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Legal implications and practical considerations for Token Classification

11/01/2023

So far, this series has provided us with an overview of the Swiss legal foundation for the classification of tokens, the qualification of tokens as securities and an overview of some common tokens models such as stable coins, NFTs and governance tokens.

In this post, we will give you a broad overview of the legal and regulatory implications of the token classification for both the sale of tokens and the listing and trading of tokens in Switzerland. Or put differently: Why do I even need to know the legal nature of a token in the first place?

Legal implications for a token sale

The primary issuance of a token to the public (i.e., an ICO/STO/IEO/IDO depending on the specific design of the offering) is not per se subject to Swiss financial market regulatory law. This is notably different from the EU MiCA framework, which will require token issuers to either publish a crypto-asset whitepaper or obtain a specific authorization under MiCA or as a credit institution (depending on what kind of crypto asset is issued). Under Swiss law, however, the following regulatory implications should be considered depending on the qualification of the token that is issued:

  • Securities offering: The public offering of security tokens (i.e. tokens that qualify as securities (see our last post)) is subject to the Swiss prospectus and possibly KID requirements. While, in general, any public offering of securities triggers the need to draft a prospectus and have it reviewed by the authorities, there are various exemptions (e.g. if the public offer does not exceed a total value of CHF 8 Mio. over a 12-month period)
  • Anti-Money Laundering and KYC: The public sale of payment tokens is subject to the Swiss Anti-Money Laundering Act (AMLA) as long as the tokens can be transferred on a blockchain infrastructure. The same goes for utility tokens if they provide access rights to a financial application of blockchain technology. This essentially means that the issuer must affiliate with a Swiss Self Regulatory Organisation (SRO) tasked with the supervision of the AMLA and fulfilling know-your-customer (KYC) duties on the buyers (e.g. verification of the buyer and identification of the beneficial owner of assets). See also one of our older posts on the topic.
  • Tax: The sale of tokens may trigger different tax implications for the involved parties, depending on (i) the underlying economic transaction (e.g., the public sale of tokens or the allocation of founder tokens) and (ii) the legal qualification of the token. For the latter, the Swiss tax authorities (like FINMA) differentiate between payment, utility and asset tokens. However, the token classification by the tax authorities is not fully congruent with the one of FINMA. Hence, you need to account for these differences to achieve an efficient tax structuring.
  • Foreign laws and regulations: Finally, it is important to understand that foreign regulators may deem any token sale accessible in their country subject to their local regulation. In particular, U.S. regulators have taken enforcement action before against projects that were launched outside of the U.S. but were still accessible in the U.S./by U.S. investors.

Legal implications for the secondary listing and trading of tokens

Securities and other financial instruments are subject to trading restrictions and other regulatory requirements set out by the Swiss Banking, Financial Market Infrastructure, Financial Institutions, Financial Services and Anti-Money Laundering Act. This has implications for both the financial intermediaries offering services in relation to crypto tokens as well as the token issuer:

  • Crypto broker, exchanges and other financial intermediaries: If you are intending to offer financial services that involve crypto tokens, the extent of regulation that applies to you depends on (i) the exact scope of services you offer (e.g., on- and off-ramp services, portfolio management services, wallet and custody services, brokerage or exchange services or any combination of different services) and (ii) the nature of the tokens that you cover in your services. To give you an example:
    • Crypto wallet services: The offering of a custodial wallet solution is generally subject to the Swiss Banking Act. However, this only applies to payment tokens and not to utility and asset tokens.
    • Brokerage services: The trading of security tokens in its own name and for the account of clients requires a FINMA license as a securities firm. However, such a license is not required if only non-security tokens are offered.

In summary, crypto financial service providers are required to have clarity on the legal nature of tokens to strategically plan for, understand and comply with financial market regulations.

  • Token issuer: Many crypto exchanges and trading platforms are not sufficiently regulated under applicable laws to offer the trading of security tokens. As such, these exchanges will require a legal assessment/opinion as a non-security token as part of their onboarding and token listing process. As a token issuer looking to have your token listed on a (centralized) exchange, you will usually be in need of producing such an assessment.

Conclusion: Token classification as an essential part of your regulatory strategy

Although the regulatory treatment of crypto tokens and services is still nascent, the current trend in the industry points to a more densely regulated future for crypto and blockchain on a global level. At the same time, the Swiss legislation and FINMA practice already provide for a relatively comprehensive and clear framework for both token issuers as well as financial intermediaries with crypto. The token classification is an important puzzle piece in getting a complete understanding of applicable regulations and allows you to build a robust regulatory strategy.

By Florian Prantl

Senior Legal Counsel

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