On September 29, 2017, the Financial Market Supervisory Authority FINMA has published a Press Release with the following content:

"In recent times FINMA has observed a marked increase in initial coin offerings (ICOs), either conducted in or offered from Switzerland. ICOs are a digital form of the initial public offerings that businesses carry out but which, by contrast, exclusively take place using blockchain technology. FINMA recognises the innovative potential of such technology and has been supporting efforts in developing and implementing blockchain solutions in the Swiss finance industry for several years."

ICOs may come under existing regulatory legislation

How ICOs are structured from technical, functional and business standpoints varies markedly from offering to offering. ICOs are currently not governed by specific regulations, either globally or in Switzerland. Swiss legislation on financial markets is principle-based; one such principle is technology neutrality. Collecting funds for one’s own account without a platform or issuing house is unregulated from a supervisory perspective in cases where repayment is not obliged, payment instruments have not been issued and no secondary market exists.

Depending on how an ICO is structured, however, some parts of the procedure may already be covered by existing regulations. As specified in FINMA Guidance 04/2017, published today, this concerns the following areas in particular:

  • provisions on combating money laundering and terrorist financing;
  • banking law provisions;
  • provisions on securities trading;
  • provisions set out in collective investment scheme legislation.

FINMA is investigating ICOs

Given the close resemblance, in some respects, between ICOs/token-generating events and conventional financial-market transactions, one or more aspects of financial market law may already cover ICO campaigns according to their various models. FINMA is currently looking into a number of different cases. Moreover, whenever FINMA is notified about ICO procedures that breach regulatory law or which seek to circumvent financial market law it initiates enforcement proceedings.

Information for investors

Coins or tokens acquired through an ICO may be subject to high price volatility. Additionally, many cryptocurrency projects are still in early stages of development. Consequently, considerable uncertainty remains as to how they will be financed and implemented in the future.

FINMA cannot rule out that ICO activities may be fraudulent, especially in light of current market developments. A few days ago, it therefore published a press release informing the general public about enforcement proceedings currently in progress and how it deals with fake cryptocurrencies. It also issued a general warning about increased fraudulent activity by fake cryptocurrency providers.

MME Observations

The FINMA announcement today does not come as a surprise as FINMA has monitored and continues to review various TGE’s regarding their compliance with above mentioned regulations. MME much welcomes FINMA’s approach as it will give additional guidance and legal certainty in this new field of technology. Moreover, FINMA – in line with many other regulators around the world – takes a nuanced approach in assessing TGE’s under applicable Swiss regulations. As a result, all projects, token issuers and other community participants need to carefully analyse their projects, the TGE structure and the functionality of the token to be released to determine which Swiss regulations apply and what measures need to be taken to comply with these.

We thus strongly encourage the blockchain community, projects, token issuers and other participants to seek the appropriate legal advice prior to launching their projects and to respect the following:

  • Be smart. First and foremost, figure out your blockchain solution and your token mechanic. The business case and, perhaps more importantly, the legal analysis, will flow from these foundational elements.
  • Don’t commit fraud. This means a lot of things, but we emphasize particularly that you should have good disclosures about your project, the associated token and the use of proceeds. It also means good communication with the community.
  • Think globally. Most likely the project will sell tokens to people in various countries. Be prepared to comply with the laws and regulations of other jurisdictions than Switzerland.
  • Remember tax. Make sure you fully understand the taxation of your token launch, which could have implications beyond the location where you are based.
  • Communication does not end with the public token launch. You have sold something to the public and people will want to understand what is happening.

In addition, MME is committed to provide high quality legal, tax and compliance services for high quality TGE projects. In order to be able to assist in such project, it must meet the following standards:

  • High level project team with a clear project vision and execution abilities
  • Project scope has been developed and specified in a whitepaper with clear descriptions of innovative nature of technology or business model, and the intended token functionality including Blockchain Crypto Property ("BCP") asset classification (see here for more information)
  • Detailed project execution road map and budget has been developed and TGE funding targets correspond to this budget
  • Team is dedicated to comply with applicable regulatory requirements (financial regulations, sanction & embargoes, taxation, etc.)
  • Team is dedicated to comply with state of the industry legal and technical smart contract audit standards

If you believe that your project does not meet these standards, please take your time to further incubate before conducting a TGE. In addition, kindly be advised that the timeline for a complete TGE project usually amounts to 3-4 months.