The new FINMA Guidelines on the ICOs in Switzerland Recently the Swiss Financial Market Supervisory Authority (FINMA) receives a huge number of enquiries from organisers of Initial Coin Offerings (ICOs) regarding the launch of their ICOs in Switzerland and more particularly regarding the applicability of the financial market regulation and the existence of licensing requirements. In its first Guidance 04/2017 published on 29 September 2017, FINMA expressed its position on initial coin offerings (ICOs) and highlighted the areas where ICOs may fall under the scope of the financial market regulation. However, many questions remained unanswered and required further clarification. After the enforcement actions against unauthorized providers of the fake cryptocurrency "E-Coin" in September 2017, on February 2018 FINMA published its new guidelines on its regulatory treatment of ICOs in Switzerland. These new guidelines will not replace, but will complement its earlier FINMA Guidance 04/2017.

A new requirement- formal request to FINMA regarding the planned ICO
In its Guidance FINMA explicitly stated that it will provide an assessment letter only on planned ICOs. FINMA made it clear that ICOs which already have taken place will be assessed in the context of investigations regarding potential unlicensed activities. It is important to note, that FINMA will assess ICOs only in the perspective of the application of the financial market regulation. It will not assess if the ICO is compliant with the civil and tax laws. The minimum information requirements are published in the Annex to the ICO Guidelines. Thus, before launching an ICO its organiser shall address a formal request to FINMA with the information required according to the ICO Guidelines (information regarding the project itself, the company and its founders, the design and economic purpose of the tokens and potential secondary trading etc.) and wait for the assessment from the Swiss Financial Market Supervisory Authority. Pursuant to the FINMA Ordinance of the Levying of Supervisory Fees and Levies, FINMA will charge a fee (depending on the complexity of the ICO structure or token model – averaging between CHF 10,000 – 15,000) for the provision of the formal assessment. Only after the receiving of the response from FINMA ICO organisers can proceed to the ICO.

FINMA will continue to treat each ICO on a case by case basis
Currently, there is no ICO-specific regulation or relevant case law in Switzerland. In its latest Guidelines FINMA made it clear that it will assess each ICO on a case by case basis and that it will base its assessment on the underlying economic purpose of the ICO, especially in cases where there is a suspicion of an attempt to circumvent the financial market regulation.

Token categories: Assessment based on the economic function and the transferability of the tokens
In its latest guideline on ICOs FINMA explicitly stated that it will assess each ICO on a case by case basis making a focus on the underlying purpose of the tokens and whether they are already tradeable or transferable. Pursuant to its latest Guidance, the Swiss Financial Market Supervisory Authority categorizes tokens into the following types:

1. Payment tokens. This type of tokens is synonymous to cryptocurrencies and do not have any other functions or links to the development of the project. These tokens are used as a means of payment for acquiring goods or services now or in the future and do not give rise to any claims to their issuer.
Legal Implication
FINMA did not mention that cryptocurrencies qualify as a payment system pursuant to article 81 of the Swiss Financial Market Infrastructure Act (FMIA). Thus, the issuance of payment tokens will not trigger a licence for a payment system for currencies. However, according to the provisions of the Anti-Money Laundering Act (AMLA) the issuing of payment tokens presents an issuing of means of payment since the tokens can be transferred technically on a blockchain infrastructure. FINMA will require compliance with anti-money legislation, if the payment tokens are transferrable at the time of issuance. FINMA stated that it will not treat payment tokens as securities.
Further, as mentioned in our previous article, the exchange of a cryptocurrency for fiat money or another cryptocurrency falls under the regulation of Article 2(3) AMLA. The provisions of the AMLA apply to the offering of services to transfer tokens if the service provider (custodial wallet provider) maintains the private key.

2. Utility tokens are intended to provide digital access to an application or a service on the platform. As long as these tokens have no investment purpose FINMA will not treat them as securities. Thus, pure utility tokens that can be used at the time of their issuance will not be treated as securities. However, if the utility token also contains functions as an investment, FINMA will treat them as a security.
Legal Implications
Most of the ICOs are launched with the idea to raise funds for the development of a platform. This means that at the time of the issuance of the tokens, the platform is not accessible. Thus, and according to the wording of the latest FINMA Guidelines, at the time of the issuance of the utility tokens FINMA will most likely quality them as security tokens rather than utility tokens. Currently it is unclear whether FINMA requires an already established platform or a beta version of the platform for the qualification of the tokens as utility tokens. The qualification as a security token will trigger the preparation of a Prospectus according to the Swiss Code of Obligations. Articles 652a and 1156 CO set out the minimum content requirements for public offering prospectuses regarding shares and debt securities.

3. Asset tokens represent assets or claims such as debts or equity claims on the issuer of the tokens, equity position/corporate membership right in the issuer, earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, shares, bonds or derivatives, entailing a promise by the issuer to share a proportional part of future profits or other fund flows with the token holders. Tokens intended to enable physical assets to be traded on the blockchain also fall into this category. FINMA made it clear that it will treat asset tokens as securities.
Legal Implications
The issuing of tokens that are analogous to equities or bonds may result in prospectus requirements under the Swiss Code of Obligations. Moreover, the issuers may fall under the scope of the Swiss securities regulation.

4. Hybrid forms of tokens present asset and utility tokens that can also be classified as payment tokens. Such tokens may qualify both as securities and as means of payment. In this case the requirements are cumulative, meaning that tokens are both securities and means of payment.

Classification of tokens as securities
So far, there was no clear position under the Swiss law as to what types of tokens would qualify as securities. Many practitioners supported the idea that to be qualified as a security a token must include some form of right or claim on the issuer of the tokens. FINMA made it clear that in its determination as to whether tokens qualify as securities it will be bound by the definition of securities given in the Financial Market Infrastructure Act (FMIA). Pursuant to Art. 2 let. B of the FMIA, the definition of securities includes certificated securities (Wertpapiere) or uncertificated securities (Wertrechte) as well as derivatives and intermediated securities that are standardised and suitable for mass trading, requiring that they be publicly offered in a standardized structure and denomination or are placed with more than 20 clients (except if they are created specifically for individual counterparties). This exception means that there is still a door to issue asset tokens without a security dealer’s license in a token generating event (a private sale) with fewer investors (individual counterparties).
As a rule, FINMA states that it will consider asset tokens to be securities, specifically if they represent an uncertificated security or a derivative and the tokens are standardised and suitable for mass trading. Pursuant to art. 973c CO, uncertified securities are rights which, based on a common legal basis are issued or established in large numbers and are generally identical.
FINMA further notes that claims in the context of pre-financings and pre-sales may qualify as securities. In each case, the prerequisite for a security qualification is that the tokens are standardised and suitable for mass trading.
The legal implications of a treatment as a security is that the tokens of the ICO will fall under the scope of the Swiss Stock Exchange Act (SESTA). This raises the question whether the ICO organiser needs a securities dealer licence (art. 10 para 1 and art. 2 let. D SESTA). According to art. 2 of SESTA, A securities dealer shall mean any natural person, legal entity or partnership who buys and sells securities, in a professional capacity, on the secondary market, either for its own account with the intent of reselling them within a short period of time or for the account of third parties, or makes public offers of securities to the public on the primary market, or creates derivatives and offers them to the public. Due to art. 10 para 1, an authorisation from FINMA is required for performing this type of activities.
According to the latest FINMA Guidelines, the book-entry of self-issued uncertified securities and the public offerings of securities to third parties continue to be unregulated. However, the creation and issuance of derivatives to the public on the primary market may be subject to a securities dealer licence requirements. Further, underwriting and offering tokens which represent securities of third parties publicly on the primary market will require a securities dealer licence if conducted in a professional capacity. In addition, professional dealers in tokens on the secondary market may require a licence.
As mentioned above, when tokens qualify as shares and debt securities (the issuing of tokens that are analogous to equities or bonds), the ICO organisers need to prepare a prospectus (art. 652a and 1156 CO). Non-compliance with the prospectus requirements will entail the liability of the issuer and all other people involved (art. 752 CO).

The Banking Regulation is no longer the biggest threat
In its most recent Guidance FINMA explicitly states that the Anti-money laundering and the Securities regulation are the most relevant to the ICOs regulations. Further, the Banking Act (governing deposit-taking) and the Collective Investment Schemes Act (governing investment fund products) are not typically applicable to the ICOs according to the latest FINMA Guidance.
The money laundering risks are very high in a decentralised blockchain-based system, where tokens can be transferred anonymously and without the involvement of any regulated intermediaries. In Switzerland, the regime governing the combating of money laundering derives from the following legislation: the Anti-Money Laundering Act (AMLA), Anti-Money Laundering Ordinance and the FINMA Ordinance on the anti-money laundering. The AMLA applies to financial intermediaries and aims at ensuring that the appropriate level of due diligence is exercised in the course of conducting of financial transactions. The AMLA imposes several due diligence requirements (e.g., identification of beneficial owner, obligation to join a self-regulatory organisation (SRO) or accepting direct FINMA supervision). However, the requirements can also be met by accepting the funds through a financial intermediary who is subject to Swiss AML-regulation and who exercises the due diligence requirements on behalf of the issuer of the tokens.
Finally, FINMA expressed an opinion that the Banking Act that governs the deposit-taking activities is typically not applicable to tokens, because they generally do not impose repayment obligations on the ICO organiser. Finally, FINMA made it clear that the provisions of the Collective Investment Schemes Act will only be applicable when the funds accepted in the context of the ICO will be managed by third parties.

Conclusion
ICO organisers need to access very carefully before launching an ICO in Switzerland whether the tokens they intend to launch present a security according to Swiss law. ICO organisers need to be very careful when a platform does not yet exist at the time of the issuance of the tokens. As we mentioned above, in this case the tokens may be qualified as securities by FINMA until the establishment of the platform.
These Guidelines may not put the end of the ICOs launched in Switzerland as FINMA has explicitly reserved its right to issue further guidance regarding the ICOs, following future changes in the financial market legislation. In addition, Switzerland ranks first as top global innovative economy in the Global Innovation Index for the seventh consecutive year.
The expressed level of support from the Swiss government is a clear indication that Switzerland will remain a top location for ambitious and qualified tech entrepreneurs to launch an ICO and that Switzerland will fulfil its goal to become a Crypto Nation. FINMA CEO, Mark Branson comments on the ICOs: "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."

If you have any questions regarding cryptocurrencies and ICOs, don’t hesitate contact us, here .

Vera Moreva
Attorney at law
Lausanne, Switzerland

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