February 9, 2025
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Token launch in 2024 in Europe: A compliance checklist | Opinion

Launching a token can unlock opportunities for raising capital, establishing decentralized ecosystems, or creating a distinctive digital economy. However, it is essential to ensure compliance with regulatory standards to avoid legal issues. This checklist serves as a comprehensive guide for navigating the compliance landscape, particularly from a Swiss regulatory perspective, while also applicable to other regions such as the European Union.

Why Launch a Token?

Before delving into the regulatory framework, it’s crucial to clarify your purpose for launching a token. Whether the aim is to provide access to a platform, create a decentralized financial ecosystem, or facilitate payments, having a clear objective will shape both your token structure and compliance obligations. However, this is just the first step; understanding the regulatory landscape is vital.

1. Jurisdiction and Regulatory Environment

The jurisdiction of your target users dictates the regulatory requirements for your token launch. Different countries have unique regulations regarding token offerings, anti-money laundering (AML) procedures, and securities laws. Switzerland, under the guidance of the Swiss Financial Market Supervisory Authority (FINMA), has emerged as a leading regulator for blockchain and token projects due to its pragmatic approach and clear regulatory framework.

Key factors to consider when choosing a jurisdiction include:

  • Legal clarity on token categories and their regulation (as seen in Switzerland).
  • Cost and ease of compliance in jurisdictions like Liechtenstein or the UAE.
  • Cross-border offerings, particularly in the EU, where GDPR and token-specific laws apply.

2. Token Categories from the Swiss Regulatory Perspective

Switzerland offers a detailed categorization of tokens through FINMA’s ICO Guidelines (2018) and Supplement (2019). Understanding these categories is crucial for determining your compliance obligations:

  • Utility Tokens: These grant access to a specific service or platform and generally do not fall under 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 decentralized applications, participating in governance, or rewarding users for platform activity.
    Key compliance consideration: Utility tokens are not subject to AML or securities laws unless their use overlaps with investment functions.
  • Payment Tokens: Synonymous with cryptocurrencies, these are intended as a medium of exchange, such as Bitcoin or Litecoin. Unlike utility tokens, payment tokens are treated like currency, and their issuers have no contractual obligations to holders.
    Key compliance consideration: Payment tokens must comply with AML laws and KYC requirements, especially for monetary transfers or transactions.
  • Security/Asset Tokens: These represent claims on real-world assets and are treated as securities under FINMA guidelines. For example, a token that grants a share of future company earnings or allows the trading of physical assets on the blockchain would be classified as an asset token.
    Key compliance consideration: These tokens must adhere to securities regulations, requiring either exemptions from public offerings or a registered prospectus.
  • Hybrid Tokens: These combine features of utility, payment, and asset tokens. For instance, a utility token that can also be used for payments would need to comply with both 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 steer clear of the following:

  • Promises of investment returns or rewards beyond their utility value.
  • Buy-back guarantees that imply token value preservation.

Addressing these red flags early in your token design is crucial for staying within regulatory boundaries.

4. Obtaining a Legal Opinion and FINMA No-Action Letter

Securing a legal opinion from Swiss and EU legal experts is essential for understanding your token’s classification and compliance obligations. Additionally, applying for a FINMA “no-action” letter can provide assurance that your token won’t be classified as a security or regulated financial instrument.

The FINMA no-action letter serves as a safeguard, offering peace of mind for your project and its investors that the token offering will not encounter unexpected regulatory challenges.

5. Establishing a Legal Entity

To issue a token in Switzerland, establishing a legal entity is necessary to protect the project’s founders from personal liability. Legal structures, including those reflecting a DAO, can provide additional protection and operational flexibility, especially in jurisdictions like Liechtenstein or the UAE.

It’s important to establish corporate wallets and accounts to ensure transparent handling of funds, thereby reducing the risk of liability or financial misconduct.

6. Issuing the Token: Self-Issuance vs. Using a Launchpad

When launching a token, you can either self-issue it or utilize a launchpad service. Each approach has its own compliance and operational considerations:

  • Self-Issuance:
    • Advantages: Complete control over tokenomics, pricing, and timing.
    • Disadvantages: Requires extensive legal expertise and technical infrastructure. Compliance measures like KYC/AML procedures must be managed internally.
  • Launchpad: Launchpads provide pre-vetted communities and streamline the technical aspects of the token sale. They offer security checks, compliance measures, and liquidity support but may charge significant fees and impose restrictions on token sales.
    Key consideration: While launchpads often reduce compliance risks, the project team must ensure that the launchpad adheres to the specific regulations of their chosen jurisdiction.

7. KYC and AML Compliance

Although utility tokens are not subject to AML legislation in Switzerland, financial intermediaries may still require KYC verification, particularly if a token has payment functions. If the project involves fiat-to-crypto transactions, AML compliance becomes even more critical.

Incorporating a KYC process helps avoid interactions with blacklisted or fraudulent actors, thereby minimizing legal and reputational risks.

8. Private Sale and Public Token Offering

Many projects start with a private sale using a Simple Agreement for Future Tokens (SAFT) before transitioning to a public sale. A public offering may involve listing on a launchpad or self-issuance. Regardless of the method, it’s essential to prepare the following:

  • Terms and conditions for token purchasers.
  • A whitepaper and legal review of the offering documents.
  • Data protection measures for user information in compliance with GDPR or local privacy laws.

9. Public Offering of Tokens in the EU

For projects targeting the European Union, understanding its complex legal environment is essential. Public token offerings in the EU must comply with rules regarding prospectus requirements, securities law, and consumer protection. Token issuers must also ensure compliance with GDPR when handling personal data.

Starting at the end of 2024, new white paper content requirements and issuer obligations will apply to token issuers under the Markets in Crypto-Assets Regulation.

Launching a token involves numerous regulatory considerations, from understanding token classifications to ensuring proper KYC/AML compliance. By following this checklist and seeking legal advice as needed, projects can navigate the complex regulatory landscape and confidently launch their tokens.