FINMA’s ICO guidelines leave space for crypto innovation and growth

  • February 21, 2018

“How can you write detailed, prescriptive regulations in such a new space? This would kill innovation,” said SMART VALOR CEO Olga Feldmeier in an interview with CNN Money’s Anna Maria Montero on 21 February 2018.

Feldmeier was of course referring to FINMA’s considerations around their recently announced guidelines for ICOs (Initial Coin Offerings). Fortunately, FINMA has realized that old rules don’t apply to crypto, and has chosen not to regulate this area heavily. Instead, they continue to apply a principle-based approach which will give Swiss crypto companies space to innovate and grow.

Why ICOs matter to innovation

Traditional IPOs (Initial Public Offerings) happen when multi-billion dollar companies in a growth phase list on public stock exchanges, usually after rounds of private funding. An IPO is a complex, expensive and heavily regulated process which is out of reach for all but the largest of enterprises. Until recently, smaller companies, and specifically start-ups, needed to raise funding from angel investors or venture capitalists - methods that typically generate lower sums, and involve long roll-out periods and other tie-ins.

Enter the blockchain, Bitcoin, and ICOs (Initial Coin Offerings). An ICO is the process whereby a company or start-up issues its own token on a public blockchain, giving it to developers or users for free, or selling it to contributors. The first ICO, Ethereum’s, took place in 2014, and since then many more have followed. Over 1,000 ICOs took place in 2017 and many more are to be expected in 2018.

Why is regulation necessary?

With so much activity and money involved, is the ICO space the Wild West? Not if you are in it, says Feldmeier. The crypto space is becoming more crowded and competitive, and it is the crypto companies who conduct their ICOs professionally who will attract the most attention and investment. Most good crypto companies have been adopting compliant and transparent practices, like adhering to AML (anti money laundering) and vesting tokens for a team, already today. So for them, FINMA’s guidelines are nothing new or restrictive.

“With FINMA as our regulator, Switzerland has a very good chance to develop into a global crypto hub,” Olga continued. In fact, the country is already well on its way to being one of the world’s top 3 crypto centres, giving Singapore and London a run for their money. Of the $5.6 billion raised in ICOs in 2017, over $1 billion was by companies which are at least domiciled in Switzerland. ‘Domiciled’ of course does not necessarily mean that the companies operate from here, but Feldmeier is optimistic that forward-thinking regulation is going to help change this, and draw more exciting companies and projects to Switzerland.

FINMA has classified tokens into three types, with different requirements for each. In a simplified form these are:

Payment tokens

• These are essentially cryptocurrencies.

• Anti-money laundering measures are required.

Utility tokens

• Can be exchanged for on-platform digital assets.

• Securities regulations may apply.

Asset tokens

• Equivalent to equities, derivative and bonds.

• Securities regulations and civil laws apply.

More forward-looking than the rest of the world

Compared with regulations elsewhere in the world, FINMA’s principle-based approach keeps the industry flexible and engaged. In contract, the US SEC issued a warning about ICOs to investors, which does little to help shape the way forward in that country. China has prohibited ICOs completely.

In contrast, FINMA has chosen a forward-looking, neutral approach which does not ban anything, but instead gives start-ups guidance and help in conducting compliant crowdfunding through ICOs. For this young crypto industry to win the trust of investors, regulation is key. CEO of FINMA, Mark Branson, made it clear that Switzerland is open for crypto business: “Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system."

In this way, Switzerland is well positioned to attract quality tech companies and drive innovation - an area in which the country is already a world leader. As a small, flexible and independent state, if we continue with this forward-thinking approach, we will have a huge competitive advantage and can become a global hub for crypto finance.