Monthly Archives

February 2018

Discounted tickets to Blockhain Summit – Crypto Valley for CVA members

By | Member News

The Blockchain Summit – Crypto Valley is a unique event held in the heart of Switzerland’s Crypto Valley – in Zug. This is the place where Ethereum was born. And this is the place where blockchain and crypto are king.

The 2017 edition of the Blockchain Summit – Crypto Valley attracted over 1 000 attendees who gathered at the Theatre Casino and watched online.
Don’t miss out on the next edition coming up on 25-26 April. Use the code provided for a discounted ticket.
  • Discounted tickets: Click here
  • Discount code: CVAMembers

Weekly Twitter Summary (2018-02-18 – 2018-02-24)

By | Public Announcements

Opinion: FINMA circular For ICOs and token transfer law  – what does it mean?

By | Public Announcements

By Mona El Isa, CEO & Co-Founder of Melonport.

DISCLAIMER: This post is part of our series of CVA member feedback to the recent FINMA ICO Guidelines. It reflects the private opinion of the author, and does not constitute or represent the official opinion of the CVA. The author adds: “This is also not a legal opinion. It is intended as a summary, first opinion and our personal views only.”

On Friday 16th February, FINMA produced guidelines intended to give clarity on some of the major issues around ICO’s and token transfer.

We welcome the approach that FINMA has taken in publishing some of the first ICO guideline globally. This shows great initiative and engagement with the fast-growing Swiss community of blockchain companies!

One of the first points that FINMA emphasizes is the importance of defining and documenting clearly the terms and conditions for an ICO. In particular, all tokens classified as “securities” — especially those that look like “equities” or “bonds” — will have to adhere to SESTA standards of reporting. This applies to anyone issuing such a token in return for a cryptocurrency or fiat of some sort. This should hopefully already be clear to most market participants — but if its not, hopefully it is now!

Another interesting obersvation was FINMA hinted that it is currently mostly concerned with ICO’s taking place in the future. FINMA no doubt must be swamped with requests from ICO’s, so dealing with what they have on the table now is probably a first priority:

“ICO’s which have already taken place will only be assessed in the context of investigations into potentially unlicensed activities. The same applies to submissions made to FINMA solely for information.”

Finally , FINMA established four main categories of tokens. The next part of this blog attempts to summarise these categories and classifications to the best of our understanding after which we will then look at the potential implications and question that still remain. It should be emphasised that there remain uncertainties and ambiguities, as far as we can tell, and we hope they will be clarified in the coming weeks and months. However, as a first step the guidance is useful in that it does nevertheless provide more clarity than had hitherto existed. The four categories and classifications appear to be as follows:

1) PAYMENT TOKENS (cryptocurrencies) — intended to be used now (or in future) as a means of payment for acquiring goods or services as a means of money or value transfer. Bitcoin and Ether are listed examples here.

Classification: FINMA clearly took the view that they do not see payment tokens as security tokens. This is consistent with how FINMA has treated Bitcoin and Ether in the past. FINMA also mentioned that whilst this was the current assessment, new case law or legislation could revise their view on this at a later date.

2) UTILITY TOKENS — intended to provide access digitally to an application or service by means of a blockchain infrastructure.

Classification: Utility tokens will not be treated as securities if their sole purpose is to confer digital access rights to an application or service and if the utility token can actually be used in this way at the point of issue.

In these cases, the underlying function to grant the access rights and a connection to capital markets (a typical feature of securities) is missing.

IMPORTANT: If a utility token additionally has an investment purpose at the point of issue, FINMA will treat such tokens as securities.

3) ASSET TOKENS — represent a tokenized asset in the traditional sense (ie. a security) such as a debt or equity claim on the issuer. Asset tokens promise for example a share in future company earning, capital flows etc. Asset tokens which are backed by any physical assets also fall into this category.

Classification: Such tokens are Securities within the meaning of Art.2 let b FMIA.

4) PRE FINANCING or PRE SALE TOKENS: Promise to receive some kind of tokens or right to acquire tokens at a future date.

Classification: Such tokens are also Securities, and presumably therefore also fall within the meaning of Art.2 let b FMIA although this is not specified explicitly.

These classifications are not mutually exclusive and could result as classification into a hybrid token.

Whilst the classifications are fairly clear, there is some degree of confusion which remains. We will touch on that towards the end of this blog. But first, let’s look at the legal implications.


Well, if FINMA defines your token within the “securities” category in Switzerland — the token and its issuer will then fall under securities regulation — in particular they refer to SESTA :

Taking a look at SESTA, the main purpose of this appears to be giving transparency and equality to investors:

It seems to me that this would mainly apply when accepting cryptocurrencies (or fiat money) in exchange for tokens being issued, ie, in the form of ICO’s going forward. However, these rules were defined for securities that look like securities and bonds.

Until now, the book-entry of self-issued uncertificated securities (presumably payment, utility and asset tokens as we understand these to be un-certified in a sense) is essentially unregulated. The same applies to the public offering of securities to third parties. We were not sure if and how this was relevant to ICO participants.

FINMA also made a statement which appeared to be mostly applicable to crypto exchanges (presumably, unless companies are issuing derivatives in their own or other tokens).

They state that the creation, issuance, underwriting and offering of derivative products as defined by FMIA to the public on the primary market is regulated as per Art 3 para 2& 3 Stock Exchange Ordinance SESTO.

Finally, they stated that the issuing of tokens that are “security tokens” (in particular those that look like, but not necessarily limited to equities or bonds) can result in prospectus requirements under the Swiss Code of Obligations. This is not FINMA territory but refer to FinSA Art 37 Draft FinSA(Art 37 Draft FinSA) which will soon become part of supervisory law.

Classification as deposits

If you have not made any claims with regards to issuing tokens (ie that when you issue a token you get some kind of repayment back), you should not be subject to Banking Act and deposit law.

Applicability of Collective Investment Scheme Act

If you have made no claims to hold custody of and manage assets (including tokens) on behalf of third parties (eg. as an investment fund for example), you should not fall under the Collective Investment Scheme Act.

Applicability of Anti Money Laundering Act

It was made quite clear in the guidelines that securities, payment tokens AND financial service related utility tokens are all subject to Anti-money laundering act. This is probably the single most important statement from the guidelines.

“Anyone who provides payment services or who issues or manages a means of payment is a financial intermediary subject to the AMLA (Art 2 para 3 let b AMLA)”

FINMA also stated that the issuance of payment tokens constitutes the issuing of a means of payment, subject to today’s guidelines. The definition of this had previously been a grey area.

In the case of utility tokens, there is a bit more room — anti-money laundering regulation is not applicable:

as long as the main reason for issuing the tokens is to provide access rights to a non-financial application of blockchain technology (Art 2 para 2 let a no3 AMLO).

This assessment was un-deniably disappointing and restrictive since the majority of blockchain applications are indeed for financial applications of the technology with a low likelihood of being used to launder money through the access rights. However, it remains to be seen if this will be decided on a case by case basis.

Under FINMA guidelines of Feb 16th, it was made very clear that the exchange of a cryptocurrency for fiat money or a different cryptocurrency falls under Art 2 par 3 AMLA. The same applies to the offering of services to transfer tokens if the service provider maintains the private key (custody wallet provider)

So lastly, What are the implications of falling under the AMLA?

Anti money laundering regulation gives rise to a large range of due diligence requirements including the requirement to establish the identity of the beneficial owner and the obligation. In some cases, it will require an official affiliation to a self-regulatory organisation (SRO) to be subject directly to FINMA supervision.

Financial intermediaries are required to adhere to the AMLA and defined under Art 2 para 3 of the AMLA Act as persons who on a professional basis accept or hold on deposit assets belonging to others or who assist in the investment or transfer of such assets.

In addition to these, FINMA made it clear that the exchange of a cryptocurrency for fiat money (or another cryptocurrency) falls under Art 2 para 3 AMLA. The same also applies to the offering of services to transfer tokens, if the service provider maintains the private key (custody wallet provider).

These requirements can be fulfilled by having the funds accepted via a financial intermediary who is already subject to the AMLA in Switzerland and who exercises on behalf of the organiser the corresponding due diligence requirements.


1. By today’s guidance most ICO’s or tokens that were issued before today would be classified as “securities” because they are “pre-financed” or “pre-sold” before a technology is complete. FINMA distinguished that ICOs which issue tradable CLAIMS on future tokens via presale, would be classified as securities. The tokens themselves, when they get issued at a later point could then become Utility or Payment tokens but this was not made very clear in the statement.

2. It was a bit of a shame to see utility tokens being treated differently for financial systems than for non-financial systems with respect to the AML Act. This seems a bit restrictive, especially when one of the biggest applications in blockchain is specifically for financial applications. Is this final or perhaps to be considered on a case by case basis we wonder?

3. In section 3.3, FINMA talks about legal implications for securities and makes reference to SESTA and FMIA in the context of those implications. While this makes sense for those pure securities, in the sense of those that look like “equities” and “bonds” or give the holder some share in an “underlying asset”, it is not clear how it should be treated for “pre-financing/ pre-sale” security tokens. In other words, what are the reporting requirements (if any) on tokens which are one day intended to be “utility” or “payment” tokens, but by today’s FINMA definition are classified as “security tokens”?

5. Section 3.6 — A crucial element of the guidelines was the FINMA introduction of a new kind of financial intermediary. As per the AML Act Art 2 para 3 of the AMLA, a financial intermediary is defined as follows:

Financial intermediaries are defined as persons who on a professional basis accept or hold on deposit assets belonging to others or who assist in the investment or transfer of such assets; they include in particular persons who:

…. b. provide services related to payment transactions, in particular by carrying out electronic transfers on behalf of other persons, or who issue or manage means of payment such as credit cards and travellers’ cheques;

However, as per the FINMA guidelines — a clear statement was made to contrast this definition:

The objective of the Anti-Money Laundering Act (AMLA) is to protect the financial system from money laundering and the financing of terrorism. Anyone who provides payment services or who issues or manages a means of payment is a financial intermediary subject to the AMLA (Art. 2 para. 3 let. b AMLA). The issuing of payment tokens constitutes the issuing of a means of payment subject to this regulation as long as the tokens can be transferred technically on a blockchain infrastructure. This may be the case at the time of the ICO or only at a later date. 7/11 In the case of utility tokens, anti-money laundering regulation is not applicable as long as the main reason for issuing the tokens is to provide access rights to a non-financial application of blockchain technology (see Art. 2 para. 2 let. a no. 3 AMLO, FINMA Circ. 11/1 “Financial intermediation under AMLA” margin no. 13 et seq.).

If understood correctly, this statement implied that anyone who invests or transfers tokens is considered a financial intermediary, whilst the legal definition suggests that anyone who invests or transfers tokens “on behalf of others” is a financial intermediary and thus subject to AML Act. This is a pretty big difference vs the official legal definition.

Consider the following example: a company has issued tokens and wants to distribute them for free in exchange for testing, competitions, increasing a network effect, etc. How should this be treated? In a world of “air-dropping” tokens to enhance important “network effects” which very much rely on the success of these technologies, is the AMLA Act really necessary when giving tokens out as a gift or with respect to a service if no cryptocurrency or fiat money is accepted in return? In our opinion the law is pretty clear it is applicable to those payment systems that “transfer on behalf of others”. However, more conservative legal firms have argued its important to create a paper trail regardless of whether you are acting on behalf of someone else or not. We would say that this is an unnecessary burden on innovation because at the point where you come to “sell” this token for a fiat currency, your paper trail is recorded anyhow by existing AMLA law — why the need to duplicate it?

Some have argued that there is a need to create a “paper trail” regardless of whether you are acting on behalf of someone else or not. We would say that this is an unnecessary burden on innovation because at the point where you come to “sell” this token for a fiat currency, your paper trail is recorded anyhow by AMLA law. Why duplicate it when you are not even accepting something in return for the token? Furthermore, we are seeing more relaxed thinking about this from Wyoming which just passed a 60–1 bill on utility tokens exempting them from the money transmittor act and France also recently took steps to begin trading unlisted securities using blockchain technology.

8. Understanding the real definition of a financial intermediary is incredibly important. We can’t stress this enough. The reason being, if all blockchain companies “are” financial intermediaries, section 3.7 of the guidelines reminds us that they are required by law either to affiliate to a self-regulatory organisation (SRO) or to be subject directly to FINMA supervision. This is a pretty big deal — having personally called a couple of SRO’s since Friday to discuss, they do not seem aware OR ready to accomodate for blockchain companies. The FINMA backlog already appears to be very large at the moment. How do we deal with this requirement? And is it even a necessary requirement?

9. Lastly, AMLA law is understandable but unnecessarily cumbersome and complex in the world of blockchain, a bleeding edge technology. If you look at the requirements under Art 2 para 3, they may benefit from modernization with technology too or risk slowing down the majority of market participants substantially in Switzerland. Perhaps a proposal on how to advance through an SRO using digital identification techniques would be useful.

We will be analyzing the situation further in coming days and would love to hear some of your opinions. Please bear in mind that this is only a first assessment by someone following the space closely and our personal views only. Feedback is very welcome — please do send any thoughts, concerns or comments to

Opinion: Assessing FINMA’s ICO Guidelines – Good, but room for improvement

By | Public Announcements

by Dr. Mattia L. Rattaggi, Co-Chair CVA Regulatory and Policy Task Force and Board Member of the SmartOne Foundation.

DISCLAIMER: This post is part of our series of CVA member feedback to the recent FINMA ICO Guidelines. It reflects the private opinion of the author, and does not constitute or represent the official opinion of the CVA. The author adds: “It goes without saying that the below is by no means a legal opinion but just a summary, first opinion and my personal views / assessment only.”

The Swiss financial regulator FINMA issued on 16 February 2018 guidelines for enquiries regarding the regulatory framework for ICOs. The purpose of the guidelines is to specify the information required by FINMA to process enquiries and also to set out the principles on which FINMA will respond to them. FINMA had issued on 29 September 2017 a guidance laying out its position on ICOs and highlighting areas in which ICOs may be covered by existing financial market regulation. I assess the guidelines as good, for many reasons, but I also believe that there is room for improvement in a number of areas.

Let’s elaborate:

The good

The work of FINMA deserves praise from many perspectives.

  • The guideline comes in response to a sharp increase in the number of ICOs planned or executed in Switzerland and the corresponding increase in the number of enquiries about the applicability of regulation, and aims to enable FINMA to respond quickly and precisely. The guideline is thus an implicit recognition of the ongoing normalization of ICOs – as a financing instrument in its own right – and a support to their professionalization.
  • The guidelines confirm the predictability, pragmatic, innovation-friendly, sustainability-oriented and risk-aware nature of the Swiss regulatory approach.
    • No u-turn, no surprising change in direction or radical move regarding ICO regulation, but recognition of the innovative potential of blockchain technology, support of the federal government’s blockchain / ICO working group and desire to back the industry with a more efficient handling of requests instead.
    • Principle-based / balanced approach as opposed to a straight-jacketed approach, leaving open the door for further refinement – as this innovative financing practice evolves – and ultimate reliance on a case-by-case assessment.
    • Firm desire to ensure that the development of ICOs continues to grant highest investors protection, integrity of the financial system, and continuation of investigations into ICOs to ascertain possible breaches of supervisory law, circumventions of regulation, fraudulent intent.

The guideline offers a token classification based on the underlying economic function and assesses applicability of financial regulation against it. The result is: enhanced upfront clarity as to the relevance and applicability of the banking act, the collective investment scheme act, the anti-money laundering act, the stock exchange act, the financial market infrastructure act and even the code of obligations and the draft financial services act.

  • Payment tokens (pure means of payment not giving rise to claims on their issuer): when they do not yet exist and the claims are tradeable, AML legislation do not apply and the claims are securities. Payment tokens that exist, are not securities and are subject to AML.
  • Utility tokens (conferring digital access rights to an application or service): when they do not yet exist and the claims are tradeable, AML legislation do not apply and the claims are securities. Utility tokens that exist and are not attributed with an investment function, are not securities.
  • Asset tokens (tokens having an investment function, a connection with capital markets, being suitable for mass standardized trading, representing a derivative or a debt or equity claim on the issuer, or enabling physical assets to be traded on the blockchain) are securities and are not subject to AML – irrespective from whether they exist or not yet. On a more process-oriented level, the guidance establishes a set of minimum information requirements for ICO enquiries which clarifies the expectations and helps standardizing the preparation of the submissions.

Room for improvement

The good work of FINMA offers room for improvement and perhaps the guidelines would have benefited from a short official consultation period with the community before issuance.

  • The large majority of the ICOs (and I expect this category to even increase in comparative significance, as the ICO process normalises) issue tokens on the back of pre-existing protocols or platforms, such as Ethereum. The token may be operative at issuance in a fully-fledged or embryonic blockchain-based platform, or its emission / issuance may finance the development of the blockchain-based platform in which the token will operate. The promoters – like in IPOs – may offer investors to reserve tokens in advance, at bespoke conditions (including discounted price and lock- up periods). These pre-sale agreements are typically bespoke and not tradeable. In these pre-sales the investor receives a claim on future tokens, not a token with which to buy other tokens.
  • FINMA states that in the case of pre-financing and pre-sale of an ICO which confer claims to acquire tokens in the future, these claims will also be treated as securities if they are standardized and suitable for mass standardized trading. It calls ‘pre-financing’ the promise of tokens at some point in the future on a blockchain still to be developed, and it calls ‘pre-sale’ when investors receive tokens entitling them to acquire other, different, tokens at a later date. The guideline could have been clearer in relation to the conditions under which the claim on future token and the token itself may be considered a security with reference to the standard ICO model described above.
  • According to the guidelines, the issuance of payment tokens tantamount to means of payment subject to AML – provided the tokens can be transferred on a blockchain. Most of the (complex) tokens (i.e., utility and or asset tokens) characterizing the tokenized ecosystem in a standard ICO such as described above have a payment function (within the ecosystem). It is hard to imagine that AML legislation may apply in closed ecosystems, but the text is not conclusive about it. On the other hand, an ICO is a financing instrument where crypto assets or and fiat money changed into crypto- assets flow into an economic venture, alimenting the creation of new tokens which eventually may leave the ecosystem via an exchange. While FINMA subject second market trading to AML legislation, it could have been explicit in addressing the creation phase – given that the financial community should not miss any opportunity to identify, catch and stop funds originating from illicit activities. Fortunately, such checks are becoming an established ICO practice – not least granting protection to the promoter.
  • Following the guidelines, a utility token may be considered a securities if it additionally or only has an investment purpose. Now, the mere expectation of the user that the token will gain value should not have an effect on the token qualification as such interpretation would lack a legal basis in Swiss security laws. However, the guidelines lack clarity on this point.
  • FINMA writes that securities regulation is intended to ensure that market participants can base their decisions regarding investments on a reliable and defined set of information. This suggests that ICOs based on non-security tokens may mislead market participants and cannot be structured in a way that ensures market participants as if the token was a security – something I disagree with. At the same time, FINMA renews the warning to all investors in ICOs – irrespective from the token classification – about the risks ICOs can pose for investors, suggesting even securities regulation cannot achieve the intended goal.
  • A further clarification point is more operational, namely whether the minimum requirements form the basis of a regulatory white paper or an annex to a white paper or something else.

Unless some clarifying interpretations are provided, market participants will have to address FINMA and obtain a ruling. This may partially undermine at least for the time being harvesting the benefits intended with the Guidelines: deal more efficiently with the growing volume of ICOs.

Opinion: An Open Letter to FINMA, the Swiss Financial Regulators

By | Public Announcements

By David Siegel of the Pillar Foundation.

This post is part of our series of CVA member feedback to the recent FINMA ICO Guidelines. It reflects the private opinion of the author, and does not constitute or represent the official opinion of the CVA. Adds the author: “This piece is not meant to be the opinion of the CVA or other members. It is also not meant as advice for anyone launching an ICO.”

To the Directors and Management of FINMA,

Your ICO guidelines of 2017 and your recent update on how you intend to apply the guidelines show that you are listening and learning and want to help people in our nascent industry comply with regulation while discovering new technologies and ways to finance innovation. You are to be applauded for your approachability and thoughtfulness. In this short response, I would like to place it in context and add some data.

Financial Firsts in Europe

In the 16th century, voyages from Europe to foreign lands in search of spices and treasures were financed as single projects. But in 1600, the British East India company was formed as a private corporation to launch and maintain a network of ships and trading infrastructure. It was financed by issuing private shares to its investors, who were the typical high-net-worth investors of the day. Two years later, the Dutch East India company was similarly created by a group of entrepreneurs hoping to create a “unicorn” company to rival the British. In 1606, they collaborated with the government to raise more funds by going to every city and town in Holland holding meetings and explaining to citizens that they were issuing something called an “actie,” which gave public investors the right to own shares in the company. The charter said that the company would not redeem those shares; rather, the holders could then sell those shares to others if they wanted liquidity. These were the first public shares, followed soon after by the first public stock market, in history.

Both companies lasted more than 200 years and made their shareholders more wealthy than anyone could have imagined – HODLing shares of the Dutch East India company yielded a steady 16 percent average annual dividend for most of the life of the enterprise. The well-funded Dutch company had better technology than any other company, or even government, in the world. It has been argued that the Dutch remained far ahead of their British competitors throughout the 17th century. Adjusting for inflation, the Dutch East India company became the world’s first trillion-dollar company, hundreds of years before Apple and Amazon were even close.

These companies were soon followed by many more. Some, like the Mississippi Company, were unsustainable and poorly governed. Others were simply scams. But in retrospect, letting members of the public buy, share, and trade the risk in a new enterprise – sans regulation! – was one of the most successful financial innovations of all time. Four hundred years of continuous delivery and continuous improvement on these basic concepts bring us to where we are today.

Protecting The Public

FINMA has issued a middle-of-the-road statement, outlining the three main types of tokens and acknowledging that there can be hybrid versions. FINMA is focusing on the tokens and their intended purpose. They are taking a SAFT approach, saying that if a system is not yet built and is raising funds to build it, then the token must be a security, as there is too much risk to simply call it a utility token. Only when the system is working and the token can be used could a token be considered a utility token.

Recently, the SEC issued a similar statement, and I responded with an essay pointing out the flaws in trying to regulate types of tokens. I also looked for evidence that regulations were performing their intended purpose – keeping retail investors safe – and concluded that the evidence largely doesn’t exist. Researchers may well refer to the last eighty years of financial regulation as “the failed war on financial crime.” I encourage all regulators to understand whether banks or blockchains are better at facilitating money laundering, and to realize that cash, not bitcoin is where the money-laundering action is, especially in a country where the thousand-franc note is so easy to get, carry, and exchange anonymously. If you wanted to design the perfect tool for money laundering, that Swiss note would probably be at the top of the list. I’m not sure that research supports the basic theory behind money laundering in the first place.

Now, let me make three simple arguments in favor of rethinking the current framework.

First, there is an implicit assumption that if a system is already built then it offers less risk to the token buyer. As a blanket statement, this is probably true, but the reality is far more complex. For starters, if a working system had been needed before the public was allowed to send money, most of the decentralized technology we have now would not exist. Many world-changing projects, like Ethereum and others, were funded by a large number of small investors who weren’t taking much risk and, overall, have pushed society forward with innovative technology that regulators agree is valuable. But let’s assume some intrepid entrepreneurs have built a system that works, and then they have an ICO to sell the utility tokens necessary to access it. Is the risk gone? Obviously, the risk has not disappeared, it simply has been reduced by some percentage.

What is that percentage? How many successful companies have pivoted completely away from their original plan – or even their original system? The answer is – almost all of them. Almost all new companies pivot after launching their original product or service, because the number one cause of start-up failure is that the market wasn’t there in the first place. Those who listen to customers and conserve cash (and get lucky) are able to pivot and survive. Given the sophistication of ICO marketing these days, I can imagine plenty of startups raising money by selling utility tokens to a system they’ve already built that customers still don’t really want. So if this is the norm, not the exception, aren’t we back at square one, trying to keep investors safe?

There are other things you can do to help protect investors. You could get better data from exchanges on wash sales, consolidation, front running, and more. You could require pre-sale investors to lock up for six months. You could require that token main-sale tokens of de-novo projects be locked up for a year. This not only gives the development team time to get their system ready, it prevents speculators from selling on the initial pop.

Second, there is an assumption that the risk is all in the building of the system, after which the tokens sold are simply “tickets” to use that system. I could not disagree more and have written about this at length. Why? Because selling a fixed number of tokens to the public and providing exchanges for trading practically guarantees volatility in the price of the token. I keep asking entrepreneurs – why should your customers have to deal with the volatility of the price of your service simply because the market forces on your token force it? In other words, whatever you’re selling may have its own volatility, but the pumping, dumping, and manipulation of your token, not to mention your monetary policy, has a larger effect on the price of what you’re selling than the actual benefit the user gets from using that token. Token volatility often has nothing to do with the underlying value it represents. Shouldn’t we be trying to reduce volatility for what effectively should be fixed-price services? Imagine paying twice as much to ride a bus this week as you did last week – how does derisking the construction of the bus affect the ultimate risk the tokenholder faces? Why should the value of a work of art go up simply because the tokens are in (artificially) short supply? To get a feel for this in reality, see the average price of an ether transaction over time.

Simply by allowing the public to buy a fixed number of tokens, FINMA is practically endorsing huge market risk, including the risk of market manipulation and failure. I would argue that this is the wrong way to think about risk.

Third, the tax incentives are backward. Current tax laws require people to report gains/losses on every token transaction, which penalizes “utility” and encourages speculation. How does a token become no longer a security when every time you go to use it you have to calculate your capital gain/loss?

Project vs Company Finance

One common misperception is that groups launching ICOs are startups. In many cases, this is not true! In the case of open-source systems, most ICOs are project finance, not equity. A nonprofit foundation has no equity. There’s no scenario in which a group starting an open-source project like Ethereum can later be acquired, providing an exit to investors. In most cases, the exit is simply the ongoing use of the system which, through network effects, increases the price of the token. The “exit” happens on day one. Furthermore, when a group publishes a white paper they propose to build a single system with a single goal. If they are forced to pivot, the right thing to do would be to give the remaining money back to tokenholders.

We are collectively making some progress in decentralized governance – one thing we’re going toward at Pillar is a tokenholder’s council that can properly veto any major spending and straegy decisions. Ultimately, tokenholders should probably have the right to force liquidation in certain circumstances. This shows how far we still have to go in governance of blockchain-based projects, and why Vitalik and others continue to work on next-generation governance issues. Equity investors, on the other hand, know full well they are going along for a roller-coaster ride. They are backing the team to try things and see where the market takes them.

Whether financing companies or projects, we can expect most to fail. That’s what happened with joint-stock companies, it happened during the 1990s, and it will happen again to groups selling ICOs. As I have argued, asset-price bubbles are poorly understood and mostly don’t exist. In fact, it’s the normal pattern of progress.

Keeping the Public Safe

I continue to point out that it’s impossible to make investors safe by focusing on the products, the intent, or the exchanges. The category definitions simply don’t hold.

I applaud Swiss regulators for listening and trying to work within the system they have already set up. But given that several Swiss banks have paid billions of Swiss francs in fines for cheating their customers over the past ten years, and that the Swiss central bank itself has been directly responsible for the demise of several financial firms, and the fact that this year will see a radical shift toward equity tokens, I think now would be a good time to rethink the regulatory platform for this century.

The Future of Tokens

I think regulators tend to regulate by looking in the rear-view mirror, but in this case we should be trying to think ahead. As explained in detail in The Token Handbook, I believe that tokens first should be seen as one of three types:

Security tokens should be for for-profit companies and funds. While I don’t agree with the current framework for regulating equity markets, I think it would be a good place to start. I think perhaps half of all ICOs should simply be equity offerings, which would solve a lot of problems. It would be great if every jurisdiction followed Wyoming’s lead, but that would require a complete overhaul of our securities laws. I don’t think the token magically becomes a utility once the system is working.

Tickets are unlimited number, fixed-price access tokens. Given that so many of our existing (non-blockchain) digital tokens are tickets, I’m surprised that regulators haven’t recognized this important product category. I believe roughly 40 percent of all token sales should be for tickets. This is what crowdfunding is for – I encourage you to read “The Kickstarter method” chapter of the Token Handbook to learn how this can be done.

Utility tokens are important for open-source projects only. They have way too much volatility, but I think these kinds of speculative sales to the public should continue without requiring a working system. I think we should let the public decide what to fund. We can and should work on new token standards and guidelines for these sales. It’s not clear that regulated products and markets provide more protection. Perhaps 10 percent of all tokens sold will be of this type. The best solution here is consumer education, not token regulation.


I don’t think the current thinking about token categories will protect investors any more than I think most financial crime laws protect the public today. This is a conversation to have at the legislative level, the regulatory level, and the self-regulatory level. I don’t speak for the CVA, but I am personally willing to help FINMA create a level playing field that does help Swiss citizens, investors, and innovators.


David Siegel


David Siegel is a serial entrepreneur from the United States. He is the founder of 20|30 and the Pillar project. 20|30 provides consulting services and is building the CryptX — a broadly diversified portfolio of cryptocurrencies in a single token. His full bio is at Connect to him on LinkedIn.

CVA publishes statement on FINMA ICO Guidelines, plans to collect feedback from the community

By | Public Announcements

The CVA welcomes the recent initiative of FINMA to clarify how it intends to apply financial market legislation in handling enquiries from ICO organisers – in particular the information that FINMA requires to deal with such enquiries and the principles upon which it will base its responses.

The guidelines should enable FINMA to respond quickly and precisely to ICO organisers in an environment characterised by a sharp increase in the number of ICOs planned or executed in Switzerland. The move by FINMA confirms a regulatory approach to ICOs in Switzerland which is directionally predictable, pragmatic, supportive and risk-aware.

The CVA will support its members in implementing the guidelines as well as continue the Association‘s dialogue with the regulator. To this end the CVA intends to actively work with the CVA community to collect feedback on the FINMA initiative. More details on how this process will work will be communicated soon.