May Crypto-currencies be qualified as investment product?


The Italian Supreme Court has recently (decision no. 44378 of 22 November 2022) stated that, under certain circumstances, cryptocurrencies must be considered “investment instruments”, and as such their offer is subject to prospectus duties.

This decision is in line with previous stances taken by the Supreme Court (decisions n. 26807 of 17 September 2020; n. 44337 of 29 November 2021) and certain local Courts (Court of Verona, decision n. 195/2017) in relation to the offering of cryptocurrencies as a form of investment.

However, the principle expressed by the Supreme Court cannot generally apply to all cryptocurrencies, nor in all cases, but must be assessed on a case by case basis, as better explained below.

It is worth noting that some fanciful comments published by experts and social media on the subject case have generated some misunderstanding on the nature of cryptocurrencies under Italian law. In particular, in the case under examination it must be noted that Bitcoins were used as a means of payment (or exchange), and were not the subject of the investment, to the effect that the principle expressed by the Court cannot relate to such cryptocurrency, but rather to the specific cryptocurrency/token called LWF Coin, that was created by a cryptocurrency platform (LWF) for the purpose of financing the development of a blockchain-based logistics services platform.

The Public Prosecutor of the Court of Brescia claimed that LWF Coins qualify as financial instruments (or products), and therefore LWF and their promoters violated the Italian Consolidated Financial Act (Testo Unico della Finanza aka “TUF”) rules on public offers of financial products, (whose violation amounts to a criminal offence) not having published a prospectus for their offer.

For this reason, the Prosecutor requested the Court to seize the Bitcoins collected in exchange for the LWF Coins, but the Court of Brescia dismissed such request by arguing that LWF Coins do not qualify as financial products.

The Prosecutor then appealed such decision to the Supreme Court, which has rendered the above mentioned decision upholding the thesis of the Prosecutor.
To better understand the contents of such decision by the Supreme Court, it is necessary to clarify the correct meaning of the terms that have been erroneously used by the Court as synonyms, i.e.: investment instruments, financial instruments and financial products.

First of all, the term “investment instruments” (strumenti di investimento), that was used by the Supreme Court to refer to LWF Coins, is a-technical and misleading, since it is not defined under the TUF. In fact, only the terms “financial instruments” (strumenti finanziari) and “financial products” (prodotti finanziari), as defined under the TUF, are relevant for application of the TUF provisions on prospectus duties and investment services.

In particular, “financial instruments”, by specific regulatory choice (Article 1, paragraph 2, TUF), are a “closed number”, with the consequence that, in the opinion of the writers, it is not possible to include cryptocurrencies (and cryptoassets in general) in this category.

“Financial products”, on the other hand, have a (deliberately) broader definition, as they include not only financial instruments, but also “every other form of investment of a financial nature”.
Financial products are therefore an open category in which any investment may fall, based on an analysis of the concrete case. Indeed, some rulings (e.g. Court of Verona no. 195/2017) have come to qualify the buying and selling of cryptocurrencies as transactions involving high risks related to financial products, with the consequence that those who offer them to the public are obliged to inform investors of the risks associated with the relevant investment through a prospectus.

Therefore, the position taken by some Italian judges at various levels (also in order to protect individual investors) is that cryptocurrencies qualify as financial products if they are offered as such to investors and, more specifically, the following three requirements identified by Consob (the Italian Regulator on investment services and products) occur: (i) the use of capital, (ii) the expectation of return and (iii) a risk directly linked to the use of capital.

Also the Supreme Court made reference to such three requirements to qualify LWF Coins as investment instruments (rectius: financial products) and as such subject to the TUF rules on public offerings.

In conclusion, the statement expressed by the Supreme Court is in principle not wrong, but must be applied on a case by case basis: in the case at issue, for example, based on the available documentation, it is not possible to assess whether the LWF Coins qualify as a financial product, or they should rather be considered as a cryptocurrency, or even an utility token (i.e. giving rights to good and services).

As a consequence, the principle expressed by the Supreme Court cannot be automatically extended to all cryptocurrencies, and not even more generally to all crypto-assets (tokens, NFT, etc.), since it is necessary to assess in the specific case the existence of the three requirements set out above, also by perusing the White Paper on the features of the offered crypto-assets.

On such basis, in our opinion cryptocurrencies of large use, like Bitcoin and Ethereum, cannot qualify as financial products, so triggering the obligation to issue a prospectus, unless they are offered as a form of investment, whilst initiatives based on the issuance of crypto-assets must be well structured and documented (with an appropriate White Paper), in order to avoid a possible requalification.