On 16 February 2018, the Swiss Financial Market Supervisory Authority FINMA has published guidelines (Guidelines) for enquiries regarding the regulatory framework for initial coin offerings (ICOs). The Guidelines complement the earlier FINMA Guidance 04/2017 of 29 September 2017which highlighted areas in which ICOs may be covered by existing Swiss financial market law.
The new Guidelines provide insights on how FINMA intends to apply the Swiss financial market legislation when handling enquiries from ICO organisers about the applicability of such legislation to ICOs, particularly in terms of licensing requirements. More precisely, the Guidelines set forth the enquiry procedure, including the minimum information required by FINMA to process specific enquiries, and outline the legal principles FINMA intends to apply when assessing such enquiries.
The Guidelines might not be the end of the story as FINMA has explicitly reserved the right to issue further guidance regarding ICOs in the form of a formal circular (Rundschreiben) at a later stage, following further consolidation of its supervisory practice and/or future changes in financial market legislation.
In order to ensure an effective response by FINMA, the Guidelines clarify that ICO organisers should include in their enquiries the minimum general information regarding the project as set out in detail in an appendix to the Guidelines. The enquiries can be submitted to FINMA's FinTech Desk (firstname.lastname@example.org) not only in one of the official languages (German, French and Italian), but also in English.
It is important to note that enquires may be made only with respect to ICOs which have not yet taken place. Otherwise, ICOs will be assessed by FINMA only in the context of a potential investigation into unlicensed activities. Furthermore – and in line with its competences – FINMA treats enquiries exclusively with view to the existing Swiss financial market legislation.
Legal Principles Applied When Assessing Specific Enquiries
Introduction – Substance over Form?
To begin with, the Guidelines make it clear that due to the wide variety of types of tokens and ICO set-ups, a generalisation is not possible and a conclusive regulatory assessment will be carried out by FINMA only on a case-by-case basis.
However, FINMA will focus in its assessment on the economic function and purpose of the tokensto be issued. The key factors for their classification are, hence, the underlying purpose of the tokens and whether they are tradeable or transferable.
The Guidelines differentiate between the following three types of tokens (hybrid forms being possible):
- Payment tokens/cryptocurrencies: Payment tokens are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. They have no further functions or links to other development projects.
- Utility tokens: Utility tokens are intended to provide digital access to an application or serviceby means of a blockchain-based infrastructure.
- Asset tokens: Asset tokens represent assets such as debt or equity claims on the issuer and they promise, e.g., a share in future company earnings or future capital flows. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
In view of its focus on the economic function and purpose of the tokens, FINMA seems to take a "substance over form" approach. In other words, FINMA seems to be prepared to apply the relevant financial market legislation once the tokens fulfil a certain function and purpose, even if it is not necessarily possible to capture them with the pertinent formal legal terms.
Tokens as Securities
A first important legal issue addressed in the Guidelines is whether specific tokens qualify as securities. As a starting point, FINMA sets forth the legal definition of securities within the meaning of the Financial Market Infrastructure Act (FMIA). Pursuant to such definition (cf. art. 2 let. b FMIA), securities are standardised certificated or uncertificated securities, derivatives and intermediated securities, which are suitable for mass standardised trading, i.e. are publicly offered for sale in the same structure and denomination or are placed with more than 20 clients without being created especially for individual counterparties. Uncertificated securities are rights which, based on a common legal basis (e.g. articles of association), are issued or established in large numbers and are generally identical (cf. art. 973c Swiss Code of Obligations (CO)).
Considering these definitions and, particularly, focusing on the explained economic function and purpose of the tokens, FINMA classifies the three types of tokens basically as follows:
- Payment tokens/cryptocurrencies: Due to their purpose as a means of payment, payment tokens are not analogous in their function to traditional securities and will therefore not be treated as securities.
- Utility tokens: Utility tokens will not be treated as securities if their sole purpose is to confer digital access rights to an application or service and if the utility token can actually be used in this way at the time of its issuance.
- Asset tokens: Asset tokens can be treated as securities. They constitute securities within the meaning of FMIA if they represent an uncertificated security or derivative (i.e. the value of the conferred claim depends on an underlying asset) and the tokens are standardised and suitable for mass standardised trading.
The Guidelines also address the pre-financing and pre-sale phases of an ICO conferring claims to acquire tokens in the future. They clarify that such claims may also be treated as securities if they are standardised and suitable for mass standardised trading.
If the tokens issued in an ICO qualify as securities, the basic requirement for an application of the provisions on securities dealers (Effektenhändler) of the Swiss Stock Exchange Act (SESTA) is met. This raises namely the question whether an ICO organiser requires a licence as a securities dealer (cf. art. 10 para. 1 and art. 2 let. d SESTA).
According to the Guidelines, the book-entry of self-issued uncertificated securities and the public offering of securities to third parties remain essentially unregulated. On the other hand, the creation and issuance of derivative products to the public on the primary market might be subject to the licence requirements set forth in the SESTA. Also underwriting and offering tokens which constitute securities of third parties publicly on the primary market amount to a licensed activity if conducted in a professional capacity. Another consequence of the qualification of tokens as securities is notably that professional dealers in tokens on the secondary market could require a license.
In addition, the issuance of tokens can result in prospectus requirements which are currently governed by the Swiss Code of Obligations. However, as FINMA is not responsible to supervise these requirements, it is up to the ICO organisers to clarify whether the prospectus requirements apply. In this respect, we note that when it comes to the construction of the private law provisions stipulating such requirements (art. 652a and art. 1156 CO), the "substance over form" approach FINMA seems to take will not necessarily apply. Non-compliance with the prospectus requirements may particularly entail a liability of the issuer and the other persons involved (cf. art. 752 CO). In any case, as also the Guidelines point out, the Swiss prospectus requirements will be brought on a new and broader public law basis with the entry into force of the future Financial Services Act.
Applicability of the Anti-Money Laundering Regulation
The Swiss Anti-Money Laundering Act (AMLA) applies to financial intermediaries who provide payment services or who issue or manage a means of payment (cf. art. 2 para. 3 let. b AMLA).
According to the Guidelines, the issuing of payment tokens is therefore subject to the AMLA insofar as the tokens can be transferred technically on a blockchain infrastructure. In the Guidelines, FINMA furthermore sets out its current practice according to which the exchange of a cryptocurrency for fiat money or another cryptocurrency as well as the offering of services to transfer tokens if the service provider maintains the so-called private key (i.e. acts as a custody wallet provider) fall under the AMLA. Utility and asset tokens, on the other hand, should not fall under the AMLA, except in case they are hybrid tokens.
The AMLA gives rise to multiple due diligence requirements of the ICO organisers, including the duty to identity the beneficial owner and the duty to affiliate with a self-regulatory organisation or to submit directly to the supervision of FINMA. However, the Guidelines point out that these requirements can also be fulfilled if the ICO organiser accepts funds via a financial intermediary who is already subject to the AMLA and who exercises the corresponding due diligence requirements on behalf of the ICO organiser.
Applicability of Other Financial Market Legislation
Eventually, FINMA does not exclude the applicability of further financial market legislation. Yet, it clarifies that ICOs which would fall under other legislation such as the Banking Act or the Collective Investment Schemes Act are not typical. The Banking Act governing deposit-taking is typically not applicable to tokens since they generally do not impose repayment obligations on the ICO organiser and the provisions of the Collective Investment Schemes Act become only relevant if the funds accepted in the context of an ICO will be managed by third parties.
Conclusion - Further Considerations
In its Guidelines, FINMA commits to evaluate enquiries regarding the treatment of ICOs under Swiss financial market legislation and sets out the procedure to be followed (incl. its information requirements). This will be appreciated by market participants.
FINMA also clarifies certain legal principles on how ICOs are, actually, to be treated and which legal consequences such treatment might imply.
However, as the Guidelines emphasize that each case needs to be looked at individually it continues to be advisable to seek guidance from FINMA in advance of an ICO under almost every circumstance. In addition, ICO organisers must also consider the legal provisions governing ICOs beyond those of the Swiss financial market legislation – whether they stem from Swiss or from foreign law. From a Swiss law perspective, the following items stand out:
- An important question is whether and to what extent ICOs are subject to Swiss tax laws, both at the level of the ICO organiser and the level of the investor.
- If the ICO organisers intend to use a Swiss structure, they must carefully assess the available legal entities, such as stock corporations, limited liability companies, cooperatives, associations or foundations. In particular in case asset tokens shall be issued, it needs to be checked whether they are compliant with the applicable provisions of the intended legal entity.
- Under Swiss contract law, it has to be ensured that the requirements for the transfer of rights are complied with when transferring tokens.
- The ICO must be in line with the Swiss Data Protection Act.