This article is from our magazine Building Blocks. The article was written by our Crypto Broker Head of Compliance Magdalena Boškić, who provides a thorough overview of the regulatory developments for crypto assets and insights into regulatory approaches in different countries.
Regulatory developments in the crypto space
In mid-December 2017, when bitcoin hit an all-time high, the regulatory landscape for crypto assets in Switzerland was metaphorically a desert landscape. The only oasis in the regulatory crypto asset desert was Guidance 04/2017 , issued by the Swiss Financial Market Supervisory Authority (FINMA) in September 2017. The respective FINMA Guidance was the result of an increasing number of ICOs, which are the blockchain-based, digital equivalents of an initial public offering, used by companies for fundraising purposes through the issuance of a new cryptocurrency or token. The FINMA Guidance 04/2017 recognises that ICOs lack specific regulation in Switzerland as well as globally, and states that ICOs are subject to existing Swiss regulation, in particular provisions on anti-money laundering (AML), banking law, securities trading, and provisions on collective investments schemes, as far as applicable. In mid-February 2018, FINMA further shaped the regulatory landscape for crypto assets in Switzerland by issuing the FINMA ICO guidelines . The guidelines complement the FINMA Guidance 04/2017 and concretise the applicability of financial market legislation for ICOs. The ICO guidelines are helpful as they provide categorisation of tokens and bring further clarity on the applicability of existing legislation on crypto assets. FINMA categorises tokens into three types, and additionally, hybrid forms are possible:
- Asset tokens “represent assets such as participation in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.”  FINMA treats asset tokens as securities.
- Utility tokens provide digital access to a blockchain-based application or service. Such tokens are not treated as securities as long as their sole purpose is to grant digital access rights to an application or service and if the token can be utilised in this way at the time of its issuance. Utility tokens, which additionally or only have an investment purpose at the time of their issuance, will be treated as securities by FINMA.
- Payment tokens (used synonymously with the term cryptocurrencies) are used as a means of payment for the acquisition of goods or services and as a value transfer now or in the future. In consistency with FINMA’s current practice, payment tokens are not considered securities.
- Asset and utility tokens, which can also be categorised as payment tokens, are described as hybrid tokens. Such tokens are considered to be securities and act as a means of payment.
Besides FINMA, the Swiss Federal Council in December 2018 provided legal guidance with regard to the handling of digital assets by issuing a report  that provides an overview of the legal framework for distributed ledger technology (DLT) and blockchain in the Swiss financial industry. The report outlines Switzerland’s openness to technological developments such as DLT and blockchain. It considers the Swiss legal framework as already suitable for dealing with business models based on DLT and blockchain, while stating that Switzerland intends to further improve the innovation-friendly framework conditions. In March 2019, the Swiss Federal Assembly approved a motion , which instructs the Federal Council to adapt legislation for cryptocurrency. According to a press release issued by the Swiss Parliament, the motion, which was approved with 99 to 83 votes in favour and 10 abstentions, intends to instruct the Federal Council to adjust provisions on procedural instruments of the judicial and administrative authorities so that they can also be applied to crypto assets.
The lack of regulation and associated legal uncertainty was one of the biggest challenges for professionals in the field in 2017 and earlier. Since then, more and more countries are adopting laws and regulations applicable to digital assets and blockchain technology. Malta was the first country in the world that issued an official set of regulations  for the blockchain, cryptocurrency, and DLT space. In summer 2018 the Maltese Parliament established a regulatory framework for blockchain technology by issuing three bills: the Innovative Technological Arrangement and Services Act, which sets up the Malta Digital Innovation Authority and certifies DLT platforms; the Malta Digital Innovation Authority Act, regulating DLT arrangements and certifications of DLT platforms; and the Virtual Financial Asset Act, governing inter alia ICOs, cryptocurrency exchanges, and wallet providers. Many other countries have followed Malta’s approach and initiated the regulation of digital assets. One of the latest examples is France , where the French National Assembly in April 2019 adopted the PACTE draft Bill (Action Plan for Business Growth and Transformation), which establishes a framework for ICOs and digital assets services providers (DASP). The bill establishes “70 articles along with regulatory and non-regulatory mechanisms, and tax measures that will be incorporated into the 2019 Finance bill ,” according to the French Financial Markets Authority, the Autorité des marchés financiers (AMF). Not only states are in the process of regulating digital assets. The Financial Action Task Force (FATF), an intergovernmental organisation, issued a Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers  (VASPs) in June 2019, which is supposed to assist states and VASPs in understanding and complying with the relevant AML/CFT requirements. The Guidance contains a full range of obligations applicable to virtual assets and VASPs, such as registration or licensing requirements for VASPs and the establishment of a USD/EUR 1,000 virtual assets transaction threshold for which VASPs must conduct customer due diligence checks.
While more and more countries are issuing laws and regulations applicable in the crypto space, the challenges are shifting. According to a global comparative study  of crypto asset regulation covering 23 jurisdictions by the Cambridge Centre for Alternative Finance (CCAF), the lack of a standard global terminology  for crypto assets and the blockchain industry is a major obstacle for the adoption of clear regulatory policies in the industry. As there is no standard usage of terminology across regulators, a variety of terms are being used to refer to crypto assets in official statements. According to the study, the term virtual currency is the most common term used in official documents; however, cryptocurrency and digital currency are often used interchangeably instead. Consequently, the lack of a common terminology results in an overlap of the scope of different regulators.
While it is understandable that each jurisdiction has its own standing towards crypto assets, a common global mindset is necessary when it comes to creating laws that govern topics of global outreach. The development of law is never as fast as technical advancement. The future will show whether jurisdictions will align their regulatory approaches when it comes to crypto assets, blockchain technology, and DLT.
About the author
Prior to joining Crypto Broker AG, Magdalena worked for Credit Suisse AG as a Compliance Officer and deputy Team Leader within the IWM Central Control Unit of the Emerging Europe team, covering Russia and CIS countries. As a member of the Cryptocurrency Working Group at Credit Suisse, she led a major project on blockchain technology and crypto assets. She is fluent in six languages and passionate about law, compliance, blockchain technology, as well as crypto assets. Magdalena studied law at the University of Zurich, the Kutafin Moscow State Law University (Bachelor of Law UZH), and the Universtiy of St. Gallen (M.A. HSG in Law). She holds a certificate from the University of Oxford’s Saïd Business School for the Oxford Blockchain Strategy Programme.Read more