An Earthquake in the Swiss Alps – Swiss Regulator investigates several ICOs

Switzerland confirms that it is investigating a number of ICOs and is willing to take enforcement action. What started with the SEC’s statement on The DAO, is now becoming more and more reality, though it has been at the cryptocommunity’s doorstep right from the start: regulatory action regarding Initial Coin Offerings.

The Swiss financial regulator, the Financial Market Supervisory Authority (FINMA) today issued a statement, in which it confirmed that it was looking into several ICOs and ponders enforcement action. The move follows a series of warnings on ICOs from different regulators around the world and the ban of ICOs and cryptocurrency exchanges by Chinese authorities.

Similar to other authorities, FINMA explained that its actions were due to the increase in initial coin offerings (ICOs). For that reason, it has published guidelines on the subject and confirmed in its press statement that it was looking into a number of cases of ICOs either conducted in or offered from Switzerland.

While FINMA described itself as generally supportive of blockchain solutions and appreciates the innovative potential of such technology, it now seems more concerned as to whether regulatory provisions have been breached.

In its guidance, the regulator clarified that while ICOs are currently not governed by any specific regulation, either globally or in Switzerland, it may due to the underlying purpose and specific characteristics of ICOs, various links to current regulatory law may exist depending on the structure of the services provided. FINMA pointed to four areas that could be affected:

  1. Provisions on combating money laundering and terrorist financing: the Anti-Money Laundering Act applies where the creation of a token by an ICO vendor involves issuing a payment instrument. If this is the case, other supervisory issues may be effective for third parties, especially for professional cryptobrokers or trading platforms which carry out 3/4 exchange transactions or transfers with tokens (secondary trading with tokens).
  2. Banking law provisions: accepting public deposits where an obligation towards participants arises for the ICO operator because of the ICO generally necessitates a banking licence.
  3. Provisions on securities trading: a licensing requirement to operate as a securities dealer may exist where the tokens issued qualify as securities (e.g. derivatives).
  4. Provisions set out in collective investment schemes legislation: potential links to collective investment schemes legislation may arise where the assets collected as part of the ICO are managed externally.

Even though the financial regulator wouldn’t go as far as saying that ICOs would be in breach of these provisions, especially considering that ICOs often differ significantly in their structure, the Swiss authority stated that “the scope of application of at least one of the financial market laws may encompass certain types of ICO model.” This was also true for those structures, which aim to circumvent those provisions. While FINMA has to carry out a conclusive regulatory assessment for each specific case, it made it clear that where financial market legislation has been breached or circumvented, enforcement proceedings would be initiated.

FINMA clarified that it would not carry out legal assessments of ICOs beyond the area of financial market legislation such as company or tax law, which doesn’t mean that other Swiss authorities wouldn’t look into it, if, for instance, they had the suspicion that an ICO was used for tax evasion.

The guidance also contains a reminder for companies conducting an ICO to ensure compliance with existing financial market laws. Reading between the lines, FINMA would not accept ignorance of these rules as an excuse when retrospectively examining these offerings.

FINMA closes with a warning to potential investors as seen elsewhere, in particular with regard to price volatility and potential fraudulent use of the instrument, highlighted by its recent decision to close down coin providers and its warning about fake cryptocurrencies.