On 29 September 2017, the Swiss Financial Market Supervisory Authority FINMA published a supervisory notification on the subject of token sales/Initial Coin Offerings and at the same time announced that it was examining several cases of ICOs whether these – or the corresponding business models – violate supervisory provisions. In its press release, the Commission cites as a reason for its action the marked increase in Initial Coin Offerings carried out in Switzerland in recent months. In fact, according to the statistics of the online publication “Coindesk”, the volume of funds raised in the context of token sales/Initial Coin Offerings in the current year has already risen to around USD 2 billion worldwide. Among the largest ICOs in terms of capital this year were the Bancor ICO, with approximately USD 150 million in collected funds, and the Tezos ICO with a volume of around USD 230 million, both located in the so-called Crypto Valley in Canton Zug.
FINMA recognises the innovative potential of the new approaches normally used in the context of such ICOs, which are based on distributed ledger and blockchain technologies, both in its press release and in its supervisory communication 4/2017 entitled “Regulatory treatment of initial coin offerings”, and expressly points out that FINMA has “for several years welcomed and accompanied the corresponding efforts in the development and implementation of blockchain solutions in the Swiss financial centre”
In its explanations, FINMA describes a token sale or initial coin offering (abbreviated to “ICO” or “TGE” for “Token Generating Event”) as “a digital form of public capital procurement for entrepreneurial purposes”, in which the buyers or investors usually send an amount in virtual currency to the address of the ICO organiser generated on a blockchain (a so-called “wallet”) and receive blockchain-based coins or other tokens “connected with a specific project or company run by the ICO organisers”. It further states that such borrowing of funds for its own purposes – without the interposition of an issuing platform or an issuing house – is, in principle, not regulated under supervisory law and is therefore permitted, provided that certain conditions are met, i. e. in particular if there is no repayment obligation, no means of payment is issued and no secondary trading takes place.
FINMA also rightly points out that the specific design of ICOs, or even more precisely the design of the tokens transferred to the purchasers within the framework of an ICO, differs greatly from case to case from a technical, functional and economic point of view, which is why each token sale or ICO – together with the respective business model, the functionalities associated with the issue of tokens or the functions associated with the tokens – has to be analysed individually. .In this context, it should be noted that neither Switzerland nor most other jurisdictions currently have specific regulations on ICOs or related business models. However, since Swiss financial market law is principle-based and designed to be technologically neutral, the general provisions of the Swiss legal system – both in the area of financial markets and, where applicable in other areas such as stock corporation law, foundation law or tax law – are also applicable to tokens issued to third parties and the associated business models. However, in Switzerland – other than in many Anglo-American jurisdictions – the issue of securities in the form of shares or bonds – at the present time, i. e. until the Financial Services Act (FIDLEG) comes into force, “only”, if applicable, is subject to a prospectus obligation – but no prior review or registration obligation by or with a supervisory authority exists. Therefore, from a purely Swiss point of view, the mere issuance of tokens similar to shares or bonds is less problematic than in most other countries if the disclosure requirements applicable to a prospectus – namely in a professionally drafted token sale document or, if applicable, in a correspondingly supplemented white paper – are complied with.
However, depending on the respective design of the specific business model – and thus also of the corresponding ICO – the principle-based and technology-neutral structure of financial market supervisory law gives rise to various points of contact or connections with the specific financial market laws, in particular with the Anti-Money Laundering Act for the areas of money laundering and terrorist financing (in particular with regard to tokens that qualify as means of payment) with banking law (especially in the case of tokens, which contain or provide for a repayment obligation of any kind), with the Stock Exchange and Securities Trading Act (especially in the case of tokens that qualify as options or other type of derivative) or with the Collective Investment Schemes Act (especially in the case of business models that involve or provide for third-party management of funds).
FINMA analyses individual ICOs for compliance with financial market legislation
At the same time as the publication of its supervisory notification on token sales, FINMA informed that it was currently conducting investigations in several cases in order to verify compliance with the above-mentioned financial market regulations. FINMA pointed out that, due to the partial economic comparability of token generating events with processes in the traditional financial market, it considered it probable “that different ICO models will fall within the scope of at least one of these financial market laws, whereby due to the very different structure of the underlying business models, a conclusive regulatory assessment can only be made in specific individual cases. FINMA also announced that she would initiate enforcement proceedings in the event of indications of breaches of supervisory rights – or also in the event of conduct classified by her as circumventing financial market legislation. Accordingly, initiators intending to implement a token sale or ICO are required to check and to ensure in time that they choose the framework conditions, their business model or the design of the tokens to be issued in such a way that they either remain outside the scope of the financial market legislation or that the requirements will be complied with in accordance with the relevant financial market laws.
In this context, it should also be noted that in the case of an offer via the internet without corresponding restrictions of the target investor group, it is also very likely that the regulations in other legal systems will be affected, especially if it is not expressly pointed out to investors from these jurisdictions that they are not entitled to acquire tokens of the respective ICO now or at a later date. In recent weeks, the supervisory authorities of various countries have also been increasingly concerned with the issue of tokens and their use or secondary trade, and have either issued or announced new guidelines or regulations – such as Australia, Canada or Russia -, specifically assessed individual cases – such as the SEC in the DAO and Zaslavskiy cases -, banned or at least announced a general ban on the issuance of tokens within the framework of an ICO and certain related activities – such as China and South Korea, for example. Against this background, the initiators or promoters of token sales or ICOs are advised to inform themselves in good time about the legal restrictions resulting from the structuring of the business model and/or the token in Switzerland as well as in important foreign legal systems in order to be able to take into account and implement the corresponding requirements in the business model on the one hand and in the structuring and technical implementation of token sales on the other hand.
- FINMA is investigating ICO procedures / Press release of September 29th, 2017
- FINMA-Guidance 04/2017: Regulatory treatment of initial coin offerings of September 29th, 2017
- FINMA closes down coin providers and issues warning about fake cryptocurrencies / Press release of September 19th, 2017
- SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds / Press release of September 29th, 2017
- SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities / Press release of July 25th ,2017
- Consumer warning about the risks of Initial Coin Offerings (‘ICOs’) / Financial Conduct Authority (FSA) press release of September 12th, 2017
- Canadian securities regulators outline securities law requirements that may apply to cryptocurrency offerings / Canadian Securities Administrators (CSA) press release of August 24th, 2017
- CSA Staff Notice 46-307 / Cryptocurrency Offerings; August 24th, 2017
- Information sheet (INFO 225) of the Australian Securities and Investments Commission: Initial coin offerings; September 28th, 2017