“What is the legal framework of Digital Tokens? FINMA’S role and the 3 types of Tokens”
Switzerland is globally known for its high quality, rigid standards, and strict regulations in many sectors and banking is not an exception. With the advent of blockchain, the country was one of the pioneers to explicitly exercise control on issuance and crypto fundraising.
The Financial Market Supervisory Authority (FINMA) is Switzerland’s independent financial-markets regulator, responsible for the supervision of Swiss-registered STOs and ICOs and published a set of guidelines that every issuer must observe to be compliant with the legal standards (1).
Switzerland has established the goal to create the best conditions to emerge as a leading, innovative, and sustainable scene for FinTech and blockchain companies (2).
One of the critical elements of FINMA`s regulations is the adherence to the anti-money laundering policy and the code of conduct for the STO/ICO projects with severe fraud protection mechanisms. All these safety measures ranked Switzerland one of the safest regulating markets for the crypto world.
FINMA is actively monitoring the development of business activities in connection with distributed ledger technologies and securities. Challenging questions are arising here on aspects concerning the trade, custody, and settlement of multiple token types and transaction systems (3).
Tokens are defined as units of information registered by the Distributed Ledger Technology (DLT). This technology allows recording the information in a decentralized way, meaning that not only the administrator will have permission rights to the information, by means of a consensus mechanism. The advantages of such systems are amongst others that there is no intermediary required, lower costs, higher efficiency, and reduced fraud rates. Blockchain is probably the most famous DLT architecture in which hash functions are used for validation, allowing to follow the transaction history almost unbreakably.
FINMA bases its own approach to the categorization of tokens on the underlying economic function as:
- Payment tokens (or cryptocurrencies): intended to be used now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer;
- Utility tokens: are intended to provide access digitally to an application or service by means of a blockchain-based infrastructure;
- Asset tokens (security tokens): represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds, or derivatives. Tokens that enable physical assets to be traded on the blockchain also fall into this category.
The individual token classifications are not mutually exclusive. Asset and utility tokens can also be classified as payment tokens (referred to as hybrid tokens). In these cases, the requirements are cumulative; in other words, the tokens are deemed to be both securities and means of payment (3).
The asset tokens regulations were introduced to provide reliable and trustworthy investment information and to minimize the potential risk for buyers. Security token offerings are obliged to meet FINMA criteria and are characterized as tokens that are issued in vast quantities of equal value. Under the Code of Obligations (CO), keeping a record book of all transferred tokens and their shareholders is fundamental. Thanks to the blockchain technology keeping a record of the token holders and transactions allows fast and secure execution of transactions. In addition, asset tokens mimic the traditional financial instruments. Hence, the obligation of publishing a Prospectus in accordance with the rules of the Swiss Code of Obligations is also needed (4).
EDSX is fully compliant with FINMA`s regulations and exercises business practices in accordance with the Swiss high standards. EDSX will be the first platform in Europe with a primary and secondary market for both institutional and retails. Please contact us to know more about our services and fundraising opportunities.
- Legal Guide for Swiss practitioners, FinTech 2020.