Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Bitcoin and other virtual currencies have been the first application of blockchain technology, allowing transactions directly peer to peer, eliminating intermediaries and significantly reducing costs. Since the introduction of Bitcoin in 2009, a new age of tokenised ecosystems has begun and the shift from centralised to decentralised blockchain-based assets is ongoing. Our world is full of different asset classes ranging from money (in a narrow sense) to gold, real estate, securities, rights and others, many of which are difficult to trade or subdivide physically. Distributed ledger technology, and more specifically blockchain technology, is increasingly providing solutions to this problem.
The Swiss Ethereum Foundation based in Zug launched the first token generating event (TGE), also called an initial coin offering (ICO), in 2014. Switzerland, with its old tradition of political and economic stability and high-skilled labour force, provides a flexible corporate and foundation legal framework for blockchain projects, competitive tax law and regulators that are experienced in blockchain technology. Therefore, the ‘Crypto Valley’ between Zug and Zurich has attracted several of the most prominent blockchain projects in the world and is home to a growing community of entrepreneurs, service providers and crypto-enthusiasts.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
Switzerland has no specific law covering cryptocurrencies and other distributed ledger tokens but rather applies existing financial market legislation to crypto projects. In its guidelines of February 2018, the Swiss Financial Market Supervisory Authority (FINMA) distinguishes between the following three token categories:
- ‘Asset tokens’ represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category. The classification of asset tokens must consider the issuing conditions and the specific legal positions relating to the token. Asset tokens are usually qualified as securities and may require a civil law prospectus for a public primary market issuance.
- ‘Utility tokens’ provide access to a digital application or service provided on or via a blockchain-based infrastructure. Depending on their form, they are comparable to vouchers, chips or keys that can be redeemed for contractually owed services. Depending on the specific case, utility tokens may be based on a contractual relationship, but are also possible in completely decentralised ecosystems without any holder claims. Due to the lack of a relationship with the capital market, utility tokens do not generally qualify as securities.
- ‘Payment tokens’ (synonymous with cryptocurrencies) are tokens intended to be used as a means of payment for acquiring goods or services or as a means of money or value transfer. Payment tokens include cryptocurrencies in the strict sense of the term, such as bitcoin, bitcoin cash and litecoin. In addition, tokens may also be designed and used as a means of payment by securing them with assets such as gold or fiat currencies (ie, stable coins). According to FINMA, the issuance of payment tokens constitutes the issuing of a "means of payment" subject to anti-money laundering provisions, if the tokens can be transferred technically on a blockchain infrastructure. In this case, the issuer must be either affiliated to a self-regulatory organisation or subject to direct FINMA supervision.
A more detailed model of token classification, including the regulatory implications, can be found here. Depending on the specific project, banking legislation, provisions on securities trading or collective investment scheme legislation may also be relevant. To enhance the business and legal certainty for crypto projects (as well as investors), every project team has the possibility to request a pre-ruling from FINMA and will receive a clear statement whether the individual project includes a regulated activity.
To further strengthen Switzerland's position as ‘Crypto Valley’, the Federal Council published a detailed report on blockchain technology in December 2018. The Federal Council wishes to create the best possible conditions so that Switzerland can further establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies. The report addresses several legal and regulatory questions and proposes specific amendments such as a new civil law instrument for tokenised securities and a distributed ledger technology licence allowing trading and post-trading activities. The new legislation proposal is expected to be published in Spring 2019.
Different EU member state authorities have thus far taken different approaches to the regulation of virtual currencies. Is this due to the different legal frameworks of the member states or (mainly) by institutional practices of the respective authorities?
How likely is it that the regulation of virtual currencies will be harmonised at EU level? Could a consistent regulatory approach be reached through institutional guidelines for the competent authorities in the member states?
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