Switzerland appears to have the most proactive financial regulator in Europe (who would have thought!). The Swiss Financial Market Supervisory Authority FINMA has published its guidelines that set out how the institution intends to apply financial market legislation in handling enquiries from ICO organisers.
Companies can also find the information that they need in order to get FINMA’s blessing when announcing an ICO. The main takeaway is that the Swiss supervisory authority will be looking at the matter on a case by case basis, with existing legislative frameworks applied on different occasions.
Commenting on the initiative, the CEO of CoinMetro, Kevin Murcko, said: “It’s high-time that a major European regulatory body broke cover on its plans. By embracing regulation, Switzerland’s financial watchdog has delivered a positive show of faith in the cryptocurrency space. It comes as ICOs are booming as a fundraising method for Swiss start-ups.”
“Nonetheless, any long-term regulation must be forged with input from both lawmakers and the businesses operating in the marketplace – as it is with other parts of the financial services space. Rules cannot be developed successfully in isolation from the very industry that needs to be regulated,” Mr Murcko elaborates.
Central Focus on AML and Company Ownership
Just like Japanese authorities, the FINMA’s approach focuses first on the most likely use case on part of criminals: money laundering. The analysis conducted by Swiss authorities indicates that money laundering and securities regulation are the most relevant to ICOs.
The true identity of the owners of the projects is instrumental to the Anti-Money Laundering Act requirements which apply to financial intermediaries. The law aims to protect the financial system against the risks of money laundering and the financing of terrorism.
Money laundering risks are especially high in a decentralised blockchain-based system, in which assets can be transferred anonymously and without any regulated intermediaries.
Three Token Types
While assessing ICOs, FINMA has focused most of its attention on the economic function and the purpose of tokens that are being issued by the firms. The key differentiation stems from the different underlying purpose of the tokens and whether they are already tradable or transferable.
The Swiss regulator is splitting tokens into three major types: payment, utility and asset tokens. Just as is the case in the majority of jurisdictions that have paid attention to the matter, the latter is akin to securities, which automatically applies all of the regulatory framework for securities.
The intent of regulating asset tokens as securities is to ensure that market participants can base their decisions about investments on a reliable minimum set of information. Moreover, trading should be fair, reliable and offer efficient price formation.
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.
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For ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. FINMA will not, however, treat such tokens as securities.
Utility tokens are tokens which are intended to provide digital access to an application or service.
Asset tokens represent assets such as participation in real physical projects, 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.
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).
Projects that are hybrids between the above will be subject to multiple laws.
A Model To Follow?
Whether or not European bureaucrats realise the potential of blockchain technology and aim to adopt a regulatory framework akin to the Swiss and Japanese approach is unknown. The opportunity for the EU to take a lead ahead of the US can certainly serve as a competitive advantage especially for tech startup, at a time when the “digital economy” has just surpassed the physical realm last year.
Elaborating on the Swiss framework’s wider impact, Mr Murko explains: “The Swiss market has the potential to be a benchmark for how the UK and EU approaches regulation of crypto in the coming months and years, so it is absolutely critical that it gets its approach right.”
“Bringing all sides to the table to develop rules that protect investors as well as nurturing the infant market is essential, rather than a heavy-handed approach that risks snuffing out a multi-billion dollar investor segment before it’s even got going. Japan is another possible model for how to do things correctly. The country made digital currencies legal tender last year, and has a thriving crypto trading environment driven by an efficient and structured framework of regulation,” he concluded.
Below you can have a look at the full copy of the Swiss regulator’s guidelines: