The ICO guidelines published by Swiss Financial Regulator (Finma) are a big relief for us – the companies and start-ups in the Swiss Crypto Valley, and likely for others involved in blockchain-based crowdfunding anywhere in the world.
For months we have been anticipating these guidelines to fill the vacuum around the legal handling of ICO (Initial Coin Offerings), or TGE (Token Generation Events) as lawyers prefer to call them.
Generally speaking, the guidance Finma released this week is a great step forward. I expected a much more restrictive and defensive approach. I am happy to see the guidelines come out as not too restrictive or prohibitive but are instead a progressive step forward for ICO regulation.
Not too restrictive
Two years ago when I was leading the first regulatory Bitcoin (Bitcoin 7485.37 -6.79%) case here in Switzerland for Xapo, the future did not always looked so promising. For a while it looked like we would be expected to apply for banking licence, because we were storing private keys and, in a way, controlling funds of «depositors».
After more than a year of untangling the complexity of Bitcoin custody we arrived at the very progressive solution of being classified as a financial intermediary, without requiring a banking licence.
Finma’s new rules set the scene for ICO to evolve within regulatory limitations which are thankfully not too restrictive. In the Guidelines released on 16th February, Finma classifies three types of tokens and explains the regulatory requirements for each: payment tokens, asset tokens and utility tokens.
Three categories, one surprise
Payment tokens are essentially cryptocurrencies, used to pay for services on a platform or network. This token type clearly falls under AML (Anti Money Laundering) regulation – and is nothing new.
Asset tokens represent participation in real assets or companies. In most cases these are classified as bond, equity or derivative instruments – in short, securities. Again, no surprises here.
The third type, utility tokens, is where it gets interesting. Utility tokens represent access to the digital usage of a platform or a service. For these not to be viewed as securities, FINMA defines two conditions:
- At the moment of ICO, contributors should be able to use the token on the platform. This is very similar to the US SEC’s standpoint. For many startups who are not yet operational, conducting a compliant ICO is going to be difficult.
- The primary purpose of a token should not be to raise funding. This is pretty clear-cut and restrictive but the Swiss regulatory framework does not require sellers of their own equity to be regulated per se or apply for financial institution licenses.
On the way to Crypto Nation
Overall, in Switzerland, the consequences of tokens being viewed as securities are not too onerous. Obviously, this is a different story in the US. As such, Finma lists several rules that will not apply, such as Collective Investment Schemes, if the offering is not managed by third parties and has no banking licence obligation, and if no dividend-like payouts are made. This is all great.
Certainly, it highlights the requirement to issue an offering prospectus, if it has the characteristics of a security offering. But this one is actually not a pain point today as any sound ICO project issues so-called ‘TGE terms’ which are de-facto similar to offering prospectuses anyways.
Another positive from these new ICO guidelines is that in most cases, utility and asset tokens are not subject to AML requirements. This is a clear statement and relief to all those frightened by the outlook of becoming a compliance company.
In summary, my opinion is that this regulatory move is a step in the right direction for Crypto Nation Switzerland and others beyond our borders. It’s a first step in fulfilling former Swiss president Johann Schneider-Ammann’s recent visionary statement: «In several years I do not want to talk about ‘Crypto Valley Zug’, I want to talk about ‘Crypto Nation Switzerland’.»