By Josiah Wilmoth
Switzerland’s chief financial regulator has issued new guidelines governing token generation events (TGEs), and in keeping with the region’s reputation as a haven for cryptocurrency startups, the framework both clarifies what startups must do to maintain regulatory compliance and codifies that utility tokens are not subject to securities laws.
Switzerland Issues Landmark TGE Regulations to Buttress Nascent Industry
Switzerland has long been a world leader in the TGE space. According to PwC, four of the 10 highest-grossing token sales have been launched from the Swiss canton of Zug, nicknamed “Crypto Valley” for its full-throttled embrace of blockchain technology.
New regulations, unveiled Friday, demonstrate that regulators desire to ensure that Switzerland remains a leader in the industry.
Under the new framework, TGE tokens will be divided into three categories: payment tokens, asset tokens, and utility tokens.
Payment tokens are coins designed solely to be used as a medium of exchange. They are, Swiss Financial Market Supervisory Authority (FINMA) says, “synonymous with cryptocurrencies.” They are not subject to securities regulations, although creators must comply with anti-money laundering regulations if they distribute payment tokens through TGEs.
Asset tokens, on the other hand, include tokens that are analogous to equities, bonds, or derivatives, such as shares of a company. These tokens are classified as securities, which means that asset token TGE organizers must comply with both securities laws and the Swiss Code of Obligations.
Finally, utility tokens — whose sole purpose is to “confer digital access rights to an application or service” — are not subject to securities regulations.
However, there is a significant caveat. Utility tokens must be functional at the point of issue, meaning that startups cannot hold their token sales until they have already created a working product or service. Without a functional product, FINMA says that the token is substantively an investment and consequently subject to securities regulations.
Moreover, FINMA acknowledged it is possible a token could fall under a hybrid classification, so the regulator said it would judge each case on its individual merits.
Regulations Likely to Have a Global Reach
FINMA itself, meanwhile, noted that it purposely sought to take a “balanced approach” to regulating the industry, as it believes blockchain technology has “innovative potential” to disrupt a number of industries.
“The application of blockchain technology has innovative potential within and far beyond the financial markets,” said FINMA CEO Mark Branson in a statement. “Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.”
Consequently, it seems likely that startups launching utility tokens will continue to choose Switzerland as the base for their TGEs, although the industry will likely see more projects waiting to launch their token sales until after they have already built a functional product.
Significantly, though, the impact of the framework will likely extend far beyond Switzerland’s borders. As one of the first movers in TGE regulation, Switzerland’s new rules will most assuredly serve as a model for other governments seeking to adopt rules that preserve the integrity of the nation’s securities laws but also incentivize blockchain development.
Spain’s ruling party, for instance, recently revealed that it is considering a bill that would provide tax benefits and other incentives to TGE organizers willing to relocate to the country. These legislators said that they intend to look to Switzerland’s regulatory framework as a model for their own, which has yet to be finalized.
Strategic Coin is a leading research and advisory firm for companies planning to integrate blockchain capabilities into their business model via utility token launches. Our customer research reports provide qualitative and quantitative analysis of token use cases and platform value. With the Strategic Coin Advantage network of partners, we offer customized services for the pre-launch, full-launch, and post-launch phases of Token Generation Events (TGEs).
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