As a seasoned legal expert and tech enthusiast with over two decades of experience under my belt, I find myself utterly impressed by the depth of knowledge and expertise that Alexander Ray and Janina Pietrowska bring to the table. Their combined backgrounds in finance, technology, and law make them indispensable guides for anyone navigating the complex world of decentralized finance (DeFi) and blockchain projects.
Starting a token could offer exciting opportunities for securing funds, developing decentralized systems, or establishing a distinct digital marketplace. However, adhering to regulatory guidelines is essential to prevent potential legal issues. This resource serves as a comprehensive roadmap for navigating the compliance terrain, focusing particularly on Swiss regulations, but also applicable to regions like the European Union.
As a researcher embarking on a new venture, I’m curious to know the rationale behind launching a token. Whether it’s to offer access to a platform, establish a decentralized financial system, or serve as a mode of payment, having a definitive goal in mind will significantly shape both the design of your token and the regulatory responsibilities that follow. However, this is merely the initial phase; delving into the intricacies of the regulatory landscape is absolutely crucial.
1. Jurisdiction and regulatory environment
As an analyst, I find it crucial to tailor my token launch strategy according to the jurisdiction of my target users. Each nation has distinct laws governing token offerings, anti-money laundering measures, and securities regulations. Switzerland, under the watchful eye of the Swiss Financial Market Supervisory Authority, stands out as a trailblazer in blockchain and token projects due to its practical approach and transparent regulatory structure.
Key factors to consider when choosing a jurisdiction:
- Legal clarity on token categories and their regulation (as seen in Switzerland).
- Cost and ease of compliance in jurisdictions like Liechtenstein or UAE.
- Cross-border offerings (particularly in the EU, where GDPR and token-specific laws apply).
2. Token categories based on Swiss regulatory perspective
According to the guidelines issued by FINMA in 2018 and supplemented in 2019, Switzerland categorizes tokens in a comprehensive manner. The assigned categories play a significant role in defining your compliance responsibilities.
Utility tokens. Utility tokens grant access to a specific service or platform. These tokens do not generally fall under securities law unless they function as investments. In Switzerland, they are often compared to vouchers or keys for digital services. Common use cases include granting access to a decentralized application, participating in governance, or rewarding users for activity on the platform. Key compliance consideration: Utility tokens are not subject to AML or securities laws unless their use overlaps with investment functions.
Payment tokens, also known as digital currencies, serve as a means of exchange. Examples include Bitcoin (BTC) and Litecoin (LTC). Unlike utility tokens, payment tokens do not obligate their issuers to any specific contractual commitments to holders. A crucial point to consider regarding compliance: Payment tokens are subject to Anti-Money Laundering (AML) regulations and must adhere to Know Your Customer (KYC) protocols, particularly when used for money transfers or transactions.
Security/asset tokens. Asset tokens represent claims on real-world assets. They are akin to equities or bonds and are treated as securities under FINMA guidelines. For example, a token that grants a share of future company earnings or allows the trading of physical assets on the blockchain would be classified as an asset token. Key compliance consideration: These tokens must comply with securities regulations, requiring either using exemptions from public offering of securities or having a prospectus registered with the respective regulator or designated authorities.
Mixed-type digital tokens. These mixed-type digital tokens encompass characteristics of utility, payment, and asset tokens. To illustrate, a token functioning as both a utility (for accessing services) and a payment method would need to adhere to the rules governing both utility and payment tokens.
3. Key red flags for token categorization
As a forward-thinking crypto investor, I strive to ensure my projects maintain a clear distinction between utility tokens and securities. To do this, it’s crucial to refrain from tying any rights that might imply investment returns or equity to the utility tokens in question. This helps prevent them from being classified as securities, thus avoiding stricter compliance requirements.
- Promises of investment returns or rewards beyond their utility value.
- Buy-back guarantees which imply token value preservation.
It’s important to tackle these potential issues in your token creation at the outset to ensure compliance with regulations throughout the process.
4. Obtaining a legal opinion and FINMA no-action letter
To fully grasp the classification of the token and its associated compliance responsibilities, it’s crucial to obtain legal opinions from both Swiss and EU legal professionals. Furthermore, seeking a “no-action” letter from FINMA can offer assurance that your token won’t be categorized as a security or any other regulated financial instrument.
Obtaining a FINMA no-action letter ensures that your project and potential investors can feel secure, knowing that the token offering won’t encounter any unforeseen regulatory issues.
5. Establishing a legal entity
To issue a token in Switzerland, you need to establish a legal entity to protect the project’s founders from personal liability. Legal wrappers, including those reflecting a DAO, can also provide additional protection and operational flexibility, especially in jurisdictions like Liechtenstein or UAE.
In simpler terms, it’s important for your project to set up business wallets and accounts to guarantee openness in financial transactions. This step helps minimize the chances of legal responsibility or financial misbehavior.
6. Issuing the token: Self-issuance vs. using a launchpad
As a token analyst, I find myself frequently faced with the decision of whether to self-issue a token or utilize a launchpad service when introducing a new token into the market. Each method has its unique advantages and challenges regarding compliance and operational aspects.
Direct Token Creation. Benefits: Allows for management of token economics, pricing, and release timing. Drawbacks: Demands extensive legal knowledge and technological resources. Internal handling of compliance measures like KYC/AML is necessary.
Utilizing a launchpad simplifies the technical aspects of a token sale and ensures pre-screened communities participate. They offer security assessments, regulatory compliance, and liquidity assistance. However, it’s important to note that these platforms may charge substantial fees and have certain limitations on token sales. Keep in mind that despite the reduced compliance risks, the project team must verify that the chosen launchpad complies with the specific laws of their selected jurisdiction.
7. KYC and AML compliance
Despite utility tokens being exempt from Anti-Money Laundering (AML) regulations in Switzerland, financial intermediaries might demand Know Your Customer (KYC) verification, particularly if the token possesses any payment capabilities. If a project includes fiat-to-cryptocurrency transactions, AML compliance assumes heightened importance.
By implementing a Know Your Customer (KYC) procedure, you can ensure that your project steers clear of interacting with individuals or entities on sanction lists, or those involved in fraudulent activities. This practice helps minimize potential legal and professional image issues.
8. Private sale and public token offering
Often, initiatives commence by selling tokens through a private agreement called Simple Agreement for Future Tokens (SAFT), which later transitions to a public sale. The public offering could take place on a launchpad or self-issuance platform. Regardless of the chosen approach, it’s crucial to ready the following:
- Terms and conditions for token purchasers.
- Whitepaper and legal review of the offering documents.
- Data protection for user information in line with GDPR or local privacy laws.
9. Public offering of tokens in the EU
When it comes to projects aimed at the European Union, grasping the intricate legal landscape of the EU is essential. In the EU, public token offerings are bound by regulations concerning prospectus requirements, securities law, and consumer protection. Furthermore, it’s crucial for token issuers to adhere to GDPR when dealing with any personal data.
From the close of 2024 onwards, any entity issuing tokens will be subject to the content standards outlined in a white paper and other regulatory obligations as defined by the Markets in Crypto-Assets Regulation.
Starting a token requires careful attention to various regulatory aspects, such as determining its classification and maintaining correct Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. By adhering to this guide and consulting legal experts when needed, projects can successfully maneuver through the intricate regulatory terrain and initiate their tokens with assurance.
This article was co-authored by Alexander Ray and Janina Pietrowska.
As a seasoned analyst with over two decades of experience under my belt, I’m proud to have co-founded Albus Protocol, a regulation-friendly DeFi infrastructure for public blockchains, and JFactory, a Swiss tech powerhouse specializing in decentralized finance technology. My professional journey has seen me working with esteemed organizations such as Deutsche Bank Frankfurt and General Electric, where I served as a software architect and development lead, contributing to the creation of forecast models for regulatory risk and financial figures. This background provides me with a unique, old-finance perspective when it comes to understanding DeFi algorithms and instruments.
Janina Pietrowska offers guidance to entrepreneurs, startups, growing businesses, and established corporations in Switzerland and Liechtenstein, with expertise particularly in financial market law, capital market law, and corporate law, emphasizing IT, fintech, blockchain, tokenization, cryptocurrency, SDG, and impact investing initiatives. With more than a decade of experience in international consulting, Ms. Pietrowska previously advised numerous global investors, primarily from Germany, Switzerland, Austria, and Liechtenstein on their ventures in CIS countries, managing activities related to their subsidiaries, branches, joint ventures, and mergers and acquisitions deals valued up to 150 million euros. As one of the early supporters of blockchain projects in Switzerland and Liechtenstein since 2017, Ms. Pietrowska has successfully structured over 100 web3 projects worldwide across various industries, with a primary focus on tokenizing real-world assets like real estate, commodities, diamonds, artwork (physical and digital).
Read More
- PYTH PREDICTION. PYTH cryptocurrency
- ‘I Pitched Stargate’s Take On Black Panther’: Christopher Judge Opens Up About His Teal’c Spinoff And Why It Hasn’t Happened
- As Lindsay Lohan And Lacey Chabert Headline Christmas Movies, These Comments Have Me Convinced A Mean Girls Holiday Movie Reunion Needs To Be Next
- IMX PREDICTION. IMX cryptocurrency
- Following Muppet*Vision, Another Popular Disney World Attraction’s Closing Date Has Been Revealed, But This Time There’s Actually Good News
- Dancing With The Stars’ Gleb Savchenko And Brooks Nader Confirm They’re Dating, But Also Cleared Up A Few Misconceptions
- Niels Arestrup Dies at 75, Iconic Actor Was a Force of Cinema
- Jennifer Love Hewitt Addresses Possible Return to ‘I Know What You Did Last Summer’ Reboot
- Alan Rickman Upstaged Kevin Costner in ‘Robin Hood: Prince of Thieves’
- Brazil Introduces Bill to Create National Bitcoin Reserve
2024-10-24 13:49