STO Switzerland regulation sets stage for the country's crypto valley boom

Apr 06, 2022

Regulation in financial markets plays an important role in promoting fair competition and cooperation to build vibrant ecosystems. This is, however, still ambiguous in the emerging crypto asset class with only a few jurisdictions have regulated the space. Currently, STO Switzerland regulations are among the most advanced hence setting the stage for a deep dive into crypto regulation. The Swiss financial watchdog, FINMA, published guidelines on crypto token issuance as early as 2018. In the guidance, FINMA categorized crypto assets into three classes; Utility token, Payment token, and Asset/Security token. Consequently, the country is becoming a crypto hub as investors seek to leverage the clarity in Security Token Offerings (STO) issuance.

This approach towards a comprehensive crypto regulatory framework has in fact earned Zug, a town in Switzerland, the nickname ‘crypto valley’. It is now a global destination for businesses in the crypto sector hosting prominent projects like Ethereum, Tezos, and Bitfinex. Notably, the Swiss privacy-focused approach towards financial services seems to have been integrated with crypto ecosystems, a highly likely match. Going by FINMA’s progress, is regulation the way to boost crypto businesses despite a hard core focus on decentralization as the underlying value? Well, it appears that Switzerland is doing quite great and a similar move by peer regulators might soon be a no-brainer.

The STO Regulation Value Proposition

STO’s made a major debut in the crypto ecosystem as part of ICO fundraising following the 2017 crypto market bull-run. A number of projects within the crypto space moved to launch their own tokens in a bid to raise money for development. With regulation catching up, some have since been forced to categorize their tokens as securities or ‘asset tokens’ in the case of STO Switzerland issuance. According to regulators that have taken a similar stance, security tokens earned this status given they represent ownership of an underlying asset such as stocks, dividends, real estate or earning streams based on tokenization.

While this approach is a bit cumbersome due to heavy compliance frameworks in securities issuance, it is proving to be the path for investors and regulators eyeing to collaborate in tokenomics. For the latter, regulating security tokens makes it easier to implement oversight and achieve consumer protection levels as high as the stock market standards. In fact, the U.S financial markets regulator, SEC, has classified these digital assets under the Regulation-D securities law. This is an SEC regulation that governs private placement exemptions looking to raise funds in the U.S market.

As for investors, STO regulation has made the crypto market more lucrative and trustworthy. Prior to the regulatory progress in jurisdictions like Switzerland and Japan, consumers in the crypto investment space were at the mercy of extreme volatility coupled with malicious cons looking to pump and dump their issued tokens. Now that the industry has notable hubs like Zug, it is not surprising that both innovators and investors are looking at STO Switzerland launch options. 

Crypto Token Regulation Trends

Regulators across the world including regional bodies such as the European Union (EU) have taken varied approaches to regulate the crypto ecosystem. Nonetheless, the focus has always been on implementing proper KYC and preventing terror financing amongst other illegal activities. As such, the Financial Action Task Force (FATF) issued a ‘Travel Rule’ back in 2019 giving local authorities and virtual asset providers one year to have complied. This initiative will allow information to be shared between stakeholders in crypto networks not limited to oversight bodies tasked with digital asset regulation. The EU also published its Fifth Anti-Money Laundering Directive (5AMLD) last year covering crypto assets; it came into action in January, 2020.

As mentioned earlier, individual countries have gone to the extent of defining digital assets based on their purpose. This has led to the emergence of payment, utility, and security tokens as per regulatory laws in a jurisdiction like Switzerland. Payment tokens are identified as the digital assets whose main value is transactional while utility tokens give access to certain products on blockchain or DLT networks. It, therefore, follows that the two are regulated with lesser strictness compared to security tokens. In Switzerland, STO’s are subject to Swiss banking regulations as well as the KYC laws applying to traditional assets such as bonds and stocks.

Stakeholders Take on STO Regulation

Crypto regulation as a whole is still very young and might take longer before global markets consolidate to common standard practices across the industry. Apart from STO Switzerland regulations, some of the nations that have also allowed this activity include France, Lithuania, Brazil and the U.K. The latter’s financial watchdog, FCA, recognizes security tokens, utility tokens and exchange tokens which are the likes of BTC and ETH.

Surprisingly, a country like China which is hailed for launching the first government-backed CBDC had already banned STO operations. In the U.S, this activity is allowed but highly regulated by the SEC and local financial authorities such as the NYDFS. While there has been some progress, the effectiveness of these crypto regulatory frameworks is yet to complement the industry’s potential.

So, is STO regulation the way forward? This will of course depend on a couple of factors that influence activity in this space. One of them is the robustness of a host financial market and its responsiveness to targeted oversight. It then begs the question of whether a replica of existing security laws is really the way to go despite a whole different dynamic by crypto innovators and investors. So far, the U.S has achieved little success from this approach and will probably adjust the current framework to be industry-specific in line with the crypto business. 

in touch
with us

Contact us to get your first consultation

Your message has been sent, we will try to answer as soon as possible

Something went wrong. Please try again later.