An overview of FINMA’s guidelines on ICOs

Eight months have passed since FINMA published its guidelines on initial coin offerings (ICOs). The publication covers the regulatory framework and the minimum requirements of the enquiries. Therefore, they are particularly relevant for the companies planning to do an ICO from Switzerland. This article provides a quick overview of the regulatory landscape in Switzerland.

FINMA is Switzerland’s independent financial-markets regulator; it is in charge of protecting creditors, investors and policyholders. FINMA is responsible for ensuring that Switzerland’s financial markets function effectively and that all clients of financial institutions are safe against their insolvency. The authority adopts a risk-based supervisory approach by turning its attention to the sectors that are most significant for the stability of the Swiss financial system.

It is important to highlight that FINMA supports innovative business models and the removal of unnecessary regulatory obstacles is part of the 2017–2020 strategic goals. It believes that innovation is fundamental for the future success of the Swiss financial centre. By providing a legal clarification and pushing for the removal of regulatory barriers for innovative businesses, FINMA aims at encouraging innovation.

By observing the continued growth of ICOs in Switzerland and receiving numerous enquiries, FINMA has decided to publish the ICO guidelines.
In this guidelines, it provides information on how it will deal with enquiries regarding the supervisory and regulatory framework for ICOs.

The Authority underlined that given the diversity of the structure of the various ICOs, it is appropriate to evaluate each case separately specifying that even if the requirements of specific regulations for ICOs do not yet exist, there are still different points of contact between ICOs and Swiss financial markets laws.

In its guide FINMA has classified various categories of tokens into three groups according to their economic function and their purpose:

Payment token: these tokens, which are a means of payment for the purchase of goods and services or the transfer of value, are equivalent to cryptocurrencies. They are units of digital values ​​which are not issued by a government agency but can be used as a private means of payment.

Utility token: these tokens provide access to a service or functions available on a blockchain-based infrastructure of the token issuer.

As an example our Rigo (GRG) token is a pure utility token. Its utility is provided by the fact that it gives users an access to the platform built on top of the RigoBlock protocol. So only by holding minimum amounts of the GRG tokens users can access and unlock premium features. Also, GRG helps to establish a meritocratic and incentives-based framework for trader, modify the fee logic, create an incentives mechanism without additional payment or asset functionalities. That makes GRG token straightforward, less complicated and more useful.

Asset token: these tokens represent assets analogue to equities, bonds or derivatives. Those tokens could promise a share in future company earnings or future capital flows.

There can also be cases of hybrid tokens when a token can fall at the same time in the class of asset, utility token or payment token.

In the FINMA guidelines, a distinction is made not only between the different classes of tokens but also, within these classes, between a projects’ development stages, such as pre-financing, pre-sales and functioning tokens.
In the case of a pre-financing, the token does not exist at the time of the fundraising: the investors contribute to the project on the promise that it will be developed. The tokens will be released sometime in the future.
In the case of a pre-sale, investors receive a token which is going to be swapped with a different token at a later date.
In some other cases, the tokens are already functioning and circulating at the time of the fundraising.

In the guidelines, FINMA explains when a token is considered a security and what the corresponding legal consequences are. The premise for this assessment of the token is the legal definition of a security, according to the Financial Market Infrastructure Act (FMIA). By reconnecting this definition to the three token categories defined above, FINMA does not treat payment tokens as transferable securities since they only operate as a means of payment. Utility tokens are also not classifiable as securities. In practice, the distinction is more complex as utility tokens are not classifiable as securities only if their unique purpose is to give access to a blockchain application or a digital service and the token can be used immediately after the issuance. Otherwise, until the moment in which the utility token only (or additionally) has an investment purpose, it must be treated as a security. In a similar fashion asset tokens are treated as securities when they represent an uncertificated security or a derivative and the tokens are standardised and suitable for mass standardised trading.

Getting back to the distinctions by stage of development, an asset token must be always treated as a security. Meanwhile, a payment token is considered a security only during the pre-financing and pre-sale stages; when a token is already functional it’s seen as a mean of payment. The same applies to a utility token. However, a functional token might be considered a security if it also has an investment function. What is the legal implication of a token being classified as a security? Such token falls under securities regulation.

In the guidelines, it is also explained that ICO tokens are not classified as deposits since the issuing of tokens is not generally associated with claims for repayment on the ICO organizer. From the moment in which there are liabilities with characteristics of debt capital though, the funds raised are treated as deposits and there is a requirement under the Banking Act to obtain a license unless exceptions apply.

In the case the funds raised through an ICO are managed by third parties, the provisions of the Collective Investment Schemes Act are applied with the main purpose of protecting investors.

According to AMLA, the issuing of payment tokens is subject to the Anti-Money Laundering Act when these tokens can be transferred on a blockchain, so they are considered as a means of payment. However, due to the lack of a clear definition of the term “means of payment”, the payment token itself or its mere issuance are not subject to the AMLA regulation if there is no further financial intermediary activity. It is also important to define how a payment token is regulated according to its development stage. During the pre-financing stage the AMLA it is not applicable as there is no issuance of a means of payment since the token does not exist yet and there is no financial intermediation activity by the issuer. The same applies to the pre-sale stage. In the case of a functional token, the applicability of the Anti-Money Laundering Act must be examined in more detail as the token is, in fact, a means of payment and it could already be used. Furthermore, there is a possible financial intermediation activity concerning the issuer. As a consequence, a payment token issuer, which also carries out financial intermediation activities, must comply with the due diligence obligations. These obligations include verification of the identity of the customer and of the beneficial owner, the repetition of identity verification, the obligation to keep records and other special due diligence obligations.

If a utility token also has a payment function, it must be evaluated whether it is simply an accessory function that adds to a main utility function outside the financial area, or if the payment function is to be considered as the main function. The issuance of a utility token with the accessory payment function is not subject to the AMLA, provided that the main token function fulfills a purpose outside the financial area.

Asset tokens are treated in the FINMA guidelines as securities and therefore the issuing of this token is not subject to the AMLA.

Together with the guidelines you can find an appendix “Minimum information requirements for the ICO enquiries” where you can specify some general piece of information such as a description of the project, the information about the issuing of the tokens and their functionalities, how the token is transferable and through which tools this is done, what happens after the emission, etc. By completing this form, promoters of an ICO can provide the minimum information that will enable FINMA to continue with the assessment of the enquiry. It is usually to be sent together with the whitepaper and the ICO terms and conditions. Due to the Authority’s commitment, the response should arrive within 4–6 weeks. The actual timing depends on the number of requests received and the complexity of the case. During the evaluation phase, FINMA could ask further questions and details. Finally, following the decision regarding the nature of the token, the promoters of the ICO receive confirmation regarding the type of subjection to which they are subjected. In its decision, FINMA indicates if the startup can continue with its ICO set in the way indicated in the enquiry or not. The application to FINMA is not free of charge, therefore a fee is based on the number of hours worked for examining the request.

It is therefore noted that FINMA has decided to adopt a fairly liberal and neutral approach, without placing excessive limits on the ICO’s promoters, thus leaving space for innovation. The guidelines are proof of the fact that the Authority understands very well that the old rules may not apply to ICOs and has chosen not to heavily regulate this area, favoring the principle-based approach instead and offer Swiss blockchain startups space to innovate and grow. FINMA’s support is crucial to the competitiveness of the Swiss financial markets, as this also helps win the trust of investors.

Disclaimer: This article does not constitute legal advice. As a cofounder of RigoBlock and after doing quite a bit of research on the regulatory framework for our own token, I wanted to share the results which have been collected together in this article.