FINMA Classified ICO Tokens by Economic Function

Switzerland’s financial-market regulator published guidelines on February 16, 2018 explaining how it would apply existing law to initial coin offerings. The Swiss Financial Market Supervisory Authority, FINMA, divided tokens into payment, utility and asset categories, while emphasizing that each project required an individual assessment based on economic function and transferability.

The development mattered because Switzerland had become an important jurisdiction for blockchain fundraising, yet organizers faced uncertainty about whether an ICO implicated securities, banking, collective-investment or anti-money-laundering requirements. FINMA did not create a separate ICO statute or declare every token a security. It instead supplied a framework for interpreting existing Swiss financial-market law.

Function mattered more than the label

FINMA defined payment tokens as cryptocurrencies intended to serve as payment instruments or means of transferring money or value. Because their economic function was not analogous to a traditional security, the regulator said it would not treat payment tokens such as bitcoin or ether as securities under its existing practice. Transferable payment tokens could nevertheless fall under the Anti-Money Laundering Act.

Utility tokens were intended to provide digital access to an application or service. FINMA said a utility token would avoid securities treatment only when that access was its sole purpose and the token could already perform that function when issued. A purported utility token with an additional or exclusive investment purpose would be treated like an asset token and therefore as a security.

Asset tokens represented claims such as debt, equity, participation in future earnings or exposure to an underlying asset. FINMA considered standardized asset tokens suitable for mass trading to be securities. The framework also covered standardized, tradeable claims issued during pre-financing or presale stages before the eventual token existed.

Hybrid tokens could carry cumulative obligations

The three categories were not mutually exclusive. A utility or asset token could also operate as a payment token, producing a hybrid classification. FINMA said the applicable requirements would then be cumulative: a token could be both a security and a means of payment rather than receiving whichever classification was more convenient for its organizer.

That approach constrained a common feature of the 2017–2018 ICO market. Projects could not determine regulatory status merely by calling a token a cryptocurrency or describing a future service. FINMA would examine what rights the token conveyed, whether it was functional, how it could be transferred and whether its economic purpose resembled investment, payment or access.

The guidelines also established minimum information for regulatory enquiries. Organizers were expected to identify the project participants, fundraising structure, technologies, token functionality, investor rights, transfer mechanisms, secondary-market plans and arrangements for anti-money-laundering due diligence. FINMA noted that reviewing an enquiry was fee-based and that organizers remained responsible for civil-law and tax obligations outside its financial-market remit.

Clarity did not amount to approval

FINMA’s document was supervisory guidance, not authorization for an ICO, validation of a project or assurance that a token would retain value. The regulator said there was no ICO-specific regulation, relevant case law or consistent legal doctrine sufficient to support blanket conclusions. It also warned that tokens could be highly volatile, that many projects were at an early stage and that the civil-law enforceability of blockchain-based contracts remained uncertain.

Contemporaneous Reuters coverage described the framework as one under which many digital-token offerings would be treated as securities. The narrower verified conclusion is that treatment depended on the token’s structure and economic function. On February 16, 2018, FINMA had given issuers and investors a clearer classification method, but every proposed offering still required its own legal and factual analysis.