A first analysis of the legal aspects of the newly released ICO guidelines
The Swiss are smart. They have always been with money. In last 20 years Switzerland has progressively lost its appeal as the former secret banking centre of the world. This has dramatically changed the landscape among Swiss professionals — mainly lawyers and fiduciaries — which have progressively lost clients and businesses and had to look for new areas of opportunities. And now they have been the fastest and smartest in jumping at this new business opportunity. And this time the potential is really immense for the Confederation.
World Premiere for ICO´s
ICO`s, ITO´s or TGE´s, call it whatever you want, are the future of fund raising. And the Swiss financial authority (FINMA) on 16th of February 2018, was the first regulator to officially issue fairly detailed ICO guidelines to help clarify if and how the current Swiss laws will apply to ICO´s. As a lawyer, I must say that I am positively impressed. Due to the recent crescendo of hysteria, critics and plainly alarming statements on the part of Central Bankers, regulators and financial prominent people vs. ICO´s, Bitcoin & Co, I was fearing that a regulatory nightmare scenario would have rapidly ensued for the sector. Luckily, the Swiss move sets an important precedent for regulators worldwide. Either follow the Swiss smart lead and improve their regulatory framework — thereby making compliance for ICO´s less burdensome and therefore a more attractive environment for ICO issuers, or go the other way and make it more burdensome than the Swiss and consequently shot yourself in the foot just like they did in NY with the infamous BitLicense. Then, say forever goodbye to the most promising business sector of the future.
I am optimistic that the countries that will soon follow the Swiss move — likely Gibraltar and possibly Canada, London, Singapore, Estonia and even Spain — will do the smart thing and start a race to the top rather than to the bottom, therefore making it easier for start-ups to go the ICO route. This is also a huge opportunity for Europe if the EU regulators will be smart enough to improve the path set by the Swiss. If not, if they decide to do like the Americans, then I am sure that London will grab the opportunity to do the smart thing and attract very good business. After all London is ideally positioned — after Brexit — to offer EU start-ups some generous incentives (also on the taxation side) to move there and steal precious business from the EU and its sclerotic bureaucracy. The Brits have all the infrastructure (just like the Swiss) to become one of the leading ICO hubs of the world. It would be a pity to lose this opportunity.
The FINMA guidelines.
Now, without getting too much into the legalities of it, let’s see in simple terms what the Swiss new guidelines say. I will keep it short to five main points.
1. First of all there is no need for new regulations. Existing regulations are sufficient to regulate even recent creations such as tokens/coins or crypto currencies. This is known by legal practitioners as Analogia legis — a fundamental principle shared by all civil law jurisdictions — whereby the interpretation of existing laws can be extended to new cases if they are analogous. Therefore FINMA correctly classifies tokens/coins and crypto currencies in very practical terms based on their use and the rights attached to them. Then they decide if and when existing Securities´ Laws and AML (Anti Money Laundering) Regulations will apply.
2. Based on current experience, fundamentally 4 types of tokens/coins have been classified: payment tokens (i.e. crypto currencies), utility tokens, asset tokens and hybrid tokens.
(i) payment tokens are not securities — therefore all the burdensome compliance with securities laws is excluded — but because they are a means of payment, then AML (Anti Money Laundering) regulations apply;
(ii) utility tokens are to be looked into more carefully. Generally, they are not to be considered securities if they grant the right to a digital use or to a digital service. In addition, the investor must be able to use the token already at the time of the ICO. This means that all the infrastructure of the issuer — that allows the tokens to be spent — must be already fully operational at the time of the ICO. However, if the token has even partially the characteristics of an “investment”, then it will be treated as a security. Because they are not considered a means of payment, AML does not apply.
(iii) asset tokens are always considered securities and will fall within the burdensome application of Swiss Securities´ Laws (i.e. a prospectus is necessary, etc). However, because they are not considered a means of payment, AML does not apply.
(iv) Hybrid tokens will have to be evaluated on a case to case basis.
3. All the above applies only to tokens which already exist at the time of the ICO. Whichever token will be issued post ICO is to be considered a security. Therefore the procedure known as ICO pre-sale or pre-financing shall be avoided if you do not want to fall within the application of Securities Law.
4. FINMA also provides a well detailed Questionnaire which is to be completed by the ICO issuer to request FINMA´s opinion on the prospective ICO. A fee will be due as well.
5. Finally, AML compliance can be easily fulfilled by hiring the services of a Swiss financial intermediary which will ensure compliance with AML laws on behalf of the ICO issuer.
Clearly, with the growing flow of ICO´s, FINMA will provide vital clarifications and interpretation to the guidelines and an interesting framework of practical ICO cases will soon develop, which will be a very useful precedent for practitioners and regulators worldwide.
All in all a positive and balanced approach which no doubt will bring very good business in Switzerland. Well done the Swiss.