Applicable Law to the Orionx Case in Chile

The new securities regimes, in general, aim to increase investment offerings, facilitate capital formation, and foster innovation. This must be accompanied by adequate investor protection, insofar as attention has been paid to the information provided to decide on an investment. Here we refer especially to the crypto industry, as a new capital regime.

Jurisdictions have not decided to fully subject these assets to securities regimes or financial law in general. The reason for excluding them from traditional regulation may be political (reducing regulatory burden to promote innovation) or simply administrative caution, but it is clear that a new regulatory space is sought (such as the Fintech Law and the proposal of the U.S. Securities and Exchange Commission). Whatever this new regulatory space may be, it is evident that the novel formulas mirror securities regulation. They are guided by the principle of providing information to make informed decisions, especially transmitting to the market the narratives and principles of the asset. In summary, the regulation of these new regimes seeks to ensure that investors in the industry are fully informed, without subsequent intervention in the relationship.

The Government, as stated in the origins of securities rules, must not take measures that approve or guarantee issued securities. It cannot assure benefits or financial security in an investment. Instead, the State must ensure that securities offerings are accompanied by the greatest possible amount of information, with nothing concealed. In the Anglo-Saxon tradition, caveat emptor was supplemented by the requirement that the seller be honest and careful, since the securities industry entails that intermediaries or issuers bear the burden of disclosing all information. The aim is to protect the public with minimal intervention. This is called regulation by disclosure.

The market is protected by ensuring that all information will be available. This perspective is contrary to merit regulation, in which the regulator judges the value by the merit perceived by the investor. If it is overvalued or unsafe, the intermediary or issuer is canceled or shut down. Louis Brandeis, in his famous book Other People’s Money And How the Bankers Use It, summarized regulation by disclosure with the analogy of regulating securities like food products: neither quality nor price is guaranteed, but the buyer is empowered to judge for themselves, always with the ingredients visible. Facts must be communicated to the investor, in notices or similar, accompanying the purchase offer. This must be mandatory and non-waivable. As the author said, “sunlight is the best disinfectant.” The State, neither judge nor regulator, does not advise or approve. It only ensures information before one enters the industry to invest.

The cryptoasset market is the application of the above.

The Orionx case is extremely useful for several reasons in relation to the above, but we will focus on just a couple.

In principle, the Fintech Law is the special law governing the matter in Chile, defining what a cryptoasset is and who may operate with them (e.g., custody and intermediation). These rules apply from the law’s entry into force. However, the regulator (CMF) has warned that Orionx does not fall within its regulatory perimeter, given its tradition of only entering the perimeter when agents are expressly mentioned by law (a tradition inherited from the Superintendencies of Banks and Securities), since it never granted Orionx the respective license. We believe this can be debated, because the CMF’s organic law contains sufficient elements to expand its powers, but we will not dwell on that. What is important is this position, which raises the question of what law applies in the absence of the Fintech Law.

A useful division, we might think, is whether an operation or legal act was executed before or after the entry into force of the Fintech Law.

This regulation began to apply, in the relevant part, from the issuance of the CMF’s general rules. But the law itself, immediately after creating a legal gap upon its publication, states that regulated entities may continue carrying out such activities until the Commission resolves their application. Then, the law adds, if the license is not requested during this period, companies must refrain from continuing operations. In some way, the law allows commercial activity both before and after (licensed or not, but with the license requested) its entry into force.

Once in force, therefore, there is a special law applicable, only distinguishing between licensed and unlicensed for purposes of applying the fintech regulatory framework to a greater or lesser extent.

It is not necessary to conclude, we believe, that each operation or act, and the agents of these acts (licensed or not, and whether or not the license was requested), upon entry into force are subject to the Fintech Law insofar as applicable, as it is a special law. And, we repeat, whether or not the license was obtained, or whether or not it was requested (in fact, the law carefully regulates the scenario in case the license is not obtained, as in the Orionx case).

The Fintech Law is inspired by the principles of securities regulation already discussed, though with a purer regime (lighter regulatory burden). This could exclude such commercial activity, for example, from civil rules contrary to the Fintech Law (and its principles) or from consumer law regulation prima facie, whether licensed or not, whether requested or not.

But the question remains regarding operations carried out before the entry into force of the Fintech Law. Again, Chile’s fintech rules are inspired by securities rules, but with lighter regulation. Thus, one could plausibly conclude that the general regime prior to the Fintech regime could be adapted to this interpretation.

One possibility consistent with this interpretation is that cryptoasset operations prior to the Fintech Law are covered by financial law rules, especially securities market rules. Article 3 of the Securities Market Law states that a security is (i) transferable titles, (ii) credit instruments, or (iii) an investment. It is under this last concept that an “investment contract” arises (we believe it is plausible to apply, therefore, the entire doctrine of SEC v. W.J. Howey Co.). Similar is the definition of financial instrument in Law No. 20.345 and the definition of what can be deposited in the special financial market regime on deposits in Law No. 18.876. Therefore, we would be dealing with securities operations proper before the Fintech Law, even if the regulator refuses to intervene for lack of authorization under the Fintech Law.

A second possibility is that, at least in intermediation and custody operations, commercial law rules apply. Indeed, intermediation is closely related to brokerage, stock exchange operations, banking, and commercial instruments, as it is the very essence of commerce. We cannot expand on this, but we believe that Title III, Book I of the Commercial Code (which the Supreme Court has applied to brokerage in general, even without official brokers appointed by the President of the Republic) shows the essence of this commercial act. It should be noted, in any case, that it would be plausible to conclude that it is commercial both for the investor and the intermediary, since in commercial agency it is always commercial for the principal (investor) who orders the commercial operation (for the intermediary it is so because of brokerage and intermediation).

In custody, although more doubtful, we would be dealing with a deposit contract which, strictly speaking, is a commercial mandate if it involves credits (although we believe not every form of ownership of a cryptoasset gives rise to a credit, but we lack space to delve into this distinction). Indeed, doctrine holds that the pledge or deposit of credits in general, whether civil or commercial, ends up being a mandate for the depositary (some simply refer to the pledge as inherently involving a mandate). This is concluded from Article 811 of the Commercial Code.

On the above, note that it is no coincidence that Article 2 of the Fintech Law begins with the statement “commercialization.”

Now, distinguished Chilean law professors (University of Chile Law School) have argued that consumer law rules would apply. And this both to acts (agents) before and after the Fintech Law’s entry into force. That is where our disagreement lies.

Whether the Fintech Law, securities rules, or commercial law apply, before or after the Fintech Law’s entry into force, we are always dealing with a special regime. It is no accident that cryptoasset regimes seek to exclude these operations from securities or commercial law, and not from consumer law. A contrario sensu, the general rule is that securities or commercial rules apply. Thus, if new regulation is created, it does not change the nature of what is regulated, but creates a new, very special regulation that removes a matter from other special rules. Therefore, in no case was, is, or will it be subject to the common regime, and even less will consumer law rules apply.

We believe it is possible to apply consumer rules to certain agents, certain services or goods, certain persons and acts, but in no case can this be the general rule here. The opposite would be to begin merit regulation over disclosure regulation, going against the very essence of financial law. Cryptoassets must be governed by disclosure regulation (Louis D. Brandeis), which is precisely contrary to the principles of consumer law (merit regulation).

In summary, before the Fintech Law: securities and/or commercial rules apply. Under the Fintech regime, (i) If the license is requested → Fintech Law applies as appropriate, plus securities and/or commercial rules. (ii) If the license is obtained → Fintech Law applies in full. (iii) If the license is not obtained → transitional provisions of the Fintech Law and securities and/or commercial rules apply.