Know your token

Moritz Feuchter, Senior Manager

October 2018, 28th

Crypto + ICO Summit: Regulatory & Compliance-fit for ICOs in Switzerland

This presentation is intended to provide an overview about regulations and compliance topics and is not a definitive statement of the law.

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➢ Tulipmania, the first economical bubble

➢ Roaring Twenties and Stock Market Crash

➢ DotCom Boom & Bubble

➢ Subprime Crisis

➢ Crypto Crash….?

Is financial market regulation preventing the next crisis?

Kenneth Arrow: «Not every business cycle has a financial crisis. Frequently they do»1

What will actually trigger the next

global recession and crisis, and when?

How to ensure repeating amazon’s or

broadcast’s success stories instead of

repeating pets.com failures?

10 years post crisis, how long until next

crisis?

Has the crypto bubble burst

already?

History repeating?

Will it burst again?

EOY 2017 +/-20k$

+/-7k$

?

How to prepare?

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Competitive location advantage: Blue Mountains

ICOs1 carry the smell of ambiguity – the Swiss regulator found way to create clarity for market participants

Situation

ICO Funding is undergoing a veritable global hype

For startups ICOs offer a significant easier and quicker promise to raise capital

The Swiss crypto valley (of thousand and one crypto coins) attracts crypto tourism and crypto exploration endorsing it a cosmos of crypto brain, capital and a true innovation catalyst

Today, over 600 cross-industry, blockchain-related companies with a total valuation of approx. 44 billion $ are located in Switzerland and Liechtenstein, according to recent CV VC study

General Regulators

Regulators across the globe generally still seem to be reluctant to step ahead and provide regulatory guidance needed for ICOs.

Risk

ICOs bear significant inherent risks, e.g. missing valuations, high crypto currency volatility, hacker attacks / scams or opaque investors and investments.

Swiss Regulators – a step ahead

In contrast, the Swiss Regulator FINMA has taken a stance and published ICO guidelines in 2018 which create clarity for market participants and prevent circumvention of existing law. FINMA sets out how Swiss financial market laws will be applied for ICOs and that also applicability of respective foreign regulation needs to be assessed

1) ICO stands for Initial Coin Offering, often also referred to as token sale or crowd sale. FINMA definition of ICO: “In an ICO, investors transfer funds, usually in the form of cryptocurrencies, to the ICO organizer. In return they receive a quantity ofblockchain-based coins or tokens which are created and stored in a decentralized form either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain.”

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RoI - ICOs

The Risk of Ignoring Inevitable Compliance Obligations

➢ FINMA believes in the innovative potential that the blockchain technology holds and supports ICO organizers with regulatory decision making

➢ FINMA is one of the first regulators to establish clear, followable guidelines for ICOs*

Each case is decided on its individual merits, but standardizationand clarity on:

➢ Definition of the information FINMA requires to deal with ICO enquiries

➢ Description of principles upon which FINMA will base its responses (e.g. token categorization focusing on the function and transferability of tokens) and

➢ Applicability of other financial market legislations when handling ICOs (e.g. anti-money laundering and securities regulation)

➢ FINMA research into ICOs continues as well as support the federal government's Blockchain/ICO Working Group

FINMA among pioneers on ICO regulation

FINMA – the Swiss regulator - creates clarity for all market participants

2009, 3rd Jan. 2010 2015 2016 EOY 2017 2018

BTC boomBlock #0 Slow but steady rise of BTC1st pizza order paid in BTC 10 kBTC

ECB / EBA investor warning

2011

1 BTC = 1 $

2017

BTC ICO regulation rise

*prior to 02/2018 guidelines: FINMA Guidance, 04/2017, Regulatory treatment of initial coin offerings

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ICOs are at risk to miss out on compliance obligations – the SBVg issued guidelines on account opening

Swiss Banking sector among pioneers on ICO CRM

Switzerland’s world-known banking sector is prepared for welcoming the global crypto / ICO community:

✓ Guidelines for Swiss banks for the handling of corporate blockchain accounts have been established in collaboration with CV VC, considering among other things

➢ Block chain specific elements and AMLA / Know Your Customer (KYC) processes

➢ Separation of crypto currency provider vs. companies dealing with block chain technology (DLT) only

➢ Expectations to ICO organizer per specific business model are outlined

➢ Relevant due diligence questions / obligations are covered (e.g. distinguishing between funding from crypto vs. FIAT currencies)

Swiss banks already get acquainted with organizing ICOs for start-ups or joining forces participating in distributed ledger technology (DLT) solutions:

➢ Swissquote, Swiss bank, organizes the ICO of a start-up (e.g. LakeDiamond) for the first time

➢ Commodity trade finance transformation through DLT (e.g. komgo SA)

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Token categorization focusing on its function and transferability*

Know your token

Missing out on FINMA’s key ICO definitions endangers successful ICO

Asset tokens are assets such as participations in real physical underlyings (companies, earnings streams,

entitlement to dividends or interest payments)

Classification as security (similar to equities, bonds or derivatives)

Utility tokens are tokens which are intended to provide digital access to an application or service

Possible classification as security

Payment tokens are synonymous with cryptocurrencies (no further functions or links to other development)

Payment services

Hybrid tokens can be a mix of all of the above(token classifications are not mutually exclusive)

Cumulative regulatory classification applies

*Projects which would fall under the Banking Act (governing deposit-taking) or the Collective Investment Schemes Act (governing investment fund products) are not common in Switzerland

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Know your regulation: High level overview of the most relevant FIDLEG topics

Example of eventual FIDLEG compliance impacts within financial service providers and financial instruments

Code of Conduct

Scope

Organization

Client classification

Suitability & Appropriateness

Miscellaneous

Client Information & ReportingFinancial ServiceProvider

FinancialInstrument

Financial service providers (e.g. wealth / asset managers, issuers of financial instruments) / client advisors operating in CH are in scope. Insurers / re-insurers are out of scope.

Extensive information / documentation requirements apply. Transparency and due diligence are to be exercised upon customer orders.

Proper organizational measurers need to be taken to: (i) secure client advisor’s training(ii) monitor service provider chain(iii) handle conflict of interest(iv) register client advisors

Detailed rules apply for supervision, disputes, information exchange and documentation issue.Fines up to CHF 500 apply depending on the various breach of obligations.

Best execution

Conflict of interest

Comprehensive information should be provided to clients before concluding the agreement or providing services. Various information about the services, portfolio and costs should be provided to clients after provision of services.

Disputes between clients or clients and financial service providers can be handled through a mediation process.

Ombudsman’s office

Client orders should achieve the best possible overall result for the client from the following perspectives:(i) Financial (ii) Qualitatively(iii) Time

Basic Information Sheet and Prospectus

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FinfraG: Financial Market Infrastructure Act

FIDLEG: Financial Services Act

Applicability of Anti-Money Laundering Act (AMLA)

Examples of regulatory frameworks to consider

Know your playground - Know your regulation

Classification as security

Applicability of Anti-Money Laundering Act (AMLA)

Cumulative regulatory requirements

AMLA protects the financial system from money laundering and the financing of terrorism

➢ AMLA due diligence requirements include the requirement to establish the identity of the beneficial owner (KYO: know your customer) and the obligation either to affiliate to a self-regulatory organization (SRO) or to be subject directly to FINMA supervision

Taxable eventsFATCA Foreign Account Tax

Compliance ActCRS Common Reporting StandardDAC6 Mandatory Disclosure for

Intermediaries

Securities regulation (applicable for standardized certificated or uncertificated securities) aims at ensuring that market participants base investment decision making on a reliable minimum set of information

➢ Trading should be fair, reliable and offer efficient price formation

EMIR European Market Infrastructure

RegulationMiFID II Markets in

Financial Instruments Directive

GDPRGeneral Data

ProtectionRegulation

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Key challenges to be considered as an ICO organizer

Missing out on key compliance challenges may scare off potential partners

Expected Path

Actual Path

What e.g. financial market regulation is relevant for us

– BA, FMIA, FISA, SESTA, CISA, CO, AMLA or upcoming FinSA?

Which regulation is relevant to us? What about AMLA / KYC when offering e.g. payment tokens? Or is there a prospectus liability (for

ICO white papers) or even Banking license required, e.g. when offering an asset token?

How do we implement a bullet-proof AML

Compliance framework, considering e.g. KYC or supervisory authority

registration?

How can we keep Compliance risks under

control in daily business? Are there any pragmatic best-practice approaches

we can apply?

How can we maintain an overview of Compliance risks and systematically screen investors, flow of

funds and make sure proper documentation?

How can we keep efforts and costs low whilst maximizing Compliance effect? E.g. are

there proven solutions, which scale for us and we could

leverage?

Thank you!

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Contacts

BearingPointRoute de Pré-Bois 291215 Genève 15Switzerland

cristina.gagiu@bearingpoint.com

Cristina GagiuManager

T + 41 22 747 0 558M + 41 79 898 6212

www.bearingpoint.com

BearingPointErika-Mann-Straße 980636 MünchenGermany

moritz.feuchter@bearingpoint.com

Moritz FeuchterSenior Manager

T + 49 89 54033 6103 M + 49 160 2784763

www.bearingpoint.com