The Swiss Financial Market Supervisory Authority (FINMA) has published guidelines on initial coin offerings (ICOs). Switzerland, as many people know, is a hot bed of ICOs and cryptocurrency in general. Switzerland has recognized the newfound prominence in this sector of Fintech and has sought to create a regulatory environment that balances investor protection with an ecosystem that is conducive to innovation. FINMA’s response today was driven, in part, to the numerous requests they were receiving for guidance.
FINMA CEO, Mark Branson commented on the published guidance;
“The application of blockchain technology has innovative potential within and far beyond the financial markets. However, blockchain-based projects conducted analogously to regulated activities cannot simply circumvent the tried and tested regulatory framework. Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.”
FINMA says it has seen a sharp increase in the number of ICOs planned or executed in Switzerland and a corresponding increase in the number of enquiries about the applicability of regulation. Given a legal and regulatory framework with partially unclear applicability, FINMA has published guidelines, which complement earlier guidance. FINMA said that creating transparency at this time is important given the dynamic market and the high level of demand.
FINMA stated that financial market law and regulation are not applicable to all ICOs. 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.
As set out in previous guidance, there are several areas in which ICOs are potentially impacted by financial market regulation. At present, there is no ICO-specific regulation, nor is there relevant case law or consistent legal doctrine.
In assessing ICOs, FINMA said it would focus on the economic function and purpose of the tokens issued by an ICO organizer. The key factors are the underlying purpose of the tokens and whether they are already tradable or transferable. At present, there is no generally recognized terminology for the classification of tokens either in Switzerland or internationally.
FINMA categorizes tokens into three types, but hybrid forms are possible:
- Payment tokens 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.
- Utility tokens are tokens which are intended to provide digital access to an application or service.
- Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
FINMA’s said that money laundering and securities regulation are the most relevant to ICOs. Projects which would fall under the Banking Act (governing deposit-taking) or the Collective Investment Schemes Act (governing investment fund products) are not typical.
The Anti-Money Laundering Act contains requirements for financial intermediaries including, for example, the need to establish the identity of beneficial owners. The law aims to protect the financial system against the risks of money laundering and the financing of terrorism. Money laundering risks are especially high in a decentralised blockchain-based system, in which assets can be transferred anonymously and without any regulated intermediaries.
FINAM added that securities regulation is intended to ensure that market participants can base their decisions about investments on a reliable minimum set of information. Moreover, trading should be fair, reliable and offer efficient price formation.
FINMA will handle ICO enquiries as follows:
- Payment ICOs: For ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. FINMA will not, however, treat such tokens as securities.
- Utility ICOs: These tokens do not qualify as securities only if their sole purpose is to confer digital access rights to anapplication 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 ICOs: FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens, as well as civil law requirements under the Swiss Code of Obligations (e.g. prospectus requirements).
ICOs can also exist in hybrid forms of the above categories. FINMA cited the example of anti-money laundering regulation that would apply to utility tokens that can also be widely used as a means of payment or are intended to be used as such.
FINMA said that it recognizes the innovative potential of blockchain technology and therefore supports the federal government’s Blockchain/ICO Working Group in which it is participating. Clarity about the underlying civil law framework will be a decisive factor in establishing this technology sustainably and successfully in Switzerland.
FINMA Guidance wegleitung ico