FINMA publishes ICO guidelines

By Rizwan Qayyum

The Swiss Financial Market Supervisory Authority (“FINMA”) have published guidelines on initial coin offerings, after receiving numerous requests for guidance from start-ups aiming to launch their own ICO and considering Switzerland as their jurisdiction. Having reviewed the document, its evident that FINMA have aimed to create a regulatory environment which balances the central tenet of consumer protection whilst existing in an ecosystem conducive to innovation. The guidelines can be found here.

FINMA CEO, Mark Branson commented: “The application of blockchain technology has innovative potential within and far beyond the financial markets. However, blockchain-based projects conducted analogously to regulated activities cannot simply circumvent the tried and tested regulatory framework. Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system”.

FINMA notes that they have identified a sharp increase in the number of ICOs planned or executed in Switzerland, alongside the increased activity relating to enquiries about the current regulatory framework and its applicability.

FINMA categorizes tokens into three types, but hybrid forms are possible:

1. Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
2. Utility tokens are tokens which are intended to provide digital access to an application or service.
3. Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.

FINMA said that money laundering and securities regulation are the most relevant to ICOs. Projects which would fall under the Banking Act (governing deposit-taking) or the Collective Investment Schemes Act (governing investment fund products) are not typical. The Financial Market Infrastructure Act (FMIA) will also be relevant in determine certificated or uncertificated securities.

FINMA have noted that they intend to deal with ICO enquiries in the following manner:

1. Payment ICOs – where the ICO is intended to function as a means of payment and can readily be transferred. This will require compliance with AML. These tokens will not be treated as securities under the FMIA.
2. 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).
3. Asset ICOs – asset tokens will be securities according to FINMA, and will require compliance with securities law requirements as well as civil law requirements under the Swiss Code of Obligations, which includes prospectus requirements.

FINMA also talked about the federal government’s Blockchain/ICO working group, in which it will participate in.