As a response to the sharp increase in the number of initial coin offerings (ICOs) in Switzerland over the last quarters, FINMA published today ICO guidelines aiming to improve transparency in the crypto market.
At present, there is still no ICO-specific regulation, nor is there relevant case law or consistent legal doctrine. Therefore, each case must be decided on its individual merits.
FINMA makes it clear to focus on the function and transferability of tokens.
The key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable, whereby it categorizes tokens basically into three types:
• Payment tokens
They 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.
FINMA will not treat payment tokens as securities.
• Utility tokens
Tokens which are intended to provide digital access to an application or service.
Utility tokens will not be treated as securities if their sole purpose is to confer digital access rights to an application or service and if the utility token can actually be used in this way at the point of issue.
• Asset tokens
Tokens representing assets such as participation in real physical underlying, 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 treats asset tokens as securities. According to FINMA asset tokens constitute securities within the meaning of Article 2 let. b FMIA if they represent an uncertificated security and the tokens are standardized and suitable for mass standardized trading.
An asset token also qualifies as a security if it represents a derivative (i.e. the value of the conferred claim depends on an underlying asset) and the token is standardized and suitable for mass standardized trading.
In the case of the 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 (i.e. in the same way as asset tokens) if they are standardised and suitable for mass standardized trading.
On the basis of the above-mentioned criteria (function and transferability), FINMA will handle ICO inquiries as follows (see also the diagram in the Guidelines, page 8):
• 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 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 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. For example, anti-money laundering regulation would apply to utility tokens that can also be widely used as a means of payment or are intended to be used as such.
digitalCounsels and its broad network of financial markets and securities lawyers in Switzerland is at your disposal for any questions who may arise.