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Catrina Luchsinger Gähwiler
The hype around initial coin offerings and new DLT-protocol launches has calmed down. The technology has proven its ability to revolutionise the financial market industry, but also other industries, by serving as an infrastructure where physical and digital assets or financial instruments can be tokenised in rivalrous cryptographic tokens and exchanged in a secure, cost-efficient and reliable manner. The next stage for DLT-technology to enter into full productivity is to have built the surrounding infrastructure, tools and service providers. Trading signals and copy trading are among such additional tools.
Trading signals are trading ideas or trade suggestions to buy or sell a particular cryptographic asset at a certain price and time. These trade signals are generated manually by experienced, professional traders, or automatically by algorithmic bots. Copy trading goes one step further. It enables a holder of cryptographic assets not only to receive buy or sell indications but also to automatically copy transactions made by another experienced trader on an ongoing basis. The use of these two terms in practice is not consistent. Sometimes trading signals can also be applied directly to balances of cryptographic assets on exchange-platforms, whereby procedure becomes copy trading.
Trading signals and copy trading have similarities to professional asset management and investment advice known from the old economy, but with a different mission: reduction of intermediary costs and expenses as well as the democratisation of asset management and investment advice.
As with every new tool, be it infrastructure or services surrounding DLT-technology, the question arises if and how they fall under existing financial market law regulation. As of January 1, 2020, financial services are mainly regulated in the Financial Market Services Act (FINSA) that seeks to enhance the reputation and competitiveness of Switzerland’s financial market. FinSA applies to financial service providers, client advisers, producers and providers of financial instruments. In terms of cryptographic tokens, it is only relevant for tokens qualifying as securities.
The term “financial services” in accordance with article 3 (c) FinSA is defined broadly. It includes the acquisition and sale of financial instruments for the account of clients (article 3 [c] [1] FinSA). Mere brokering of transactions in financial instruments (article 3 [c] [2] FinSA) as well as portfolio management and investment advice are also considered to be financial services. Portfolio management is deemed to comprise all activities for which the financial service provider is given power of attorney to invest assets for the account of the clients (article 3 [c] [2] FinSA). By contrast, if the financial service provider recommends the purchase or sale of financial instruments to specific clients, this constitutes investment advice. No personal recommendation and thus no investment advice is given if a financial services provider merely communicates to its client the general expectations of its institution or third parties regarding the development of certain financial instruments. Such references do not refer to financial instruments in client portfolios.
Trading signal providers in our view simply communicate to the signal receivers general expectations of its institution or third parties regarding the development of certain security tokens (financial instruments). Signal providers do not have access to the portfolios held by the signal receivers on third-party exchanges. They also do not have any information in this regard. The relationship is impersonally (anonymous) and the signals do not take into account in any way personal characteristics of the signal receivers such as their preferences, risk appetite and financial situation. In our opinion trading signals, therefore, do not qualify as financial services as there is no customer/provider relationship. It is possible that the signals relate to security tokens which the signal receiver does not even own or are not traded on the third-party exchanges for which she/he has wallets. To publish a trading signal is only to grant a use right (no different than the purchase of an app) where only the purchaser can decide whether or not the software tool is of use to him or not.
We believe that the same must apply to copy trading. With copy trading, the expert traders only allow others to obtain information about the trades they are executing and give them the opportunity to copy such trades. The expert traders likewise do not have access to the portfolios held by the copying individuals on third-party exchanges. Neither they can adjust signals to the existing constituents contained in any one exchange account. The relationship is again impersonally (anonymous). The expert traders act in their own name and own account and only consider their own interests and preferences. Interests and preferences of copying individuals are not known to the expert traders; in fact, they do not care about the interests and preferences of copying individuals. As stated trading signals and copy trading have similarities to asset management and investment advice, however, their functioning includes key distinctive characteristics. These characteristics should not be ignored and in our view must result in the non-application of the Financial Market Services Act. But the Swiss Financial Market Supervisory Authority will have a say in how these tools will be treated.
