Summary
- The Financial Services Act 2025 has no category called "digital security" or "security token". A token is classified by what it represents, using the list of Specified Investments in Schedule 1, Part 3, paras 85 to 99B.
- The kinds most likely to catch a token are shares (para. 87), debt instruments (para. 88), fund units (para. 93), derivatives (paras 94 to 96), rights or interests (para. 98), structured products (para. 99A) and environmental instruments (para. 99B).
- A token that is none of these may still be a "Virtual Asset" (s. 258), and dealing, arranging, advising, custody and platform activities in Virtual Assets are regulated in any event.
- If a token is a "Security", Part 6 applies: no Offer of Securities in GMC without an Approved Prospectus unless the Offer is exempt under the Rules (ss. 58, 59, 61).
- Marketing a token issue is a financial promotion under s. 18 unless a Licensed Firm communicates or approves it, or a Schedule 2 exemption applies.
- Issuing your own shares or debentures is excluded from Dealing in Investments as Principal (Sch. 1, para. 8), but that does not remove the Part 6, s. 18 or s. 19A obligations.
Why classification comes first
Every token launch in the Gelephu Mindfulness City (GMC) starts with one question: what does the token represent? The Financial Services Act 2025 (the "Act") regulates activities, and most are regulated only when they relate "to an investment of a kind specified by any provision of Part 3" of Schedule 1 (Sch. 1, para. 2(1)). A few, including Providing Custody (para. 43), are regulated "irrespective of the kind of property" involved (para. 2(2)). For the rest, the perimeter depends on classification.
The Act is neutral as to technology. The word "token" does not appear in Schedule 1, Part 3. A share recorded on a distributed ledger is still a share; a bond issued as a token is still a debt instrument. Terms in capitals are defined in s. 258 of the Act unless stated otherwise.
Three defined terms
Specified Investment means "an investment falling within paragraphs 85 to 99B of Schedule 1, without regard to any applicable exclusions or exemptions". It is the widest term and is used by Arranging Deals in Investments (para. 16) and Advising on Investments (para. 28).
Financial Instrument means the instruments in paras 87 to 96, 99A and 99B, plus paras 98 and 99 so far as relevant. It is used by Dealing in Investments as Principal and as Agent (paras 4 and 12), Providing Custody (para. 43), Operating an MTF or OTF (para. 54) and Managing Assets (para. 56).
Security means an investment in paras 87 to 93 and 99A, para. 98 so far as relevant, anything declared a Security in Rules and anything deemed a Security under s. 58(2). Security triggers Part 6 (Offers of Securities). Derivatives (paras 94 to 96) and environmental instruments (para. 99B) are Financial Instruments but not Securities on the face of the definition.
Schedule 1, Part 3: the categories a token can fall into
Shares (para. 87)
Paragraph 87 covers "shares or stock in the share capital of" any Body Corporate other than an open-ended investment company, and any unincorporated body constituted outside GMC. A token conferring membership in a company, with dividend and voting rights, is a para. 87 investment wherever the company is.
Instruments creating or acknowledging indebtedness (para. 88)
Paragraph 88(1) lists debentures, loan stock, bonds, certificates of deposit and "any other instrument creating or acknowledging indebtedness". Paragraph 88(2) excludes instruments for the price of goods or services, cheques, banknotes, account statements, leases and contracts of insurance; public body instruments fall under para. 90. Many "yield" tokens and tokenised loans are promises to pay. If the issuer owes the holder money, the token is likely a debt instrument, whatever the marketing calls it.
Warrants and certificates (paras 91 and 92)
Paragraph 91 catches instruments "entitling the holder to subscribe for" a para. 87, 88 or 90 investment, whether or not that investment yet exists (para. 91(2)); a token giving a right to future equity is tested here. Paragraph 92 covers transferable certificates conferring rights in respect of a paras 87 to 91 investment held by someone else, such as a token representing shares held by a nominee.
Units in a Collective Investment Fund (para. 93)
A Collective Investment Fund is any arrangement enabling participants "to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property" (s. 106(1)), where participants lack day-to-day control (s. 106(2)) and contributions are pooled and the property managed as a whole (s. 106(3)). Tokenised real estate pools and tokenised portfolios are caught here. Managing a Collective Investment Fund (para. 59) is a regulated activity, and no person may Offer a Unit in GMC except as provided under the Act and Rules (s. 106A(1)). See our guide to setting up a fund in GMC.
Derivatives (paras 94 to 96)
Options (para. 94) include options over a Financial Instrument, a currency, a commodity or a cash-settled index. Futures (para. 95) are rights under a contract for future delivery at a price agreed when made, excluding contracts made "for commercial and not investment purposes" (para. 95(2)). Contracts for differences (para. 96) cover contracts whose purpose is "to secure a profit or avoid a loss by reference to fluctuations in" the value of property or an index, excluding contracts where delivery is intended (para. 96(2)(a)). Tokens that track a price without conferring ownership are analysed here.
Rights to or interests in investments (para. 98)
Paragraph 98 sweeps in "any right to or interest in anything which is specified by any other provision of this Part". A fractional or beneficial interest in a share or bond held in a wrapper is caught even if the token is not itself the share or bond.
Structured products (para. 99A)
A "Structured Product" is a contract where each party's gain or loss is determined by an underlying factor (property, index or rate), is "not leveraged", is wholly cash-settled, involves no contingent liability, and there is "readily available public information in relation to the underlying factor"; delivery contracts, debentures and insurance are excluded (para. 99A). Structured Products are Securities, so Part 6 can apply.
Environmental instruments (para. 99B)
Paragraph 99B covers emissions allowances, carbon credits and environmental attribute certificates "recognised by the Regulator". Tokenised carbon credits are addressed in our guide to carbon credits and environmental instruments in GMC.
The Virtual Asset route
A token outside Part 3 is not outside the Act. A "Virtual Asset" is "a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction", is "neither issued nor guaranteed by any jurisdiction" and is distinguished from Fiat Currency and E-money (s. 258). A Fiat-Referenced Token is separately defined and licensed under para. 53B (see our guide to stablecoin issuance in GMC).
Dealing (paras 4 and 12), arranging (para. 16), advising (para. 28), custody (para. 43), trading platforms (para. 54) and managing assets (para. 56) each expressly extend to Virtual Assets, and GFSO sets the requirements for an "Accepted Virtual Asset" under s. 5A. A "pure utility" classification does not take a token business outside GFSO licensing; it changes which rules apply.
What follows once the token is classified
Licensing of intermediaries
Anyone who, by way of business (Sch. 1, para. 3), deals in the token as principal or agent, arranges deals, advises on it, holds it for others or operates a platform on which it trades needs a Financial Services Licence or an exemption (s. 16), subject to the Schedule 1 exclusions (see our guide to the Schedule 1 exclusions). An agreement made in breach of the General Prohibition is unenforceable against the other party (s. 21).
The issuer's own position
Paragraph 8 excludes from Dealing in Investments as Principal "the issue by a Company of its own Shares or share warrants, and the issue by any person of his own debentures or debenture warrants", with "Shares" and "debentures" including paras 87 and 88 investments (para. 8(2)(b)). Dealing in own treasury shares is also excluded (para. 9). These exclusions are narrow in their application. They do not cover an issuer that runs a secondary market in its tokens, arranges for others to buy them or advises on them, and they do not touch Part 6 or s. 18.
Part 6: Offers of Securities
If the token is a Security, s. 58(1) provides that a person "shall not make an Offer of Securities in GMC", or have Securities admitted to trading on a Licensed Exchange, "except as provided by or under this Act". An Offer of Securities is "a communication to any person in any form or by any means, presenting information on the terms of the Offer and the Securities offered, so as to enable an investor to decide to buy or subscribe" (s. 59). Section 61(1) requires an Approved Prospectus, one "approved by the Regulator in accordance with the requirements prescribed in the Rules" (s. 61(2)(a)), unless the Offer is an exempt offer as prescribed in the Rules (s. 61(3)). The Act itself sets no investor-count or minimum-subscription thresholds; whether a private placement to professional investors avoids a prospectus depends on GFSO's Rules. Securities of an Exempt Offeror are outside s. 58(1) (s. 60).
A prospectus must contain all information an investor "would reasonably require and expect to find" (s. 62(1)), and persons prescribed in the Rules as liable for it must compensate investors who suffer loss from an untrue or misleading statement or material omission (s. 70). Whether a token issue is a Prospectus Offer is the most consequential outcome of classification.
Section 18: financial promotions
Any communication "in the course of business" that is "an invitation or inducement to Engage in Investment Activity" is restricted (s. 18(1)), and Engaging in Investment Activity includes entering an agreement whose performance constitutes a Regulated Activity, or would but for an exclusion (s. 258). A launch website, whitepaper or social media campaign inviting subscription is within this. The restriction does not apply where a Licensed Firm or Exempt Firm communicates or approves the content, or a Schedule 2 exemption applies (s. 18(2)); a communication from outside GMC is caught only if "capable of having an effect in GMC" (s. 18(3)).
Relevant Schedule 2 exemptions include communications to non-GMC recipients and Licensed Firms (para. 4), generic promotions that identify neither the provider nor anyone engaging in investment activity (para. 8), material in an Approved Prospectus (para. 35) and limited material about a prospectus (para. 36). See our guide to financial promotions in GMC. Independently, s. 19A prohibits misleading, deceptive, fraudulent or dishonest conduct in relation to a Specified Investment or Virtual Asset, in or from GMC; whitepaper claims are measured against it.
Practical checklist / Next steps
- Write down every right the token confers: money, membership, profit share, redemption, price exposure, or nothing beyond use of a network.
- Map those rights against paras 85 to 99B and record the category and reasoning; if none applies, test the Virtual Asset definition.
- If the category is a Security, plan for Part 6: an Approved Prospectus or a Rules-based exempt offer confirmed with GFSO.
- Identify who will deal, arrange, advise, custody or run a market in the token, and confirm each has a licence covering that activity or a Schedule 1 exclusion.
- Confirm the issuer's own activity fits within para. 8 and does not stray into arranging or advising.
- Route all marketing through s. 18: use a Licensed Firm, obtain approval of content, or fit a Schedule 2 exemption.
Frequently asked questions
Does GMC law have a "security token" category?
No. The Act classifies investments by their legal nature under Schedule 1, Part 3, not by the technology used to record them. A token is a share, a debt instrument, a fund unit or another listed kind if it confers those rights, and otherwise may be a Virtual Asset.
If my token is only a utility token, do I need a licence?
The answer is that it may. A token functioning as a medium of exchange, unit of account or store of value is a Virtual Asset under s. 258, and dealing, arranging, advising, custody and platform activities in Virtual Assets are regulated. Issuing the token yourself is a different question from running the market or holding it for others.
Can I do a private placement of tokenised shares without a prospectus?
Section 61(3) disapplies the prospectus requirement for an Offer that is "an exempt offer as prescribed in the Rules". The Act does not set the criteria; they are in GFSO's Rules and should be confirmed before launch.
Does marketing to overseas investors only avoid s. 18?
Schedule 2, para. 4 exempts communications made only to, or reasonably regarded as directed only at, Licensed Firms or persons outside GMC, provided the indications and access controls in para. 4(2) are met. Section 18(3) also limits the restriction for communications from outside GMC.
Key takeaways
- Classification under Schedule 1, Part 3 decides which activities are regulated, whether Part 6 applies and how the token may be marketed.
- Shares, debt, fund units, derivatives, interests and structured products (paras 87 to 99A) are the categories most likely to catch a token.
- A token outside Part 3 is usually a Virtual Asset, and intermediary activities in Virtual Assets are regulated in the same way.
- Securities need an Approved Prospectus or a Rules-based exempt offer (ss. 58, 59, 61); the Act leaves the exemption criteria to GFSO's Rules.
- Issuing your own shares or debentures is excluded from dealing (para. 8), but s. 18, s. 19A and Part 6 still apply to the issuer.
This article is general information about the law of the Gelephu Mindfulness City Special Administrative Region as at the date above. It is not legal advice and does not create a lawyer–client relationship.
You may contact Basnet Law at basnet@basnetgmc.com or office@basnetgmc.com for any legal queries related to GMC.
References
- Financial Services Act 2025, ss. 5A, 16, 18, 19A, 21, 58, 59, 60, 61, 62, 70, 106, 106A, 106B, 258 (definitions of Specified Investment, Financial Instrument, Security, Virtual Asset, Fiat-Referenced Token, Engage in Investment Activity, Accepted Virtual Asset); Schedule 1, paras 2, 3, 4, 8, 9, 12, 16, 28, 43, 54, 56, 59, 85 to 99B; Schedule 2, paras 4, 8, 35, 36
