Legal and Regulatory Compliance Challenges for Equity Token Secondary Market Operators in the European Union

As equity tokenization using blockchain-based distributed ledgers and tokens is trying to gain traction in multiple jurisdictions, the need for compliant, reliable and scalable secondary markets has become urgent. Forming a vital component of the overall venture financing value chain exchanges and other secondary market trading facilities are necessary to provide adequate levels of liquidity, investor confidence and market access to make the tokenization value proposition viable. In contrast to cryptocurrencies and utility tokens used for Initial Coin Offering (ICO) fundraising equity tokens are classified legally in the European Union broadly as financial instruments and specifically as securities invoking extensive compliance requirements not only for the issuer of the equity token and/or primary market issuance platform, but in particular for secondary market operators. The objective of this article is to identify key legal and compliance challenges impacting operation of these secondary markets and their ability to support a viable tokenization value chain. While research questions are analyzed from a European Union-level perspective, specific examples from the jurisdictions of Luxembourg, Germany, Liechtenstein, Estonia and Poland are investigated in order to identify root causes of deficiencies and potential observations and recommendations for future European developments in this highly competitive and globalized industry. Quantitative overview of key relevant market players is also attempted with the objective of substantiation of qualitative observations and conclusions.