Everyone following the cryptocurrency fever in Silicon Valley is talking about Switzerland right now. To understand why, we need to talk about what ICOs are, how they work, and how the Swiss guidelines will impact their future. This article looks at the Swiss approach to ICOs, part of swissnex San Francisco’s focus on the trends shaping the structures of society — in this case, leading the charge in the financial regulation of cryptocurrencies.

What’s an ICO?

At its simplest level, an ICO is crowdfunding for startups. ICO stands for an Initial Coin Offering – a not-so-subtle reference to “Initial Public Offerings” in the stock market. The distinction of an ICO is that rather than buying stock certificates to show stake in a company, you own a unique digital currency that is (in theory, anyway) tied to the company’s value. The value of the cryptocurrency would rise as more people demand partial ownership — much like a stock. In many cases, these digital coins become cash, or bitcoin, or other mainstream digital currencies when the company launches.

Or at least, that’s one form of an ICO. This is where things get confusing, and why the market has been in a state of confusion over how, or if, to regulate them. Some ICOs offer access to digital services instead of cash, or to reward research or coding contributions, or to deliver ownership of a portion of an artist’s photography.

When ICOs go bad

The anonymity of many cryptos is a concern, as is the lack of any oversight for when anonymous parties make an exchange. Without a link to a stable identity, money can move nefariously, particularly regarding money laundering, or serving as an exchange for crime syndicates or terrorist organizations.

Anonymity can also spur on a digital version of “pump and dump schemes,” where investors create massive hype around a worthless currency (or stock) and then sell when the price peaks. With anonymity and without accountability, these schemes are more likely — especially in an era of automated bots that can get an ICO trending online at the push of a button.

While abuses are clear, it’s the wide ranges of potential uses for this crowdfunding/IPO/investment hybrid that has made it difficult for regulators to figure out where and how market laws apply to them. Some countries, such as China and South Korea, have responded to these abuses through an outright ban on the entire concept of raising funds on the blockchain.

However, blockchain-based cryptocurrencies are built on decentralization. Over-regulate, and you put the brakes on innovation. Competing interests have to be weighed: in particular, balancing security and anti-laundering laws with the flexibility required for new ideas to break through.

ICOs, the Swiss Way

Switzerland’s leadership in ICO regulation has an impact. Swiss ICOs raised $550 million in 2017, second in the world — just behind the United States’ $580 million, and well ahead of Singapore’s $184 million. So, when the Swiss Financial Market Supervisory Authority (FINMA) issued some clarity on how it might approach the regulation of these currencies, it turned heads.

FINMA is clear that it will not treat all ICOs equally, looking beyond a blanket view of the technology in favor of a more careful look at how it’s being used. What’s more, it states that in some cases, regulation isn’t required at all.

The regulators have created some useful, clear ways of thinking and distinguishing various ICO types. It suggests three categories: payment tokens, utility tokens, and asset tokens. They also note that some uses may still exist in the fuzzy areas in between.

A payment token is what we have come to call “cryptocurrencies,” they are payment forms that use the blockchain as a means of transferring funds from one place to another. These are subject to laws against money laundering, says FINMA, but will not be treated as a security.

A utility token provides access to software, a website, or other services or products, such as buying shares of an artwork, or access to a photo editing program, to rent a film. If you can use that token right away, it’s basically a payment token. If you have to hold on to it (and a lifecycle of value fluctuations) it’s basically a security.

An asset token represents “assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments.” These are, fundamentally, “equities, bonds, or derivatives,” and are regulated under the same securities and civil laws of Switzerland.

What’s next?

It seems the Swiss guidelines have hit a sweet spot that ensure a new level of minimum requirements. It helps investors know who to trust when making informed decisions, which could ultimately only lead to increased investment.  

As innovation pushes the boundaries of the blockchain and cryptocurrencies, these definitions are likely to become increasingly slippery. But by maintaining an open framework, and proposing some concrete definitions, Switzerland has left a large thumbprint on the crypto conversation.


Photo: Bitcoin in Sand by Marco Verch, CC-BY 2.0 via Flickr

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