Eternity Law International News Initial placement of coins or ICO from the point of view of Swiss law

Initial placement of coins or ICO from the point of view of Swiss law

January 9, 2018

The initial placement of coins, or, as it is also called ICO in Switzerland, just like the launch of a token, is considered an unregulated method of attracting investment into a project. In fact, it is the issue of digital coins or tokens that are used to create a new cryptocurrency or are created based on one of the existing ones.

The ICO technique is often used as an alternative way to raise funds.

The issued tokens are legally verified and controlled. The United States and Singapore have established their own methods of regulating the work with digital currencies.

Main features of working with ICO projects

The creation and transfer of tokens takes place through distributed ledger technology or blockchain technology. First of all, White Paper is prescribed – specific documentation written in the program code, which regulates the methods of financing and paying for an ICO project.

In fact, by purchasing a token, a client invests in the product development process, whether it be new software, platform, or any other idea. The essence of the token itself can be expressed in different ways: access to the product, permission to use the software, display of membership in the project team. Simply the token can be a tool for obtaining a share of the profit from the final development.

Moreover, the purchased tokens can be sold in the secondary market after the launch of the project. Also, this can be done on various digital exchanges and platforms.

Definitely, the main goal of most ICO projects is to attract investors. Based on Swiss legislation, tokens are a type of securities or a kind of financial instrument if they fall into one of the following categories:

  • securities (for example, equity interest);
  • loans;
  • derivatives;
  • contributions;
  • deposits.

There is a high probability that the token will be regarded as a financial instrument or a security if the investor buys it and then simply expects changes in value in the secondary market. In this case, the activities of the ICO startup will be monitored based on the legal framework regarding banks, securities and investments.

The current legislation of Switzerland has not yet spelled out mechanisms for regulating work with those tokens that have been issued recently and are not regarded as a security or financial instrument.

Token project evaluation methods

In each case, it is necessary to analyze the nuances of the issued tokens. The assessment should be based, first of all, on the White Paper, which describes them as much as possible.

For example, you can use the following eligibility criteria:

  • to develop or improve functionality for a specific register;
  • access to the system;
  • for the free operation of the services and products of the system;
  • for the sale of products;
  • to support the system through the execution of instructions from the creators or any other actions that affect the result of the work;
  • voices, full access to information and exchange of views.

It is most likely that those tokens that have part, and sometimes only one of the following rights will be regarded as a security or financial instrument:

  1. Contribution of funds to the project for the sake of the expected profit, expressed in receiving payments, interest or simply increasing the value of tokens. Also, in cases where the expected profit is based on entrepreneurial activity or coordination actions of others. At the same time, even having the right to vote, investors cannot effectively control the development of the project.
  2. Participation and share of proceeds or losses incurred, as well as in the separation of assets and liabilities, are clearly defined.
    In case of obtaining the status of a creditor or share participant.
  3. When filing for bankruptcy as an owner of an equity participation or a creditor.
  4. If the effective management of the project is available to the owner of obligations to repay / return the finances received from the token or from the issuer’s board.

If you have any doubts about any of the above points, you should contact FINMA – the Swiss regulator for the supervision and control of the financial market.

How the body works

Today FINMA works according to the following principles.

  1. Cryptocurrencies Bitcoin and Ethereum are regarded as a full-fledged payment instrument. They can be sold with subsequent crediting to an electronic wallet in case of compliance with the AML (protection against money laundering) rules.
  2. ICO projects are considered within the framework of existing legislation developed for financial markets. At the moment, Switzerland does not have a specific methodology for working with ICO business systems.
  3. Financial market laws apply when it is possible to unambiguously answer whether tokens can be classified as securities and / or financial instruments. In the event that the answer to this question is positive, the project’s activities are regulated by the relevant legislation of the selected jurisdiction. We are talking about a number of laws that control the processes on stock exchanges, mechanisms for working with securities and investments, as well as the work of banks. In addition, money laundering laws are taken into account.

Thus, FINMA proposes to assess whether there is a need for a special permission to launch an ICO project, based on the information provided by the creators.

FINMA sets the cost of its valuation analysis depending on the degree of detail of the information provided, and considering all possible details.

This body does not undertake analysis of ICO issues related to civil law or laws regulating taxation.

Working in the secondary market

To combat the legalization of illegal financial transactions, the AML rules system is applied.

The laborious process called KYC (Know your client) takes quite a long time, because it implies personal contact and the work of the parties. This is a significant barrier to working in the digital world.

However, there are a number of jurisdictions using a methodology that bypasses the need for personal contact. For example, it can be the process of user identification through video.

It is worth remembering that the KYC methodology adopted in one country may be unrecognized in other countries. Working with tokens in the secondary market, whether it is deposition, replication or sale, is always an important process, which must fully comply with the existing legislation of the chosen jurisdiction.

And yet, there is no certainty that if you adhere to the legislation of one state, there will be no problems when working with tokens in other countries. Additional approval may be required from local authorities that regulate ICO / TGE processes.

Also, for the project to work in each jurisdiction, it must be indicated which investors have the right to purchase tokens. This could be a user, a seasoned investor, etc.

Choosing the corporate form of the company – the token issuer

Most of the developers took the Ethereum Foundation as an ideal model and are striving to create a similar project.

There are a number of advantages in the early stages of establishing a foundation, such as independence from property. However, they are confronted by shortcomings that will appear later. This is a “locked box” (the inability to get finances for anything other than work for the benefit of the goals and objectives of the fund), a strict structure and nuances of taxation.

Also, despite the lack of ownership as such, the management of the board (or council) implies control over the foundation itself. There is no public access to information regarding the founders of the project.

In any case, it is necessary to check the project and get an expert opinion.

For example, in the case of an LLC, it is possible to provide public access to information regarding the nuances of ownership. This is due to the fact that each shareholder is required to register in the state commercial register.

Whichever corporate form is chosen, one must always admit the possibility that the court may change its position. Especially if the activities of the project fell into the scope of the legislation on financial markets.

Summing up

ICO is a new kind of working with projects using a kind of investment. There is no way to conduct a general qualification due to the wide selection of possible tokens.

Each of them must be assessed and analyzed separately. If its functions mainly consist in financing the project, the legislation governing the operation of financial instruments applies.

Eternity Law International lawyers will provide full advice and answer your questions. You can contact us by phone, as well as get advice in chat or directly at the office of the company.

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