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Launching a token can open new doors for raising capital, creating decentralized ecosystems, or building a unique digital economy. However, ensuring compliance with regulatory standards is crucial to avoid legal complications. This checklist provides a detailed guide to navigating the compliance landscape, particularly from a Swiss regulatory perspective, but also applicable to other regions like the European Union.
Why do you want to launch a token? Before diving into the regulatory framework, it is essential to clarify your objective for launching a token. Whether providing access to a platform, creating a decentralized financial ecosystem or as a means of payment, having a clear objective will influence both the structure of your tokens and your compliance obligations. However, this is only the first step: understanding the regulatory landscape is essential.
1. Jurisdiction and regulatory environment
The jurisdiction of your target users determines the regulatory requirements for launching your token. Different countries have unique rules regarding token offerings, anti-money laundering procedures, and securities laws. Under the leadership of the Federal Financial Market Supervisory Authority, Switzerland has become one of the leading regulators of blockchain and token projects thanks to its pragmatic approach and clear regulatory framework.
Key factors to consider when choosing a jurisdiction:
- Legal clarity on token categories and their regulation (like in Switzerland).
- Cost and ease of compliance in jurisdictions like Liechtenstein or the United Arab Emirates.
- Cross-border offerings (especially in the EU, where GDPR and token-specific laws apply).
2. Token categories based on Swiss regulatory perspective
Switzerland offers a detailed categorization of tokens via the FINMA ICO Guidelines (2018) and their Supplement (2019). These categories are crucial in determining your compliance obligations:
Utility tokens. Utility tokens provide access to a specific service or platform. These tokens are generally not subject to securities law unless they function as investments. In Switzerland, they are often compared to vouchers or keys for digital services. Common use cases include granting access to a decentralized application, participating in governance, or rewarding users for their activity on the platform. Key Compliance Consideration: Utility tokens are not subject to AML or securities laws unless their use overlaps with investment functions.
Payment tokens. Payment tokens, synonymous with cryptocurrencies, are intended to be used as a means of exchange. Cryptocurrencies like Bitcoin (BTC) or Litecoin (LTC) fall into this category. Unlike utility tokens, payment tokens are often treated like currency and their issuers have no contractual obligations to their holders. Key Compliance Consideration: Payment tokens are subject to AML laws and must comply with KYC requirements, particularly when used for monetary transfers or transactions.
Security/Asset Tokens. Asset tokens represent claims on real-world assets. They are similar to stocks or bonds and are treated as securities according to FINMA guidelines. For example, a token that grants a share of the company’s future profits or allows trading of physical assets on the blockchain would be classified as an asset token. Key Compliance Consideration: These tokens must comply with securities regulations, requiring either the use of securities offering exemptions or the registration of a prospectus with the relevant regulator or designated authorities.
Hybrid tokens. Hybrid tokens can combine the functionality of utility, payment, and asset tokens. For example, a utility token that can also be used for payments will need to comply with utility and payment token regulations.
3. Key Red Flags for Token Categorization
To avoid being classified as a security or asset token (which triggers stricter compliance), your project should avoid binding the following rights to utility tokens:
- Promises of returns on investment or rewards beyond their utility value.
- Buyback guarantees which involve the preservation of symbolic value.
Addressing these red flags early in your token design is critical to staying within regulatory limits.
4. Obtaining a legal opinion and a no-action letter from FINMA
Obtaining legal advice from Swiss and European legal experts is essential to understanding the token’s classification and compliance obligations. Additionally, requesting a “no action” letter from FINMA can provide certainty that your token will not be classified as a security or other regulated financial instrument.
The FINMA no-action letter serves as a guarantee, giving your project and investors peace of mind that the token offering will not face unexpected regulatory challenges.
5. Creation of a legal entity
To issue a token in Switzerland, you must create a legal entity to protect the founders of the project from any personal liability. Legal envelopes, including those reflecting a DAO, can also provide additional protection and operational flexibility, particularly in jurisdictions like Liechtenstein or the United Arab Emirates.
Your project should establish corporate portfolios and accounts to ensure funds are managed transparently, reducing the risk of liability or financial misconduct.
6. Token issuance: self-issuance or use of a launchpad
When launching a token, you can either issue the token yourself or use a launch service. Both approaches have their own compliance and operational considerations:
Self-issuance. Benefits: Full control over tokenomics, pricing and timing. Disadvantages: Requires in-depth legal expertise and technical infrastructure. Compliance measures, such as KYC/AML procedures, should be managed internally.
Launch bar. Launchpads provide pre-verified communities and streamline the technical aspects of token sales. They also offer security controls, compliance measures and liquidity support. However, launchpads may charge significant fees and place restrictions on token sales. Key consideration: Launchpads often reduce the risk of non-compliance, but the project team must still ensure that the launchpad meets the specific regulations of their chosen jurisdiction.
7. KYC and AML Compliance
Even though utility tokens are not subject to AML legislation in Switzerland, financial intermediaries may still require KYC verification, especially if a token has payment functions. If the project involves fiat-to-crypto transactions, AML compliance becomes even more critical.
Incorporating a KYC process ensures that your project avoids dealing with blacklisted or fraudulent actors, thereby reducing legal and reputational risks.
8. Private Sale and Public Offering of Tokens
Many projects start with a private sale using a simple agreement for future tokens before moving to a public sale. A public offering may involve a listing on a launch pad or a self-issuance. Whatever method you choose, it is essential to prepare:
- Terms and Conditions for Token Buyers.
- White paper and legal review of offering documents.
- Data protection for user information in accordance with GDPR or local privacy laws.
9. Public Token Offering in the EU
For projects targeting the European Union, understanding the complex EU legal environment is essential. Public offerings of tokens in the EU are subject to rules regarding prospectus requirements, securities law and consumer protection. Token issuers must also ensure compliance with the GDPR when processing personal data.
From the end of 2024, white paper content requirements and issuer obligations will apply to token issuers under the regulation of crypto-asset markets.
Launching a token involves many regulatory considerations, from understanding how tokens are classified to ensuring proper KYC/AML compliance. By following this checklist and seeking legal advice where necessary, projects can navigate the complex regulatory landscape and launch their tokens with confidence.
This article was co-authored by Alexandre Ray And Janina Pietrowska.
