Periodically Schoenherr will keep the crypto-community up-to-date with dedicated newsletters focusing on issues relating to initial coin offering (ICOs), initial token offerings (ITO) and Blockchain.
Schoenherr ICO / ITO Guide
Schoenherr has launched an online guide on ICOs and ITOs throughout the wider CEE / SEE area. The guide can be accessed here.
For now, the guide will contain a Q&A style overview for Austria, Bulgaria, Croatia, Hungary, Poland and Slovenia. Further Schoenherr jurisdictions will follow in due course. We will also keep the overview updated when new trends or issues emerge.
First securities lending transaction via Blockchain
In one of the few examples where Blockchain technology is already used in the financial market by large banks, Credit Suisse and ING entered into the first live securities lending transactions via Blockchain. The banks made use of the R3’s Corda Blockchain platform operated by Swiss technology firm HQLAx.
The transactions concerned Dutch and German government securities in the amount of EUR 25m. The securities remained stored in custody accounts held by Credit Suisse and ING respectively. The custody accounts are linked to the Digital Collateral Records (DCR) system operated by HQLAx. The transactions themselves were documented in the DCR system.
A press release of Credit Suisse can be found here.
Swiss FinMA issues guidelines on ICOs
In February 2018, the Eidgenössische Finanzmarktaufsicht (FinMA) published Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs).
FinMA distinguishes between three categories of tokens:
- Payment tokens;
- Utility tokens; and
- Asset tokens.
Payment tokens refer to cryptocurrencies, i.e. tokens that are intended to be used as a means of payment.
Utility tokens refer to tokens that have been predominant in ICOs started by Austrian companies: Similar to a voucher, utility tokens confer the right to holders to exchange their utility tokens against goods or services of the issuer (or service partners of the issuer).
Asset tokens represent assets, e.g. debt against, or equity in the issuer.
The most important take-aways from the FinMA guidelines are:
- FinMA does not consider payment tokens to qualify as securities within the meaning of the Swiss Financial Market Infrastructure Act (FMIA). The same applies to utility tokens, provided that the utility token has no investment purpose. Asset tokens though are treated as securities, provided that they represent an uncertificated security or derivative, standardised and suited for mass trading.
- If tokens qualify as securities, underwriting and offering tokens is a regulated and licensable activity. Prospectus requirements will also apply.
- If tokens represent liabilities with debt character, the raising of funds will be treated as deposit taking and require a banking license. Although FinMA does not mention this explicitly, we assume that the banking licensing requirements should not apply in case the tokens qualify as securities (because in this case investor protection is achieved by prospectus requirements and licensing requirements for trading and offering such tokens).
- If funds accepted in the context of an ICO are managed by third parties, FinMA considers that the Collective Investment Schemes Act may be applicable.
- Anti-money laundering (AML) obligations will apply to the issuance of payment tokens. AML will apply to utility tokens only in case the main reason for issuing the tokens is to provide access rights to a non-financial application of Blockchain technology.
The conclusions reached by FinMA are similar to those of the Austrian Financial Market Authority (FMA). Our legal insight on the FMA’s regulatory approach can be accessed here.
Around 50 % of ICOs fail
As news.bitcoin.com reports, around 50% of ICOs actually fail. Of these failed ICOs, 142 apparently already failed at funding stages, meaning that the ICOs couldn’t attract enough investors to raise the desired investments. Another 276 ICOs failed at later stages – many because they were fraudulent (meaning that the issuers simply took the funds and disappeared). An additional 113 ICOs are classified by news.bitcoin.com as semi-failed because the projects were either abandoned or the teams stopped communicating. A list of failed ICOs can be found here.
The report highlights the risk associated with ICOs. However, whenever new technologies emerge certain people will try to exploit these or use the technology for criminal purposes. This is not an inherent risk relating solely to Blockchain or coins and tokens.
However, investors should keep that in mind when exploring investor opportunities. As is the same with investments in securities, you should only invest in products where you understand how they operate and generate income or other benefits for you as investor.
By Stefan Paulmayer, Counsel, Schoenherr
