If Governments Regulate ICOs, They Should Do It Like the Swiss

Many people disagree with government regulation of cryptocurrencies and initial coin offerings (ICOs), but one could do a lot worse than Switzerland’s financial regulator, Swiss Financial Market Supervisory Authority (FINMA). This month, FINMA published guidelines for ICOs originating in Switzerland, which has become something of a haven for the new investment vehicles. While not at all perfect, the guidelines are far clearer than anything put out by the Securities and Exchange Commission, and could resolve some uncertainty in this burgeoning market. Furthermore, the FINMA guidelines provide an original taxonomy of crypto tokens — a taxonomy that could be useful in the wider community.

At issue is whether tokens sold in ICOs will be subject to Swiss securities and anti-money-laundering law. To clearly delineate what will and won’t be subject to different kinds of regulation, FINMA constructed a useful taxonomy of tokens generated through ICOs. In its words:

  • Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
  • Utility tokens are tokens which are intended to provide digital access to an application or service.
  • Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.

This taxonomy may be useful not just to regulators, but others working in the space.

When an ICO issues a payment token, FINMA requires compliance with anti-money-laundering laws, but not securities regulations. Utility tokens are treated as securities unless the product or service due to the coin holder is already available at the time of the ICO. Asset tokens, including shares in companies and claims to real assets such as gold, are subject to securities laws.

Companies issuing ICOs in Switzerland must provide a minimum amount of information to FINMA, set forth in the document’s appendix. That information includes the people involved in the venture and any financial licenses they hold in other countries, details of the project or firm, who the applicant intends to target with the ICO sale, how much money is to be raised, and details about the functionality of the tokens in question.

Cryptocurrencies were invented to circumvent large central institutions such as national governments, and those governments are now doing what some will consider dangerous meddling in the market. FINMA didn’t get everything right. For instance, it forecloses the possibility of a gold-backed payment token, instead labeling it an asset token and treating it under the law as a security. However, the document is brief and clear, and was created with the goal of fostering ICOs in Switzerland. It also doesn’t try to be too smart for its own good, inventing new, complex regulations. Instead, it spells out a clear taxonomy and how the law will apply. Realistically, we have not heard the last from the Securities and Exchange Commission on the topic of ICOs. Here’s to hoping they look to the Swiss as a model.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.