Switzerland has become an undisputed hub for ICOs, making up for over USD 600 Million of the total ICO funding of USD 3 billion which was obtained in 2017.²⁴¹ Other sources put the number even higher, up to a billion USD.²⁴² This story of success can be ascribed to many factors such as Switzerland's role as a global financial center as well as Switzerland's financial market supervisory authority ("FINMA"). However, the most prominent reason for Switzerland's ascension to becoming a crypto-hub may be more related to the fact that the Ethereum foundation set up in Switzerland in 2014, becoming a role model for a number of crypto-endeavours concerning both the jurisdiction it chose and the legal structure of the Zug-based foundation. Nevertheless, the Swiss regulator has proven its principles-based regulatory approach, being neutral towards technologies being used, by clearly stating that ICOs are a legitimate way of financing for commercial and non-commercial enterprises. Simultaneously, FINMA clearly communicated that ICOs are potentially subject to several financial market laws. In below country report, an overview over the regulatory framework governing token sales in Switzerland will be provided. This will be followed by a display of the regulator's statements regarding ICOs and subsequently two ICOs which have been conducted from Switzerland will be briefly summarized. Finally, critical thoughts and a comparative analysis will be provided.

Regulatory framework

In below country report, a brief overview over the regulatory frameworks potentially governing token sales will be provided. There'll be a special focus on securities law, the law on collective investment schemes, money regulations (including both means of payment as part of banking regulations and anti-money laundering regulations).²⁴³

Securities Law

i. Securities

Securities in Switzerland are regulated in a number of acts, i.e. the Federal Act on Securities and Stock Exchanges ("SESTA") as well as the corresponding ordinance ("SESTO"). Furthermore, the Federal Act on Financial Market Infrastructures ("FMIA") as well as the corresponding ordinance ("FMIO") cover other functions of securities regulations including the definition of securities, provisions regarding the secondary market (Article 26 seq. FMIA) and criminal law provisions concerning insider trading and market abuse in relation to such securities (Article 147 seq. FMIA).

Under Swiss law, securities are defined as standardized certificated and uncertificated securities, derivatives and intermediated securities that are suitable for mass trading and that

• have the same structure (interest rate, term) and same denomination (amount),

• are publicly offered or are placed with more than 20 customers, and

• have not been created specifically for individual counterparties.²⁴⁴

Although, under Swiss law, a certificate may also be stored on an electronic device and does as such not require a physical deed,²⁴⁵ a token is because of its inherent properties as an entry on a distributed ledger not suitable to be a certificated security stored on a local, electronic device. Therefore, certificated securities will not be further treated in this report as a possible appearance of a token.

According to Article 3 para. 1 of the Federal Act on Intermediated Securities ("FISA"), intermediated securities are personal and corporate rights of a fungible nature against an issuer which are credited to a securities account and may be disposed of by the account holder in accordance with the provisions of FISA.

Pursuant to Article 6 para. 1 FISA intermediated securities are, amongst others, created when a custodian registers uncertificated securities in the main register and credits the respective rights to one or more securities accounts.

Both the book of uncertificated securities and the main register for intermediated securities (may) exist in electronic, dematerialized form.²⁴⁶ As such, the distributed ledger is suitable for being treated as both the Book and the main register. Tokens which represent participation rights or claims ("Colored Coins") and which were issued as uncertificated securities may be represented on and transferred via the blockchain once they've been registered in the main register of a custodian and subsequently credited to a securities account, thus becoming intermediated securities.²⁴⁷ As only an exhaustive list of financial institutions, such as banks, securities dealers and managers of collective investment schemes may function as a custodian within the meaning of FISA,²⁴⁸ no tokens issued during an ICO have to this day been qualified as intermediated securities. With uncertificated securities, on the other hand, the problem lies with the limited transferability.²⁴⁹ Although not preventing the issuance of a token as an uncertificated security on the primary market, the limited transferability largely restricts the creation of a secondary market. Hence, both uncertificated and intermediated securities will not be dealt with hereinafter.

Therefore, derivatives, as the remaining subcategory of securities according to Article 2 letter b FMIA shall be the focus of the following remarks. Derivatives, as a subcategory of securities, are defined in Article 2 letter c of the FMIA as financial contracts whose value depends on one or more underlying assets and which are not spot transactions. Underlying assets include, in particular, assets such as shares, bonds, commodities and precious metals as well as reference values such as currencies, interest rates and indices (Article 2 paragraph 2 of the FMIO). As a rule, if certain parameters are capable of being defined in a flexible manner, then the standardization and suitability will not be sufficient for purposes of mass trading.²⁵⁰

Derivatives exist either in the form of bilateral contracts or as intermediated or uncertificated securities (Article 80 letter a FMIO e contrario).

A derivative will be deemed to exist only if it is not a spot transaction (Article 2(c) of the FMIA). Pursuant to Article 2 para. 4 FMIO, spot transactions are deemed to be transactions that are settled either immediately or, following expiry of the deferred settlement deadline, within two business days.

ii. Collective Investment Schemes

According to Art. 7 of the Collective Investment Schemes Act, collective investment schemes are assets raised from investors for the purpose of collective investment, and which are managed for the account of such investors. The investment requirements of the investors must be met on an equal basis, in order to fall within the definition.

Iii. Financial Instruments

De lege lata, Swiss law only provides for the category of "Financial Instruments" as a regulated category of financial products peripherally, with little or no effect on the current regulatory landscape (Article 42 FMIA). Financial Instruments as referenced in Article 42 of the FMIA are defined in accordance with MiFID II Appendix I Section C in Article 3 letter b of the draft Financial Services Act (FinSA). According to Article 3 letter b Draft-FinSA, they consist, amongst others, of derivatives that are not suitable for mass trading, i.e. that are tailored for one counterparty or that number less than 20 units. Units in collective investment schemes, amongst others, will, upon enactment of FinSA, be subsumed under this novel category.²⁵¹ As FinSA will presumably not be enacted until 2020, financial instruments will not be further analyzed in this report.²⁵²

iv. Tokens as Securities or Collective Investment Schemes

ICOs are currently not governed by any specific regulation 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 principles-based; one such principle is technology neutrality.²⁵³

In its guidance on the regulatory treatment of initial coin offerings, FINMA further stated that provisions on securities trading may trigger a licensing requirement to operate as a securities dealer in case where the tokens issued qualify as securities (e.g. derivatives). Furthermore, FINMA stated that potential links to collective investment schemes legislation may arise where the assets collected as part of the ICO are managed externally.²⁵⁴

A Token is a security, if it falls within the abovementioned definition under the FMIO, being either a certificated security, an uncertificated security, an intermediated security or a derivative which is issued in a standardized fashion suitable for mass-trading.

Furthermore, if the assets raised from investors in the course of an ICO are utilized for the purpose of collective investments, and such assets are managed for the account of such investors and the investors' investment requirements are met on an equal basis, the provisions of the collective investment scheme legislation need to be considered.²⁵⁵

v. Regulatory Consequences

Generally, a Swiss entity collecting funds for a third party while issuing securities triggers a licensing requirement as a securities dealer, acting specifically as an issuing house.²⁵⁶ This is the case, when the activity in question is conducted on a professional basis and the company is primarily active in the financial industry (Article 3 para. 2 SESTO; Article 2 para. 1 SESTO).

However, 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.²⁵⁷ This is even the case for tokens which qualify as securities under Swiss law.

For the issuer itself, the public issuance of a token which qualifies as either a debt or an equity securities requires a prospectus,²⁵⁸ as does the placement of units in collective investment schemes. Furthermore, the issuance of certain derivatives (i.e. structured products) requires a simplified prospectus and these structured products have to be issued, guaranteed or secured by a regulated bank or securities dealer.²⁵⁹The scholarly dispute concerning the question whether the public issuance of a derivative which does not qualify as a structured product requires a prospectus is not dealt with in this report. For issuers it's nonetheless advisable to create a prospectus in such case.²⁶⁰

However, it is noteworthy that until now Swiss securities law does not require the filing of a prospectus for debt or equity securities with any governmental or supervisory authority as is common practice in many other jurisdictions.²⁶¹ Such obligation regarding the primary market currently only exist in regards to the collective investment scheme regulation, where the fund management must submit the obligatory prospectus to FINMA (Article 106 para. 2 CISO). As such, the prospectus for equity and debt securities in Switzerland is a matter of private law, rather than regulatory law. Therefore, FINMA does not exert any supervision over debt and equity securities prospectuses. Also note, that these provisions will be subject to change with the enactment of FinSA. Under FinSA, a prospectus will be required to be filed with a FINMA-authorized inspection body for securities which are publicly offered.²⁶²

Money regulations

i. Banking Regulations / Means of Payment

Under Swiss law, accepting deposits from the public qualifies as a banking activity which requires a license,²⁶³ unless one of the exemptions in article 5 para. 3 of the Banking Ordinance are applicable.

According to WalderWyss, "Four important exemptions from the said application of the Swiss Banking Act are noteworthy. First, payments from investors based on a prospectus subject to Swiss law do not qualify as deposit under the Swiss Banking Act. Even though the disclosure requirements of a Swiss prospectus are currently rather low, the white papers used in ICOs do generally not cope with the legal requirements for a Swiss prospectus. However, it would take limited effort to amend a white paper in order to meet the prospectus requirements. Secondly, payments to a charitable foundation would generally not be deemed as deposit. We believe that Swiss foundations engaging in an ICO do not have a charitable purpose and may therefore not benefit from this exception. Third, accepting deposits from an unlimited number of third parties below the aggregate value of CHF 1 million would not trigger banking license requirements (regulatory sandbox). Fourth, the acceptance of (virtual or fiat) money not exceeding a value of CHF 3,000 by a payment system for future services or goods fall out of scope of the term deposit (provided that no interest is being paid to the investor).²⁶⁴ Even though the last two exceptions may be relied upon in an ICO, they would limit the acceptable ticket sizes and scale. Midsize and large investments would be excluded."²⁶⁵

As mentioned hereinabove, FINMA stated that ICOs as a means to collect funds for one's own account in cases where, amongst others, repayment is not obliged and payment instruments have not been issued, are unregulated. What's to be drawn from this e contrario, in cases where the token issued indeed functions as a payment instrument and a repayment can somehow be construed, shall be displayed hereinafter.

According to the FINMA Guidance on initial coin offerings, accepting public deposits, where an obligation towards participants arises for the ICO operator because of the ICO, generally necessitates a banking licence. The issuance of means of payment, which does not fall under the mentioned exemptions in article 5 para. 3 of the Banking Ordinance, is therefore qualified as accepting deposits from the public. Subsequently, a token issuer who issues a token which qualifies as a means of payment and may not rely on the abovementioned exemptions in art. 5 para. 3 of the Banking Ordinance, acts in violation of the banking ordinance as such activity would constitute a licensing requirement.²⁶⁶

Tokens should further not represent a right to request repayment of the underlying asset to the investor. Otherwise the issuance of the token could be deemed as deposit taking by the Swiss entity conducting the token offering. As stated, the acceptance of deposits from the public triggers the application of banking regulation. Swiss regulated banks only are permitted to accept deposits. A Swiss foundation or company would, therefore, not be permitted to accept fiat money, Bitcoins, Ethers or other intrinsic tokens from investors in exchange for a token which allows the holder of such token to request payout of the underlying assets.²⁶⁷

ii. Anti Money-Laundering Regulations

The Swiss anti-money laundering and terrorism financing framework primarily consists of the following two separate pieces of legislation: the Anti-Money Laundering Act ("AMLA") and the Criminal Code ("CC").

The AMLA requires financial intermediaries to comply with the following statutory obligations:

General duties of due diligence, including verification of the identity of the customer, establishment of the identity of the beneficial owner, duty to keep records and to enact organizational measures (Articles 3-8 of AMLA).

A person is subject to Swiss anti-money laundering ("AML") provisions if such person qualifies as a financial intermediary as defined in Article 2 of AMLA.

Financial intermediaries include banks and securities dealers, according to Article 2 para. 2 AMLA. Furthermore, financial intermediaries are also considered all natural and legal persons who accept, retain or help transfer assets belonging to others on a professional basis (art. 2 para. 3 AMLA). Examples of such activities will be the offering of payment services, the issuance and management of means of payment (Article 2 para. 3 letter b AMLA) and trading with money, foreign exchange, raw materials, securities and precious metals (Article 2 para. 3 letter c AMLA). The use of virtual currencies as a means of payment for the acquisition or sale of goods and services does not constitute financial intermediation. On the other hand, the trading in cryptographic tokens on a professional basis, the operation of trading platforms where monies or cryptographic tokens from users of the platform are transferred to other users of the platform and the operator acts on a professional basis, fall under the AMLA.²⁶⁸

Regarding the applicability of the Anti-Money Laundering Act ("AMLA") on activities in relation to cryptographic tokens and, FINMA states in its guidance that the Anti-Money Laundering Act applies where the creation of a token by an ICO vendor involves issuing a payment instrument. If this is the case, other supervisory issues may be effective for third parties, especially for professional cryptobrokers or trading platforms which carry out exchange transactions or transfers with tokens (secondary trading with tokens).²⁶⁹

In these cases, the financial intermediary must comply with the obligations under chapter 2 of the AMLA. In particular, the obligations to identify the contracting party (art. 3 AMLA) as well as the obligation to determine the beneficial owner (art. 4 AMLA) apply. Given the difficulties in establishing the identity of the contracting parties in relation to dealings in virtual currencies, i.e. cryptographic tokens, the regulators demand that strict due diligence, in particular with regard to customer identification, is performed.²⁷⁰

FINMA confirmed in 2015 that classical cryptocurrencies such as Bitcoin and Ether, should be deemed virtual currency.²⁷¹ Virtual currency has to be treated as any other currency, at least with regards to AML provisions. Accordingly, WalderWyss argue in their Newsletter regarding ICOs that "as a consequence, the exchange of fiat money, Bitcoin, Ether into a newly issued token with a value itself in the course of an ICO would be qualified as currency exchange, which is regulated in the AMLO-FINMA. Any Swiss entity offering currency exchange has to comply with the Swiss AML rules in the event such entity is acting on a professional basis. In the course of any ICO, the required threshold to act on professional basis is being reached if the value of the accepted Bitcoins or Ethers in exchange of the issuance of new tokens exceeds CHF 2 million.²⁷² In such event, the Swiss entity issuing new virtual currency tokens has either to join a self-regulatory organization for AML purposes or submit itself to the respective supervision of FINMA. Any investor (whether foreign or Swiss) investing more than an equivalent of CHF 5,000 in the ICO is subject to the required know your customer due diligence of the Swiss entity conducting the offering."²⁷³

However, one could argue otherwise. The issuance of an "intrinsic"²⁷⁴ token only qualifies as currency exchange if it is an actual virtual currency. According to FINMA, a virtual currency is a digital representation of a value which is tradeable on the internet and takes on the function of money, without being considered legal tender. Virtual currencies can be used as a means of payment for goods and services.²⁷⁵ For a token which is issued during an ICO, usually no secondary market exists yet. Thus, the token is restricted in its tradeability. Therefore, such a token potentially does not qualify as virtual currency. Hence, the issuance cannot qualify as currency exchange. This may even be the case for "intrinsic" tokens or "utility" tokens, provided they do not qualify as a means of payment. Furthermore, at the time where the issued token may be listed on a secondary market and made tradeable, the issuer itself may not be involved in creating the secondary market. Rather, independent and separate entities, e.g. crypto-exchanges, will maintain and take care of the respective secondary market. This is why the subjection under the AMLA via conducting currency exchange will most likely affect the exchange and not the original issuer (as long as the token itself is not being used within an electronic payment system maintained by the issuer and the issuer is not at all involved in the creation of the secondary market). However, it must be noted, that it is currently unclear how FINMA treats the issuance of such tokens in light of the applicability of AMLA and the respective Ordinances.

Furthermore, Article 260^quinquies^ (financing of terrorism) and Article 305^bis^ (money laundering) CC may apply when conducting an ICO and issuers must research whether the Embargo Act may be applicable to their token sale and any subsequent activity.

Critical thoughts and comparative analysis

Switzerland's Cryptovalley, a loosely organized cluster of blockchain startups, law firms and government initiatives sprawled around the city of Zug, connected but not congruent with the eponymous association, has been a leading force in making Switzerland a global hub for token sales. The Zug-model which includes setting up a Swiss foundation to distribute and issue and the tokens whilst using the raised funds to ensure a proper development of the blockchain platforms or applications, has become the go-to-model for many token sales conducted in Switzerland. Credit must certainly be given to MME, a leading Swiss law firm in the field of tech and distributed ledger technology, which spearheaded the foundation model and helped make Switzerland become the crypto-hub it is today. Furthermore, they greatly contributed to the accumulation of legal know-how regarding the legal treatment of cryptocurrencies and other crypto-assets in light of various aspects of the law.

The foundation model allows for ensuring a stable governance and that the funds raised are exclusively used for the foundation's purpose, i.e. to build the blockchain platform or application as envisioned in the corresponding whitepaper. Hence, these foundations can potentially exist for decades, if not centuries and consistently provide funding for the development or maintenance of the envisioned platforms. The foundation is especially apt for open-source projects such as the Ethereum Foundation's Ethereum blockchain or Web3 Foundation's Polkadot protocol. These kinds of initiatives would have a hard time raising money on the traditional capital markets as they promote non-proprietary, open-source technology and have built or aim to build decentralized, non-proprietary networks.

The tokens issued by the Foundation during or after the ICO are distributed in exchange for the contributions it receives in Ether and Bitcoin, flagged as "donations". This has some very advantageous effects from a tax perspective, where the foundation receiving the donations will not have to pay capital gains tax on these. While flagging these contributions as donations might be justifiable in light of the altruistic, open-source nature of the aforementioned initiatives, it does not always reflect the economic reality as perceived by the contributors.

Jeremy Gardner, a notorious crypto-investor based in San Francisco, described the mindset of contributors in a recent report in the New York Times the following way: 20 percent of the crypto community are in it for the ideology, 60 percent for the tech and 100 percent for the money.²⁸⁴ Hence, it remains to be seen whether the foundation-model prevails as the go-to ICO-model as it's been co-opted by numerous initiatives, where the attributes "open-source" and "non-proprietary" seem to be of lesser importance.

The hype and buzz around Switzerland as the go-to jurisdiction has slightly abated since FINMA has seemingly taken a tougher stance on these novel forms of raising funds, leaving many entrepreneurs disillusioned, as receiving a no-action-letter by FINMA takes up a long time which slows down their often unrealistic timelines for conducting an ICOs. Firms deciding to conduct ICOs in Liechtenstein or Malta instead of Switzerland has become a regular occurence.

Nevertheless, the Swiss government's recently reaffirmed its overall positive approach to innovation in the field of distributed ledger technology. The ministers of finance and education have initiated a blockchain taskforce to further fortify Switzerland's standing as a worldwide leader in the field.²⁸⁵

Benedikt Schuppli