As at the time of writing there are no laws or regulations in Switzerland aimed specifically at ICOs. Moreover, hitherto the Swiss Financial Services Regulator (“FINMA”) has been reluctant to share with service providers etc information about how they deal with inquiries regarding ICOs.
In February this year, however, FINMA published a practical guide in regards to ICOs in which it explains how it deals with such enquiries in this field and provides certain details on how FINMA applies Swiss financial market laws to ICOs.
Legal Classification of the Token to be issued
As outlined in the Practical Guide, FINMA discusses the treatment of three types of digital tokens which boast different functions, whilst at the same time acknowledging that mixed forms of Token are also possible (ie “hybrid” tokens).
Payment tokens (ie “pure” cryptocurrencies)
Payment Tokens (which are akin to pure cryptocurrencies) include Tokens which are accepted as a method of payment in particular for the purchase of goods or services. These tokens are invariably not linked to other functions or projects. “Cryptocurrencies give rise to no claims on their issuer“. These tokens are considered a digital means of payment or exchange.
Utility tokens
The second category of tokens, Utility Tokens, are tokens that provide access to a digital application or service by means of blockchain-based infrastructure. Such Tokens do not include any promise of performance or profit expectations.
Asset tokens
The third and final category of Tokens, Security Tokens, “represent assets such as participations in companies” and provide a right to income, dividends or interest. These Tokens in effect represent a claim against the issuer. “In terms of its economic function, the investment tokens are analogous to equities, bonds or derivatives“.
Anecdotally we have seen, that the delimitation set by FINMA between the different categories of tokens is not so obvious in practice. A Token will often have the characteristics of several kinds of Token (e.g. payment token and asset token or utility token and payment token).
Once the token has been classified, the Founders/Promoters of the ICO must determine which financial laws apply to his/her project and what license (if any) needs to be applied for authorizing the Token Issuing Company to issue and trade these tokens.
Determination of applicable laws
On this topic, the Practical Guide provides some guidance:
Payment tokens (“ie pure” cryptocurrencies)
FINMA is of the view that payment tokens do not represent securities, except in the case of a pre-sale of tokens. If however you intend to issue the Token in Switzerland such issuance must adhere to Swiss anti-money laundering (AML) requirements.
Utility tokens
Utility tokens are not considered to be securities provided (a) they only confer on the acquirer the right to access a digital service and (b) can already be used in this way at the time of issue.
Asset tokens
FINMA regards asset tokens as securities and has indicated that the legal and regulatory consequences of such a classification must be adhered to. (For example, if the token has the characteristics of a derivative, its sale may require a dealer’s authorization). Such a classification also invokes obligations under the Swiss Code of Obligations, eg the Promoter will need to have Lawyers draft a prospectus for the issuance of equities or bonds in the form of digital tokens.
Practical Tips
If you are considering launching your ICO from Switzerland, before you incorporate, it would be wise to send an enquiry to FINMA about the applicability of financial market regulation to your proposed ICO and the potential application of licensing requirements (including with your inquiry a White Paper containing all the required information per the Practical Guide).
Next up you’ll need to consider how to legally structure your ICO/Token issuing entity (e.g. via incorporation of a Company or Foundation, type of company, etc.) and how best to minimize taxes both in Switzeland and at home. For example, different tax rates may apply in Switzerland depending on which Swiss Canton you decide to call home.
Following receipt of FINMA’s response to your preliminary enquiry, you’ll need to prepare/draft:
(i) the legal documentation necessary for the issuance of the tokens (ie including an application to FINMA for a license should same be required) and/or a prospectus
(ii) the documents relating to the ICO itself, including the general terms and conditions governing the supply of the Token and the entitlements the Token offers.
In summary, to avoid regulatory challenges, would-be ICO Launchers are strongly advised to carry out a preliminary Swiss legal assessment as regards the token to be issued, and/or to submit an enquiry to FINMA about the applicability (or non-applicability) of Swiss financial market regulations/laws to ICOs and the likely applicability (or not) of licensing requirements.
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