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The Swiss Financial Market Supervisory Authority issues guidelines on ICOs

Following a sharp increase in the number of initial coin offerings (ICOs) taking place in Switzerland, yesterday the Swiss Financial Market Supervisory Authority (FINMA) published a series of guidelines that integrate the FINMA Guidance 04/2017, issued earlier last year.

According to the guidelines, ICOs need to be assessed case-by-case to evaluate whether they comply with the requirements of the financial market regulation, in particular with securities rules and the Anti-Money Laundering Act.

When assessing the ICOs, FINMA will consider the function of the tokens and whether they are already tradeable or transferable. FINMA categorises tokens into three different groups:

  • Payment tokens, in other words, cryptocurrencies. They have no further function or link to other development projects.
  • Utility tokens – those tokens which “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. In this sense, asset tokens are analogous to equities, bonds or derivatives.

On the basis of this classification, FINMA’s Guidelines consider each ICO in the following terms:

  • Payment ICOs: For ICOs where the token is intended to function as a mean of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulation, but it will not treat such tokens as securities.
  • Utility ICOs: Utility tokens are not considered securities 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. On the other hand, if a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities – exactly as they were asset tokens.
  • Asset ICOs: FINMA considers all asset tokens as securities. This implies that trading in these tokens needs to comply with securities law requirements and civil law requirements under the Swiss Code of Obligations. For instance, these ICOs needs to adhere to the prospectus requirements, which entails an adequate disclosure of information to investors.

FINMA also admits that ICOs may exist in hybrid form – for instance, if utility tokens can be used as a form of payment, the ICO would need to comply with anti-laundering regulations.

It appears clear that FINMA is particularly concerned about the compliance of certain types of ICOs with the Anti-Money Laundering Act. In a blockchain system financial risks may be particularly relevant, as transfers can take place anonymously and without relying on regulated intermediaries.

The focus is also on securities regulation – particularly on the obligation to provide investors with transparent and reliable information, not least because tokens acquired in the context of an ICO are likely to be subject to high price volatility.

The Guidelines confirm the interest of FINMA in the innovative potential of blockchain – and the necessity of a balanced -but firm- approach in regulating this new phenomenon. FINMA is also part of the Blockchain/ICO Working Group – formed by the (SIF) State Secretariat for International Financial Matters to overlook the legality and operational framework of ICO and blockchain, as reported by Goldblum and Partners earlier this year.