In its media release of 16 February 2018 the Swiss Financial Market Supervisory Authority FINMA published its long-awaited guidance on Initial Coin Offerings (ICO) which defines the minimum information required and principles for requests for negative clearance.
An ICO is a digital form of public fund-raising for entrepreneurial purposes. Blockchain-based “coins” or “tokens” are sold in exchange for cryptocurrencies (e. g. Bitcoin) or FIAT currencies. The token represents a certain value or service that the issuer defines prior to the ICO.
In its media release of 29 September 2017 FINMA already acknowledged the innovative potential of this technology and pointed out to intersections between ICOs and the applicable financial market laws. In its new guidance FINMA rightly points out that generalized statements with respect to the applicability of financial market laws is not possible due to the variety of tokens and ICOs. Instead, every ICO must be assessed individually on a case-by-case basis.
Types of token
FINMA basically distinguishes between three different types of tokens (although hybrid forms are possible):
- Payment tokens: These are considered standard crypto currencies. They can be used as means of payment for the purchase of goods or services as well as for the transfer of money and values. They are not associated with any other functions or projects.
- Utility tokens: They provide access to a blockchain-based applications or services.
- Investment tokens: These tokens represent assets (such as shares of companies, revenues or entitlements to dividends or interest payments). Depending on its design, this type of token is similar to a share, bond or derivative financial instrument.
FINMA came to the conclusion that it is particularly the Anti-Money Laundering and securities regulations that are concerned with respect to ICOs. Conversely, the Banking Act (“BA”) and the Collective Investment Schemes Act (“CISA”) are typically not concerned.
Based on the functionality of the various tokens FINMA makes the following legal considerations with respect to ICOs:
- Payment ICOs: Payment tokens fall within the scope of the Anti-Money Laundering Act (“AMLA”) but do not qualify as securities under the Financial Markets Infrastructure Act (“FMIA”) and the Securities Trading and Exchange Act (“SESTA”).
- Utility ICOs: Utility tokens are basically not qualified as securities provided that they are intended to provide access digitally to an application or service and may be used in this capacity at the moment of issuance. Conversely, if a utility token is also used for investment purposes it is qualified as security.
- Asset ICOs: Asset tokens are treated as securities by FINMA.
Combinations of the various types are also possible.
FINMA recognizes the innovation potential of ICOs and the block chain technology but also highlights risks that result for investors.