Switzerland Clarifies Position On Booming ICO Market
The Alpine State's primary financial regulator has weighed in on the growing initial coin offering (ICO) market, offering guidance to blockchain start-ups looking to raise funds.
Switzerland’s financial watchdog has outlined how it will bring initial coin offerings (ICOs) in line with existing regulations, as the fundraisers popular among crypto start-ups gather pace.
FINMA has witnessed a “sharp increase” in the number of ICOs planned or carried out in Switzerland, it said, along with a corresponding rise in enquiries about how regulations apply.
In its new guidance, the regulator has said that financial market law and regulation is “not applicable to all ICOs”, and that “circumstances must be considered on a case-by-case basis” as “there is no ICO-specific regulation, nor is there relevant case law”.
ICOs are a meld of crowdfunding and an initial public offering (IPO) used by blockchain companies to raise funds. Instead of shares in a company, investors in ICOs are rewarded with a new crypto-currency or digital token whose value is tied directly to the issuing company’s performance. It is for this reason some regulators, such as the US Securities and Exchange Commission, have suggested ICOs should be subject to securities regulation.
In assessing ICOs, FINMA will examine the economic function and purpose of the digital tokens issued by an ICO organiser. The key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable, FINMA added.
The regulator’s analysis suggests that money laundering and securities regulation are 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,” FINMA said, while “securities regulation is intended to ensure that market participants can base their decisions about investments on a reliable minimum set of information.”
FINMA categorised digital tokens into three segments: payment tokens, utility tokens and asset tokens.
Payment tokens are “synonymous with crypto-currencies and have no further functions or links to development projects,” it said, noting that in some cases they may be “accepted as a means of payment” in time.
Utility tokens are intended to provide digital access to an application or service.
Asset tokens “represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments,” FINMA said. Regarding economic functions, they are “analogous to equities, bonds or derivatives”.
Based on this criteria, FINMA said it will handle ICO enquiries as follows:
“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).”