within the platform, including enforceability issues. Tokenization and Cryptocurrency: Terms covering digital assets, tokens, and cryptocurrencies, including any legal implications. Blockchain Interactions: Clarity on how blockchain technology is used, including implications for data integrity and transaction irreversibility. Data protection issues in this regard should also be explained (better in a separate Privacy Policy). User Anonymity and Pseudonymity: Addressing how anonymity or pseudonymity is handled legally, especially concerning liability and responsibility. Interoperability and Third-Party Integrations: Terms covering how the platform interacts with third-party services and other blockchain networks. Security Risks: Specific clauses about security risks inherent in blockchain technologies and user responsibilities in maintaining security. Inform users about potential service interruptions or issues stemming from blockchain-specific challenges. AI-Generated Content: Address the legal implications of AI-generated content on the platform, ensuring clarity on the ownership and use rights. Cryptocurrency Payments: Detailed provisions regarding using cryptocurrencies as a payment method emphasizing the legal force and the irreversibility of transactions. Users must be aware of the unique nature of cryptocurrency transactions compared to traditional payment methods. KYC and AML Compliance: Outline the necessity of complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Specify the procedures and requirements for user verification to ensure compliance with these regulations. Restricted Countries: List the countries where services are restricted due to local regulations, especially those prohibiting crypto transactions. Password and Credential Security: Emphasize the importance of maintaining the confidentiality of passwords and other credentials. In decentralized solutions, the ability to restore lost or forgotten passwords is generally limited or nonexistent. Account Suspension in Decentralized Environments: Detail the specific conditions and processes for account suspension in a decentralized setting where traditional oversight mechanisms may not apply. It may include automated decision-making that is regulated in particular jurisdictions. No Central Authority: Acknowledge the absence of a central governing authority in the ecosystem, explaining its implications for users in terms of self-governance and responsibility. Inform users that contacting support or a central authority may be challenging in decentralized systems. Guide how users can seek assistance or report issues. Legislation and Dispute Resolution: Outline legislation and dispute resolution complexities in a decentralized environment. Address how jurisdictional aspects may be determined and resolved, considering the global and decentralized nature of Web3. Compliance with Specific Legislation (e.g., MiCA): Outline terms necessary to comply with applicable legislation, like the Markets in Crypto-Assets (MiCA) regulation, ensuring that the service aligns with current legal standards. Tax Implications: Address potential regulatory uncertainties regarding tax implications for users, especially related to income or gains from Web3 activities. DAO-Specific Terms: Define terms related to DAOs, including governance, user rights, interactions, treasury allocation, and requirements for participation. Community Group Rules: Establish rules for behavior and interaction within community groups on social platforms related to the service, especially without a central moderation. NFT-Specific Terms: Clarify rights, ownership, and intellectual property matters related to Non-Fungible Tokens (NFTs) that may be traded or used within the platform. Third-Party Service Connections: Detail terms regarding connecting and using third-party services, such as digital wallets for Web3 transactions. Specific Web3 Terms: Define terms related to unique Web3 features such as staking, airdrops, reward policies, bridging services, conduct in the metaverse, and any investment-related terms, if applicable. By incorporating these Web3-specific components into the Terms of Service, the document will comprehensively address the unique aspects and legal considerations of the Web3 environment. This approach ensures clarity, compliance, and informed usage for all participants in the platform. Jurisdictional Variances Recognizing that legal stipulations and enforcement can vary significantly across jurisdictions is imperative. This guideline serves as a general framework, and legal practitioners should tailor the ToS to the specific legal requirements of the jurisdiction in which the Web3 platform operates. Collecting User Consent for Terms of Service in Web3 Traditional Methods of Consent Collection In traditional online environments, user consent for ToS is typically obtained through explicit actions such as clicking an "I Agree" button or checking a box next to a statement acknowledging the ToS. This method, known as active consent, ensures that users are aware of and agree to the terms before using the service. Additionally, some platforms use a passive consent mechanism, where continued use of the service implies consent to the ToS. Transition to Web3: Adapting Consent Mechanisms In the Web3 ecosystem, collecting user consent requires adaptation due to its decentralized and often anonymous nature. The methods must respect the principles of decentralization while ensuring legal compliance. Explicit Consent in Decentralized Interfaces: Web3 platforms can implement explicit consent mechanisms similar to traditional methods. Users could click an "I Agree" button within a decentralized application (dApp). However, given the decentralized nature, the process should be designed to record consent in a verifiable manner, possibly using blockchain technology for transparency and immutability. Smart Contract-Based Consent: Leveraging smart contracts for consent allows for a more integrated approach in Web3. When a user engages with a dApp or a blockchain service, they could be required to interact with a smart contract that records their acceptance of the ToS. This interaction is transparent and tamper-proof, ensuring reliable evidence of consent. Cryptographic Signatures for Agreement: Users can provide consent by signing a message or transaction using their cryptographic keys. This method confirms user agreement and ties the consent to their unique blockchain identity, providing a clear audit trail. Decentralized Autonomous Organization (DAO) for Consent Governance: For platforms governed by a DAO, consent to the ToS can be integrated into the governance process. Users, as part of the DAO, can vote on or agree to the ToS, making the consent process a part of the community governance. Continuous Consent Through Blockchain Interactions: Web3 consent can be ongoing. For example, executing certain transactions or participating in specific blockchain activities could be conditioned on adherence to the latest ToS, with each interaction reaffirming consent. Consent in Immutable Blockchain and Personal Data Protection Legislation The Challenge of Immutability Blockchain technology is inherently immutable, meaning it cannot be altered or deleted once data is recorded. While ensuring data integrity and trust, this characteristic poses a significant challenge in personal data protection laws, such as the General Data Protection Regulation (GDPR) in the European Union and similar legislations globally, often requiring data to be amendable and deletable. Legislations like the GDPR grant individuals the right to have their personal data erased. Consent Management on Blockchain Obtaining explicit and informed consent from individuals is essential for personal data to be lawfully processed on a blockchain. This consent must cover the nature of the blockchain's immutability and its implications for the user's personal data. While blockchain data cannot be altered, mechanisms can be developed to ensure that consent, once given, can be revoked. This may involve complex technical solutions, such as encrypting the data on the blockchain and making the decryption key inaccessible upon consent withdrawal (still poses risks under GDPR). Compliance Strategies Data Minimization: Adhering to data minimization principles, where only necessary data is collected and processed, can reduce the impact of blockchain's immutability on personal data protection. Off-Chain Data Storage: Storing personal data off-chain while using blockchain only for verification purposes can be a strategy to balance immutability with data protection requirements. Anonymization and Pseudonymization: Employing techniques such as anonymization or pseudonymization of personal data before recording it on the blockchain can help reduce privacy concerns while maintaining the integrity of the blockchain. Identifying the Party in Agreement with Users Unlike traditional ToS with clearly defined parties (user and a legal entity-service provider), the decentralized nature of blockchain and Web3 technologies introduces a more complex dynamic. Possible Contractual Parties in Decentralized Systems DAO Mutual Acceptance: The whole DAO, as a collective of users governed by smart contracts, can hypothetically act as a mutual contractual party. Here, the agreement is between each user forming a collective community of a DAO, with terms potentially supported by the smart contract code governing user interactions. In certain decentralized systems, all users collectively agree to the terms through a voting process. The agreement may become effective when a majority or a predefined threshold of users vote in favor, reflecting the collective decision-making process inherent in decentralized systems. DAO as a Legal Entity: Certain jurisdictions are exploring the concept of recognizing DAOs as legal entities (Marshall Islands and Wyoming DAO LLCs, for example). In this scenario, a DAO itself is considered the party to the agreement. Platform Operators or Developers: When a decentralized application (dApp) is developed and maintained by a specific team or company, that entity could serve as a contracting party. This approach aligns more with traditional contract models but may not fully represent the decentralized nature of the platform and might be very risky for the core team. Network Participants: In decentralized systems, especially those on a peer-to-peer model, each participant or node could be a party to an agreement. Hybrid Models: Contractual parties in decentralized systems could involve hybrid models. For example, a company-developed dApp might operate under a DAO governance model, combining the roles of platform operators and DAO stewards. DAO Legal Wrapper as a Legal Entity: In some cases, a legal entity, such as a DAO legal wrapper, can act on behalf of a decentralized project. This legal wrapper provides a formal structure, allowing the DAO to engage in contracts and legal processes while maintaining its decentralized governance model. What We Offer Prokopiev Law Group offers specialized legal support to ensure compliance and protection of Web3 projects. Our expertise and the partnership network cover key legal aspects and can help, for example, with Web3 Terms of Service, Token Sale, and Web3 Intellectual Property Protection. We offer Web3 Compliance Strategies and Decentralized Finance (DeFi) Legal Consulting services. Our team and partners are adept at addressing the nuances of DAO Governance Legal Frameworks and ensuring adherence to Data Protection Laws. Prokopiev Law Group is equipped to provide the legal insight and strategy necessary for the success and security of your Web3 endeavors. Please read more about a DAO legal support here. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.