Thumbs up for ICOs in Switzerland, but only if you follow the rules

Just as it was starting to look like the wild west for Initial Coin Offerings (ICOs) in Switzerland, Swiss regulators lay down the law. The same day that South Korea banned ICOs, the Swiss Federal Market Supervisory Authority (FINMA) issued a guidance on ICOs requiring more compliance.
On the 29 September 2017, following China’s lead, South Korea announced its decision to ban ICOs. On the same day, Switzerland took another approach and published a guidance on the regulatory treatment of ICOs. Projects, which are not compliant with the applicable laws, will now be subject to investigation.
The announcement is important for two reasons:
  • It’s an indirect declaration by a regulator that recognizes an ICO as a new means of financing – creating juridical certitude – which doesn’t exist in other countries.
  • FINMA is providing a legal framework for ICOs and clarity regarding what ICO promoters must consider. FINMA has also declared that it will initiate enforcement procedures against an ICO if a breach is detected.
If you’re considering launching an ICO, here’s what you need to know to ensure you’re on the right side of the new guidance. According to FINMA, ICOs fall under four relevant areas of the law:

1. Anti-Money Laundering (AML):

The Swiss Federal Council characterized cryptocurrencies in its report on virtual currencies as assets due to their use as a means of payment and their tradability (Federal Council, Report on virtual currencies, 25 June 2014, 7). Therefore cryptocurrencies which can be transferred on a distributed ledger are qualified as an asset and do not fall under the definition of “means of payment” according to the AML-Act. 
According to this interpretation, many promoters performed minimum KYC (Know Your Customer) while accepting cryptocurrencies during the ICO procedure. However, whenever a party is accepting or exchanging fiat money (e.g. the Swiss franc) for cryptocurrency, the provisions for combating money laundering and terrorist financing apply. Therefore, to avoid being subject to AML provisions, ICO promoters cannot receive fiat money in exchange for newly generated coin. An exception is done in case of accepting less than CHF 2 Mio from less than 20 clients, above this numbers the use of fiat money requires the use of an AML regulated financial intermediary (a professional cryptocurrency broker).

2. Banking law:

If the promoter is issuing a coin through the ICO with the obligation to payback the amount received from the investor, then we have a deposit. A deposit can only be accepted up to the amount of CHF 1 million. Amounts greater than CHF 1 million require banking authorization. To avoid this requirement, ICO promoters must clearly indicate in their whitepaper that the funds received are not refundable.

3. Securities law:

This is the main issue for ICOs. If the coin issued through the ICO is to be qualified as a security, then the issuers must produce a prospectus under art. 1156 or art. 652a of the Swiss Code of Obligations and the platforms exchanging the tokens must have a license as a securities broker. Unfortunately, companies have been offering a profit sharing coin without accounting for the prospectus requirement and the necessity that exchangers listing such a coin be a recognized security broker.

4. Collective Investment Scheme legislation:

A company may obtain the financing for a commercial activity through an ICO. If the issuing company is using the money raised to execute a financial activity, this may be qualified as a fund and, as such, it requires FINMA approval. It is important for ICO promoters to ask for only the amount of money required for the commercial project described in the whitepaper. If the issuing company does not set a limit or cap the amount to be raised and subsequently obtains financing well above the required amount, it could invest this money in a financial product (liquidity). However, doing so puts it at risk of being qualified as a fund.
Switzerland’s ICO environment was starting to look a bit like the wild west. FINMA’s guidance is important because it introduces a clearer framework for ICOs. It also informs ICO promoters that they will be more closely monitored for compliance and the requirements will be enforced. This means that it’s now even more important to make sure you have an experienced advisor assisting you with the pre-sale and structuring of your ICO.

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