The qualification of digital assets and the regulatory assessment of tokens is one of the most debated topics in blockchain law. The topic is often narrowed down to whether or not tokens qualify as securities or any other kind of financial product. We created this series of posts on token classification under Swiss law to try and give you a broader insight into the legal basis of token classifications, how securities legislation comes into play and why it is important to know the nature of a token in the first place. In this first post, we’ll establish the basics of how tokens are classified.
FINMA Guidelines on Token Classification
The Swiss Financial Market Authority (FINMA) has issued Guidelines on the treatment of tokens from a regulatory perspective back in 2018. In mid 2019, the initial Guidelines were supplemented with a focus on the classification of stablecoins.
The FINMA Guidelines give general guidance to market participants. However, it is important to know that there is no classification of tokens set out in the law itself and FINMA has only limited authority to legislate on financial market law. The Guidelines, although established at this point, are therefore a non-binding interpretation of Swiss financial market regulation.
The Guidelines classify tokens as one of the three following:
- Payment Tokens
- Utility Tokens
- Asset Tokens
All token types can also qualify as security tokens, although asset tokens are typically security tokens and payment / utility tokens are typically not security tokens. See our next blog post for details.
Payment tokens are intended to be used, now or in the future, as means of payment for acquiring goods or services or as means of money or value transfer are payment tokens. Payment tokens, which are synonymous with cryptocurrencies, give rise to no claims on their issuer.
Samples include many native tokens such as Bitcoin (BTC), Ether (ETH) or Solana (SOL).
Tokens that are intended to provide access digitally to an application or service by means of a blockchain-based infrastructure are utility tokens. In other words, utility tokens are technically required to access or interact with the blockchain or an application. Examples of utility functions might include tokens that are used to pay gas fees or to participate in on-chain governance.
There are two main forms of asset tokens:
- Representation of assets: Tokens that represent an underlying asset such as fiat currency, a gold bar, a painting, IP rights or real estate (these tokens may often also be stablecoins).
- Capital market instruments: Tokens that are economically a capital market instrument such as shares, bonds or derivatives. The definition is broad, and any token that implies an obligation or promise by the issuer to the token holder for financial participation in the future success of the project can fall under this category. Said participation can take different forms, e.g. a mechanism to distribute profit among token holders, a buy-back or a burn mechanism.
Additional points on token classification
The above classification is the basis for understanding the nature of a token and the legal obligations that come with issuing and transacting with it. Before we take a closer look at securities legislation, DeFi and Governance tokens, NFTs, stablecoins and the like, some additional points to keep in mind:
- A token can fall into different categories at the same time (e.g. hybrid payment and utility token).
- Tokens can change qualification over time (e.g. a token can be a pre-functional utility token first but then become fully functional later on).
- FINMA’s approach is driven by the underlying economic function and purpose of a token (substance over form) and follows the principle same risks, same rules.
Those are the basics to understand token classification under Swiss regulatory law. Keep an eye out for our follow-up posts, where we will dive into the questions of:
- When does a token qualify as a security?
- How are stablecoins, NFTs and governance tokens treated?
- What are the legal consequences and obligations resulting from the token classification?