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FINMA to investigate ICO procedures

Chris Hamblin, Editor, London, 4 October 2017

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The Swiss Financial Market Supervisory Authority has observed a marked increase in initial coin offerings (ICOs) conducted in Switzerland and is investigating some ICO cases to find out whether any issuers have transgressed against its regulations.

In recent times FINMA has observed a marked increase in initial coin offerings (ICOs), either conducted in or offered from Switzerland. ICOs are a digital form of the initial public offerings that businesses carry out but which, by contrast, exclusively take place using blockchain technology. FINMA wants to encourage them and has been trying to do so for years.

FINMA believes that ICOs, or at least some of them, may be subject to existing regulations. The ways in which they are structured from technical, functional and business standpoints varies markedly from offering to offering. It believes that there are no financial regulations that deal exclusively with ICOs anywhere in the world. Switzerland bases its financial legislation on principles and one such principle is technological neutrality.

The regulator writes: "Collecting funds for one’s own account without a platform or issuing house is unregulated from a supervisory perspective in cases where repayment is not obliged, payment instruments have not been issued and no secondary market exists."

ICOs are very heterogenous. Depending on an ICO's structure, some parts of the procedure may already come under existing regulations, especially ones to do with money laundering, terrorist finance and securities trading. Banking laws and the laws that govern collective investment schemes might also apply.

FINMA is investigating ICOs because it detects a close resemblance, in some respects, between ICOs/token-generating events and conventional financial-market transactions. It is also saying that "whenever FINMA is notified about ICO procedures that breach regulatory law or which seek to circumvent financial market law, it initiates enforcement proceedings." So far, it has not.

A FINMA spokesman told Compliance Matters: "We have several guys working on this. We've had contact with several issuers of ICOs already. Some issuers welcome the idea of regulation - they want that government stamp of approval. In our canton of Zug lies Crypto Valley. It has its own own website. That's where they are."

In one of its reports, the Crypto Valley Association states: "Blockchains and cryptocurrencies fell into the lap of Canton Zug almost accidentally. Switzerland’s decentralized federal structure gives each of its 26 cantons (like states) a great deal of autonomy to determine how it will tax its citizens and corporations. While not the lowest, Zug ranks in the most fortuitous five, making it attractive to all kinds of organizations.

"The canton responded with a 'hands-off' approach to blockchain technology projects and businesses. That led to the flowering of a blockchain ecosystem, including the law firm MME and Bitcoin Suisse (which both handle numerous ICOs). Close proximity to technical universities such as ETH and Hochschule Luzern also brings talent and innovation to the area. Finally, local leaders formed the Crypto Valley Association this year to further spur activity, and have received a great deal of support and encouragement."

CoinSchedule (see diagram) lists the world's top ten ICOs of 2017 in reverse order: Filecoin (US$257 million); Tezos ($232 million); EOS Stage 1 ($185 million); Bancor ($153 million); Kin ($97 million); Status; TenX; MobileGO; Sonm; and Aeternity.

This year Zug announced, to some degree of fanfare, that it was letting its citizens pay for municipal services up to SFr200 (€174) in Bitcoin. So far, only 12 people have done it, the majority being journalists conducting tests.

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