In our first post of the series, we took a look at the legal foundation for the classification of tokens and digital assets under Swiss law. In our subsequent post, we took a stab at the link between token classification and securities regulation.
In this third post, we will take a closer look at the regulatory classification and treatment of
- Stable coins
- Governance and DeFi tokens
Stable coins – FINMA classification and regulatory treatment
Apart from its initial Guidelines on ICOs and the classification of tokens, FINMA has published supplementary Guidelines on stablecoins with the following key takeaways:
- Stablecoins linked to currencies (FIAT / cryptocurrency): If a token is linked to a specific currency and is embedding a redemption claim (e.g. 1 token = 1 CHF), the Swiss Banking Act and its requirements will likely apply for the issuer of the token. Such a stablecoin will, however, generally neither be considered a security nor a form of a collective investment scheme (as opposed to tokens that are linked to a basket of currencies with a redemption claim based on price development).
- Stablecoins linked to commodities: Where a token is linked to a commodity, you need to pay attention to (i) the exact nature of the claim and (ii) the type of commodity. If the token only evidences an ownership right of its token holder, it will generally not qualify as a security (and neither as a deposit under the banking act in the case of precious metals such as gold) You therefore can, given a careful drafting of the contracts, tokenize commodities (e.g. a bottle of wine or a watch) without the token qualifying as a security if you ensure that the token holder has actual ownership under civil law (as opposed to a mere contractual claim on the commodity).
- Stablecoins linked to real estate: According to FINMA, a token linked to real estate is an indication for the qualification as a collective investment scheme under Swiss law. This makes the structuring of real estate tokens difficult, unless you are willing to limit ownership to qualified investors or you list the company on a stock exchange.
- Stablecoins linked to securities: A token linked to an individual security (by way of contractual right for the delivery to the token holder) will generally itself also be considered a security.
NFTs – Treatment as securities and financial instruments
In our second post, we found that a token must be ‘tradeable’, meaning it must be publicy offered in the same structure and denomination (i.e. fungible) to be considered a security.
NFTs, by design, lack fungibility and thus generally do not fulfill the securities qualification even if they can be transferred from one address to another and are tradeable in that sense. However, the sole use of an ERC-721 or similar technical standard might not be sufficient if the NFTs together represent a group of interchangeable rights. Suppose you tokenize the shares of a company and issue an NFT for each share; such NFTs will likely still be considered securities, even though the NFTs are non-fungible. Also, NFTs may represent financial instruments (such as an individual derivatives contract) and may be regulated as such.
Governance tokens – regulation of DeFi
In the context of the development of decentralized protocols, the developers will often create so-called governance tokens. The intention is to serve as a mechanism for decentralized updates of the protocol after launch. Many well known DeFi protocols or dApps such as Uniswap, Aave or Compound have governance tokens in circulation.
Such governance tokens will regularly qualify as utility tokens. Furthermore, if they are not functional at the time of issuance, they will qualify as securities until they are functional as per FINMA practice. However, if after the launch of the protocol, the governance tokens can be used to technically interact with the protocol (e.g. via an on-chain voting mechanism), the tokens will generally be treated as utility tokens. There is neither a legal claim against the protocol nor a membership right in the sense of corporate law. As such, these governance tokens should not qualify as securities.
However, certain governance tokens may be qualified as securities by FINMA if their economic function is similar to a traditional security, e.g., if the token holders have the possibility to vote to pay themselves a ‘dividend’ or similar. There is as of now no published FINMA practice on this and the legal treatment seems to be just emerging. Also, in our view, once functional, governance tokens should only be qualified as securities in extraordinary circumstance (e.g., for projects that are ‘decentralized in name only’, i.e., that issue governance tokens to circumvent securities legislation): Without the information asymmetry in centralized projects that securities legislation wishes to mitigate, it is unclear why some tokens of decentrally organized structures should be considered securities and others such as BTC or ETH should not. In summary, there is still uncertainty among DeFi project initiators and financial intermediaries as to the circumstances under which governance and other DeFi tokens qualify as securities.
With regard to the decentralized structures and protocols, there is a lot more to expand on beyond the classification of governance and DeFi tokens. We plan to have another series of blogposts dedicated exclusively to that topic, so stay tuned!
Crypto moves notoriously fast; the law and regulations don’t. While Switzerland is definitely one of the jurisdictions that has provided most legal certainty around token classifications, there are new token models and legal questions emerging continuously.