Growth of initial coin offerings spark money laundering fears

Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a set of guidelines which support the issuing of initial coin offerings but at the same time seeks to ensure that anti-money laundering and securities laws apply where necessary.

Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a set of guidelines which support the issuing of initial coin offerings but at the same time seeks to ensure that anti-money laundering and securities laws apply where necessary.

FINMA says it has seen a sharp increase in the number of initial coin offerings (ICOs) planned or executed in Switzerland and a corresponding increase in the number of enquiries about the applicability of regulation.

FINMA says financial market law and regulation are not applicable to all ICOs and depending on the way in which ICOs are designed, they may not in all cases be subject to regulatory requirements.

“Circumstances must be considered on a case-by-case basis,” said FINMA. It added, “Creating transparency at this time is important given the dynamic market and the high level of demand.”

FINMA says its analysis indicates that money laundering and securities regulation are the most relevant to ICOs.

“The Anti-Money Laundering Act contains requirements for financial intermediaries including, for example, the need to establish the identity of beneficial owners,” FINMA says.

“The law aims to protect the financial system against the risks of money laundering and the financing of terrorism. Money laundering risks are especially high in a decentralised blockchain-based system, in which assets can be transferred anonymously and without any regulated intermediaries,” it adds.

Hence FINMA says for ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. Such tokens will not be treated as securities.

However, the regulator also recognises that ICOs can also exist in hybrid forms, so for example, anti-money laundering regulation would apply to utility tokens that can also be widely used as a means of payment or are intended to be used as such.

Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. Through utility token ICOs, start-ups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.

The publication of the guidelines by Switzerland come at a time when ICOs have come under intense scrutiny and some governments, such as China and South Korea, have decided to ban ICOs altogether.

Separately, the Government of Gibraltar and the Gibraltar Financial Services Commission (GFSC) are developing legislation relating to digitalised tokens.

The Government said work has begun on drafting legislation to;

• regulate the promotion, sale and distribution of tokens by persons connected with Gibraltar;

• secondary market activities relating to tokens, carried out in or from Gibraltar;

• and the provision, by way of business, in or from Gibraltar of investment advice relating to tokens.

A bill is expected to be considered by Gibraltar’s Parliament in the second quarter of the year.

The proposed token regulations will establish measures to detect and prevent financial crime such as money laundering and terrorist financing as well as disclosure rules, requiring adequate, accurate and balanced disclosure of information to anyone considering purchasing tokens.

Siân Jones, Senior Advisor on distributed ledger technology (DLT) at the GFSC said a key aspect of the token regulations is the introduction of the concept of regulating authorised sponsors who will be responsible for assuring compliance with disclosure and financial crime rules.

Additionally, GFSC is also reviewing the regulation of investment funds involving digital assets such as cryptocurrencies and similar DLT-based tokens.

The European Central Bank says in 2016, the total amount of funds raised through ICOs was less than €82 million. This number has soared to over €3 billion in 2017.

It says relevant market authorities should monitor, analyse and regulate the use of ICOs. It says, clarification is needed on the extent to which ICOs should be bound by existing regulations, such as on disclosure and prospectuses. This is particularly relevant when tokens are exchanged for fiat money.

*The topic of ICOs and cryptocurrencies are discussed further in the March edition of Commercial Crime International, available to members of Commercial Crime Services. Details about membership can be found at https://www.icc-ccs.org/membership