The Swiss Financial Market Supervisory Authority has issued regulatory guidance on ICO. Switzerland is still on the list of the most popular jurisdictions for the organization and development of the activities that are related or based on blockchain, many of which are funded through ICO. In this regard, the Swiss Financial Market Supervisory Authority (hereinafter referred to as FINMA, the Authority) published regulatory guidance on February 16, 2018 determining the direction for future normative regulation in this field. In addition, FINMA has also clarified the expectations regarding the requirements for the requests relating to the application of the Swiss financial markets legislation in the context of the specific ICO projects.
The document, entitled “FINMA Recommendations regarding requests on legislative regulation of Initial Coin Offering”, published on February 16, 2018, is a continuation of the initial recommendations on the legislative regulation of ICO, which were published in September 2017. The purpose of these recommendations of the Swiss Financial Market Supervisory Authority is to inform future and existing market participants about how FINMA intends to respond to the requests for legal and regulatory aspects of ICO. The recommendations also unify the principles which FINMA is guided by when evaluating private projects in accordance with the Swiss law on financial markets, in particular in the field of combating money-laundering and regarding securities.
Among the key points that are covered in the regulatory recommendations, we note the following:
- Tokens are subject to categorization: there are payment tokens, utility tokens and asset tokens.
- Depending on the category of the token, the provisions of different legislation apply. At the same time, FINMA reaffirms its approach based on a neutral approach to technology, and stresses the need to determine carefully the ICO compliance with the current Swiss law on a case-by-case basis.
- FINMA indicated that additional guidance and/or clarifications could be issued in the future if necessary. The preparation of special legislation on such issues in Switzerland in the near future is not provided.
- In view of the large number of ongoing ICO projects, the new regulatory recommendations, issued in February 2018, provide useful information on procedures and required information, based on which FINMA determines the need for the application of legislation and compliance with a specific project on ICO.
- FINMA confirms that a certain number of non-disclosed ICOs are checked by the service and again warns from legal risks that arise on organizing or participating in an ICO.
- In addition to the application of financial market legislation, other important aspects of Swiss corporate, contract and tax law, as well as the regulatory issues of foreign law may need careful analysis before launching an ICO.
Today we will consider the categories of tokens and the application of the Swiss law to the certain types of tokens.
Categories of tokens
Based on the analysis of each individual project, the guidelines of FINMA focus on the economic features of the tokens. The key factor is that the trade in tokens is mainly carried out by transferring them, which occurs as public sale. And, as long as there is no generally recognized classification of tokens, FINMA differentiates three categories for its analysis:
- Payment tokens (cryptocurrencies) are the tokens that have no special features or links to other development projects. After a while, after accepting, their payment tokens become a means of payment.
- Utility tokens are the tokens, which purpose is to provide digital access to certain applications or services.
- Tokens equated to securities are the tokens that provide assets (participation in physical assets, business, earnings, dividend rights, interest payments, etc.). The economic features of such tokens are the same as equities, bonds or derivatives.
Application of Financial Market Law and Regulation
FINMA determined that in practice, the application of regulations related to anti-money laundering and securities regulation are the most relevant. At the same time, the application of other legislative acts, for example, on the regulation of banking activities or normative acts regarding collective investment schemes may be applicable as well.
On the basis of the above-mentioned, FINMA will apply AML- and securities regulation as follows:
- ICO of payment tokens: It requires compliance with anti-money laundering regulations, if the payment tokens are transferred at the time of issuance. In this case, payment tokens are not considered to be securities.
- ICO of utility tokens: Pure utility tokens that can be used as of the time of issuance, they can not be treated as securities. However, if the utility token also functions as an investment, then the Authority will treat it as a security.
- ICO of asset tokens: It is absolutely obvious that such tokens will be treated exclusively as securities.
The application of anti-money laundering regulations triggers several due diligence requirements (identification of beneficial owner, obligation to join a self-regulatory organisation (SRO) or accepting direct FINMA supervision). In addition, the requirements can also be met by accepting the funds through a financial intermediary that is subject to Swiss AML-regulation and that exercises the due diligence requirements on behalf of the issuer.
If tokens are treated as securities, the relevant legislation applies, and the public issuance of shares and bonds in the form of tokens naturally requires compliance with the relevant prospectus requirements.
The application of the provisions of other regulations may cause the necessity of the fulfillment of other requirements, such as, for example, obtaining a licence from FINMA.