In mid February, the Swiss Financial Market Supervisory Authority (FINMA) published guidelines on Initial Coin Offerings (ICO). This comes in the wake of a significant increase in the number of ICOs launching in Switzerland due to a favorable regulatory climate.
This article will go over what affect these guidelines may have as well as what the broader implications on the cryptocurrency community are.
Switzerland’s favorable financial system
Switzerland has long been a financial haven by acting as a tax haven for international clients. Their government had no shame in siphoning other counties' taxable income to supplement their own.
Until January 1 2017, under Swiss law, Swiss banks and financial institutions would only provide banking information, including transaction details, if the information was requested by a country where an explicit agreement was in place. Even then the requesting country felt the weight of the burden of proof in having to provide evidence of tax evasion prior to Swiss cooperation. It became a strong hold for the rich and dubious. The corporate rate for tax in Switzerland for a foreign trading company was about 7-8%, as oppose to 28-30% in the United Kingdom. Incentive was clear.
As the banking industry felt this change, the new, attractive, and unregulated ICOs became the next venture in Switzerland.
And now, in a turn, the Swiss are embracing ICOs and cryptocurrency culture in general. They have "seen the light" and look forward to the future. The Economic Minister, Johann Schneider-Ammann, has gone as far as to say that the country ought “to be the crypto-nation”. The Swiss were all set to be a country embracing the ICO insanity and cryptocurrency anarchy.
Regardless of this previous rhetoric and history of the financial ‘wild west’ of the Swiss, FINMA has proceeded to set some guidelines in place, preparing for this since September 2017. The Guidelines have been said to assist consumers in allowing some form of transparency, while some ‘purists’ have said the entire landscape ought to be self-regulating. This simply isn’t going to happen. Value or Money + Western Governments = regulation and taxation.
The Guidelines set out to create a form of transparency in the ICO space. They are set to address regulatory treatment of the ICO structures, while being consistent with the Western laws in touching on anti-money laundering.
There will be a formal process to get an ICO off the ground in the alpine country. Minimum requirements must be met, and a fee is charged for each FINMA assessment. This fee is significant and based on the complexity of the token structure: starting from just over over $10,500 USD to $16,000 USD. This may cut out some of the scam tokens which appear to simply chunks of other white papers, even promotional videos, then garner support via social media and suckers.
The FINMA advised by way of a press release document that the criteria for gaining the regulator’s blessing would come down to the ‘underlying purpose of the tokens’, and whether the tokens would be transferable and tradeable. The focus appears to be on liquidity and true value. Something the ICO market desperately needs. The question though soon becomes: is the FINMA suitable in making these assessments in a fair, equitable and technically proficient manner?
The FINMA advise that anti-money laundering regulations (AML) and securities regulation are relevant to ICOs – meaning that the identity of the owners of a token need to be established. It’s a common sentiment and something we’ll all get tired of hearing about in 2018, yet it is a sentiment that will have impact on the markets.
The FINMA advise, in the press release that supplements and clarifies the official guidelines, that a minimum level of information is required for the market to make adequate investment decisions. This is broken into three ICO categories:
- Payment ICOs (tokens that can be used for payment, or otherwise transferred). In this instance FINMA require compliance with the AML regulations;
- Utility ICOs (tokens not qualifying as securities, only existing to confer digital access rights to an application or service). If developed or seen to be used as a ‘Payment ICO’, the aforementioned will apply; and
- Asset ICOs (tokens acting clearly as securities). This type of token will strictly be required to adhere to securities regulation and extend as far as civil law requirements in trading: the ‘Swiss Law of Obligations’.
The FINMA do appear to confer a sense of the risks associated with ICO tokens. A risk shared by the wider cryptocurrency trading community. It’s difficult to see some tokens purposes and easy to claim the market is bloated.
Investigating one such token, Tron (TRX) – the token with a cool name and a mind boggling $3 Billion USD market cap on the back of a mutant white paper stitched together from other white papers – became an exercise in real pain. This author looks first towards the regulation heads when investigating ICO tokens. TRX’s caution became clear: the ‘Head of Regulation’ photograph when reverse image searched was an Arts high school teacher in Baltimore.
The website has since been updated and the three initial ‘Heads’ of department biographies have been removed.
True to the title, this release from FINMA is ultimately just guidelines, and rather ironically, a mission of ‘transparency’ has some ambiguity regarding successful tokens to go through the process. This is because without precedent, the FINMA’s first few certifications will be closely scrutinized by the wider cryptocurrency community.
As with all new rules, we don’t know where the lines really are until we start playing the game. From a legal perspective nobody ever wants to ‘go first’. Nobody wants to be the sacrificial lamb: without precedent, without boundaries, and without clarity. Yet regardless it’s something we must all get used to as regulation will only increase.
The yardsticks of the market – BTC, et. al. – will stand tall when measured by the regulatory 'tailors'. They are established. The game’s rules must be made around them. The suit must fit around them. But for brand new ICOs which can be shot down in development stages under regulation, it’s become a completely different game. These ICOs must fit into the suits provided. They either bulk up and fill it out, or they don’t. The Swiss have drawn a line in the snow. Other countries will surely follow.
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Con’s a writer. His education background is law, where he’s published in law journals on the legal issues of crypto-currency. His opinion editorials tend to focus the relationship between people and technology, as well as the societal challenges technology can present. He’s consulted for non-profit privacy and digital rights groups, aiding governmental submissions. His passion is for information security, technology and the intertwining legal issues.