Swiss Regulator Investigates ICOs

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Switzerland’s Financial Market Supervisory Authority (FINMA) said today they are “investigating a number of ICO cases to determine whether regulatory provisions have been breached.” The regulator says they:

“Recognise the innovative potential of distributed ledger/blockchain technology. It welcomes and supports all efforts to develop and implement blockchain solutions in the Swiss financial centre.”

However, they argue a number of already established laws may apply to ICOs, ranging from AML/KYC, banking license requirements if deposits are taken, licensing requirements for securities tradings and legislation that covers collective investment schemes. We quote at some length:

“ICOs are currently not governed by any specific regulation, either globally or in Switzerland. Equity and debt capital-raising, deposit-taking and the activities of financial intermediaries are controlled by existing laws that protect creditors, depositors and investors and which ensure that financial markets function properly.

Swiss legislation on financial markets is principle based; one such principle is technology neutrality. Consequently, collecting funds for one’s own account without a platform or issuing house acting as an intermediary is unregulated from a supervisory standpoint in cases where repayment is not obliged, payment instruments have not been issued and no secondary market exists.”

They further say they are investigating a number of ICOs to see if they breach current legislation and if they do enforcement action will be taken. FINMA says:

“Owing to the wide variety in structure of ICO models, FINMA can only carry out a conclusive regulatory assessment in specific cases. Currently, FINMA is assessing a number of such cases. Where financial market legislation has been breached or circumvented, enforcement proceedings will be initiated.”

The regulator points to one case where they have taken such enforcement action. E-coin is a “fake cryptocurrency,” they say, therefore the regulator has closed down the e-coin provider, further launching “bankruptcy proceedings against the legal entities involved.” FINMA says:

“Unlike real cryptocurrencies, which are stored on distributed networks and use blockchain technology, E-Coins were completely under the providers’ control and stored locally on its servers.

The providers had suggested that E-Coins would be 80% backed by tangible assets, but the actual percentage was significantly lower. Moreover, substantial tranches of E-Coins were issued without sufficient asset backing, leading to a progressive dilution of the E-Coin system to the detriment of investors.”

It is unclear whether this latest guidance has in mind such likewise clearly fraudulent or scammy ICOs or cryptocurrencies, or whether they will seek to enforce current law to new inventions even if the project is very genuine and thorough.

But their intervention is the latest among regulators who one by one all the sudden have announced current law applies to ICOs following SEC’s judgment almost in unison.

It remains unclear whether Britain will once again try and stand out, but Quebec’s regulator has already tried to carve a niche of sorts by extending their sandbox to ICOs.

It is probable that at least some other jurisdictions, such as UK, Australia or Hong Kong, follow the same approach in extending their sandbox, but we are still waiting for the first example besides Canada.

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