There are a variety of legal issues that ICOs raise, however, there is no consistent legal doctrine yet. According to the guidelines published by the Swiss Financial Market Supervisory Authority (FINMA), when classifying an ICO or a token, the Swiss financial regulator analyses the underlying economic function of the token issued.
The categories are the following:
Payment tokens. These are the closest to cryptocurrencies, and are those intended to be used as a means of value transfer to acquire goods or services. As of now, FINMA will not treat payment tokens as securities.
Utility tokens. They are intended to provide a utility to the owners i.e. allowing their holders to access or to perform certain actions within a platform. As of now, FINMA will not treat utility tokens as securities if they do not have any investment purpose.
Asset tokens. Such tokens can represent debt, equity, a derivative, or physical assets. By tokenising assets, it is possible to trade them on the blockchain. These tokens are considered securities by FINMA.
Hybrid tokens. Token classifications are not mutually exclusive. For instance, there can be a token that provides both utility and payment functions. In these cases, the legal requirements are cumulative.
FINMA will consider the tokens listed above securities if “in the sense of the Financial Market Infrastructure Act (FMIA) are standardised certificated or uncertificated securities, derivatives and intermediated securities (Art. 2 let. B FMIA), which are suitable for mass standardised trading, i.e. they are publicly offered for sale in the same structure and denomination or are placed with more than 20 clients, insofar as they have not been created especially for individual counterparties (Art. 2 para. 1 FMIA).”
Pioneers of security tokenisation attempt to unlock the limitations of conventional securities by leveraging blockchain technology. Possible disadvantages of issuing tokenised equity are a higher supply or lower stock price that could reduce demand for future investments. On the other hand, the most significant benefits of these new type of assets are the potential secondary market liquidity, the transparency, and traceability. For instance, startups launching equity tokens want to make their shares easier to trade by decreasing transaction costs, increase liquidity, and speed. Moreover, smart contracts can have built-in regulatory compliance, and improve the efficiency of dividend distribution and exercise of voting rights.
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