While other regulators are still in “wait and see” mode, on 16 February 2018, the Swiss Financial Market Supervisory Authority FINMA published guidelines on initial coin offerings (ICOs) in response to the wave of enquiries that FINMA has been receiving in relation to ICOs planned or executed in Switzerland.
In a move which will be widely welcomed by the sector, FINMA makes clear that financial market law and regulation are not applicable to all ICOs. In the corresponding press release, it states that “depending on the manner in which ICOs are designed, they may not in all cases be subject to regulatory requirements. Circumstances must be considered on a case-by-case basis.”
Switzerland does not currently have any ICO-specific regulation, relevant case law or consistent legal doctrine. However, as set out in its previous FINMA Guidance 04/2017, there are several areas in which ICOs are potentially impacted by financial market regulation.
In this latest guidance, FINMA focuses on the function and transferability of tokens. FINMA notes that at present, there is no generally recognised terminology for the classification of tokens either in Switzerland or internationally. Its assessment is based on a substance over form approach. The key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable.
It categorises tokens into three types, based on the underlying economic function of the token, but acknowledges that hybrid forms are possible:
- Payment tokens are tokens which are intended to be used as a means of payment for acquiring goods or services, or as a means of money or value transfer, are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time. Where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with AML regulations. FINMA will not, however, treat such tokens as securities. This is consistent with FINMA’s current practice with respect to cryptocurrencies such as Bitcoin and Ether.
- Utility tokens are tokens which are intended to provide digital access to an application or service. These tokens do not qualify as securities if their sole purpose is to confer digital access rights to an application or service and if the utility token can already be used in this way at the point of issue. If a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities (i.e. in the same way as asset tokens).
- Asset tokens represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category. Asset tokens will constitute securities if they represent an uncertificated security and the tokens are standardised and suitable for mass standardised trading. In the case of pre-financing and pre-sale phases of an ICO which confer claims to acquire tokens in the future, these claims will also be treated as securities if they are standardised and suitable for mass standardised trading. There will be securities law requirements for trading in asset tokens, as well as civil law requirements (e.g. prospectus requirements). FINMA’s analysis indicates that money laundering and securities regulation are the most relevant to ICOs. However, in each token issuance, the applicability of the Banking Act (governing deposit-taking) and the Collective Investment Schemes Act (governing investment fund products) have also to be assessed closely.
The guidance further includes minimum information guidelines for companies looking for FINMA guidance, to help FINMA respond “quickly and precisely” to such enquiries. All enquiries should be submitted to FINMAs Fintech Desk. Enquiries can be made in German, French, Italian and English. The submission of an enquiry to FINMA will result in a supervisory fee which will be based on the complexity of the enquiry.
This may not be the last word from FINMA on the topic. FINMA has reserved its right to issue further guidance regarding ICOs by way of a formal circular.
Switzerland already had the reputation of being a good place to do ICO business (hence Zug being dubbed “Crypto Valley”). This new guidance could certainly help cement its position. We expect regulators around the world will now be reassessing whether they need to follow suit.
We have summarized the state of play our guide to ICOs in Switzerland.