The Swiss Financial Market Supervisory Authority (FINMA) publishes guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs). It sets out therein how it intends to apply financial market legislation in handling enquiries from ICO organisers. On the one hand the guidelines specify the minimum information required by FINMA to process enquiries from market participants. On the other hand the guidelines also set out the principles on which FINMA will respond to them. FINMA creates with this guidelines clarity for market participants.
ICOs are a digital blockchain-based form of public fund-raising for entrepreneurial purposes. Depending on the manner in which ICOs are designed, they may not in all cases be subject to regulatory requirements. Each case must be decided on its individual merits. As set out in FINMA Guidance 04/2017, there are several areas in which ICOs are potentially impacted by financial market regulation. At present, there is no ICO-specific regulation, nor is there relevant case law or consistent legal doctrine.
Requirements for ICO enquiries
In view of the sharp increase in ICO projects in recent months, FINMA is receiving significant numbers of enquiries from market participants about the applicability of financial market regulation to ICOs and the existence of licensing requirements. To enable FINMA to respond quickly and precisely to these enquiries, minimum information requirements are set out in the appendix of the guidelines regarding the project in general, as well as details of the design and issuance of the tokens and potential secondary trading. The processing of enquiries is subject to a fee.
Principles applied when assessing specific enquiries
FINMA’s principles focus on the function and transferability of tokens. Additionally, there is a focus on anti-money laundering and securities regulation.
In assessing ICOs, FINMA will focus on the economic function and purpose of the tokens issued by the ICO organiser. Key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable. At present, there is no generally recognised terminology for the classification of tokens either in Switzerland or internationally. FINMA categorises tokens into the following three types, however, hybrid forms are possible:
– payment tokens: synonymous with cryptocurrencies and have no further functions;
– utility tokens: tokens which are intended to provide digital access to an application or service; and
– asset tokens: in terms of their economic function, analogous to equities, bonds or derivatives.
FINMA’s analysis indicates that money laundering and securities regulation are the most relevant to ICOs. Money laundering risks are especially high in a decentralised blockchain-based system, in which assets can be transferred anonymously and without any regulated intermediaries. Securities regulation is intended to ensure that market participants can base their decisions about investments on a reliable minimum set of information. Moreover, trading should be fair, reliable and offer efficient price formation.
Based on the above-mentioned criteria (function and transferability), FINMA will handle ICO enquiries as follows:
– payment 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 (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.
FINMA may, following further consolidation of its supervisory practice in relation to ICOs and/or changes in financial market legislation, decide to publish its interpretation in the form of a circular at a later date.
FINMA recognises the innovative potential of blockchain technology and therefore supports the federal government’s Blockchain/ICO Working Group in which it is participating. Clarity about the underlying civil law framework will be a decisive factor in establishing this technology sustainably and successfully in Switzerland.