26 February 2018
Facing a rising tide of ICO inquiries, FINMA’s ICO Guidelines provide a more transparent regulatory framework. The guidelines address the regulatory treatment of ICO structures, anti-money laundering regulation and securities law. We offer insight into the guidelines’ impact on future ICOs in Switzerland.
Switzerland saw a clear trend in the rapidly growing numbers of initial coin offerings (ICOs) in 2017. More and more enterprises, particularly blockchain start-ups, are turning to initial coin offerings (ICOs) as a way of raising capital to fund the development of products and services.
In response to the sharp increase in ICO-related inquiries, The Swiss Financial Market Supervisory Authority FINMA recently published a new guidance regarding the regulatory framework of ICOs. We believe that this guidance will ultimately help ICO organizers attract more investors by structuring their ICOs in a compliant and transparent way.
FINMA clarified that it won’t answer information letters or assess past ICOs, and that it only treats formal requests regarding planned ICOs. To facilitate such requests, FINMA now stipulates minimum information requirements in the Annex to the ICO Guidelines. It’s crucial for an ICO issuer to write a formal request to FINMA including the information required according to the ICO Guidelines and await the “no-action letter” from FINMA before proceeding with the ICO.
For the treatment of formal requests, FINMA will charge a fee – depending on the complexity of the ICO structure or token model – averaging between CHF 10,000 – 15,000 (cf. FINMA Ordinance of the Levying of Supervisory Fees and Levies).
FINMA assesses ICO structures on a case-by-case basis and has defined the principles for assessment in its ICO Guidelines under a token framework. As a basic rule, FINMA made it clear that it will base its assessment on the underlying economic purpose of an ICO, especially in cases where it suspects a circumvention of existing financial markets regulation. FINMA has identified the following three token categories:
1. Payment tokens (synonymous with cryptocurrencies) are tokens used as a means of payment that do not give rise to claims on their issuer. According to the ICO Guidelines, FINMA “will not treat payment tokens as securities”.
Insight: FINMA hasn’t mentioned that cryptocurrencies could qualify as a payment system according to Article 81 of the Swiss Financial Market Infrastructure Act (FMIA), which indicates that FINMA will not request a licence as a payment systems for cryptocurrencies. However, the issuing of payment tokens constitutes the issuing of a means of payment subject to the Anti-Money Laundering Act (AMLA) as long as the tokens can be transferred technically on a blockchain infrastructure.
FINMA also made it clear that the exchange of a cryptocurrency for fiat money or another cryptocurrency falls under Article 2(3) AMLA. The same applies to the offering of services to transfer tokens if the service provider (custodial wallet provider) maintains the private key.
2. Utility tokens provide access to a platform that offers blockchain-based infrastructure. As long as such ‘platform tokens’ have no investment purpose and can actually be used to confer digital access rights to an application or service at the point of issue, FINMA will not treat them as securities.
Insight: In the current market environment, however, ICOs are regularly launched in order to raise funds for developing a platform – the platform is not accessible at the time of the token issuance. Consequently, according to the wording of the ICO Guidelines, in the majority of cases FINMA would qualify a ‘platform token’ at the time of the ICO as a security token rather than a utility token.
It’s currently unclear whether FINMA requires full access to an already established platform for such qualification or regards a beta version of the platform as sufficient qualification as utility token. But if the token qualifies as security, a prospectus according to the Swiss Code of Obligations (CO) may have to be issued. However, such qualification does not automatically mean that a FINMA license is required.
3. Asset tokens represent assets such as a debts or equity claims on the issuer and are qualified as securities by FINMA.
Insight: I would like to emphasise that this does not mean, however, that it is not possible to issue Swiss asset tokens. The issuing of tokens that are analogous to equities or bonds can result in prospectus requirements under the Swiss Code of Obligations to be applicable. Moreover, an issuer of asset tokens has to be compliant with Swiss securities regulation.
The book-entry of self-issued uncertificated securities is essentially unregulated, even if the uncertificated securities in question qualify as securities within the meaning of FMIA. The same applies to the public offering of securities to third parties. The creation and issuance of derivative products as defined by FMIA to the public on the primary market is, however, regulated and requires a FINMA license as a derivatives firm.
Underwriting and publicly offering tokens that constitute third-party securities on the primary market may require a license as an issuing house if the activity is conducted in a professional capacity.
Hybrid tokens are asset and utility tokens that can also be classified as payment tokens. Such tokens may be deemed to be both securities and means of payment and the respective requirements apply cumulatively.
Special caution is called for when no platform exists at the time of the issuance of the token. Whether FINMA regards a beta version of such a platform to be sufficient to avoid qualification as a security, is yet unclear. You can also not avoid the qualification of a security by promising to issue a token at a later time. FINMA made it clear that claims to acquire tokens in the future out of a pre-financing and pre-sale phases of an ICO will be treated as securities if the tokens are standardized and suitable for mass trading.
An immediate consequence of a strict application of the FINMA Guidelines is that many of the Swiss ‘platform tokens’ currently available on the market may qualify as securities. This means they may no longer be traded on an exchange that does not hold a FINMA securities dealer license or an equivalent foreign authorization. However, as soon as the ‘platform token’ becomes functional and its holder can use it to access services on the platform, it suddenly qualifies as utility token.
In our view, the treatment as securities of ‘platform tokens’ that do not grant access to a fully functional platform would make the categorization of tokens pointless and undermine the sense of ICOs as an alternative means to raise money. As the structuring of a ‘platform token’ raises questions with respect to the applicability of the financial markets legislation, present such projects to FINMA at an early stage in order to gain clarity on what regulatory requirements apply.
You should take FINMA CEO Mark Branson’s warning seriously that “blockchain-based projects […] cannot simply circumvent the tried and tested regulatory framework”. ICO organizers are better off to carefully assess whether the token they intend to launch qualifies as a security according to the FINMA Guidelines.
Nevertheless, we believe that the new ICO Guidelines foster Switzerland as a preferred location for ICOs and exchangers. It’s important to note that the Swiss economic minister explicitly stated in January 2018 that the Swiss government supports Switzerland’s bid to become a Crypto Nation. This level of support from the federal government is a clear sign that Switzerland will remain a top location for ambitious and qualified tech entrepreneurs to launch an ICO.