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

Moritz Feuchter, Senior Manager

October 2018, 28th

This presentation is intended to provide an overview about regulations and compliance topics and is not a definitive statement of the law. Kenneth Arrow: «Not every business cycle has a financial crisis. Frequently they do»1

Is financial market regulation preventing the next crisis?

How to ensure ➢ Tulipmania, the first repeating amazon’s or economical bubble 10 years post crisis, broadcast’s success how long until next stories instead of crisis? repeating pets.com failures? ➢ Roaring Twenties and Stock Market Crash History repeating? What will actually trigger the next ➢ DotCom Boom & Bubble global recession and How to crisis, and when? prepare?

Has the crypto ➢ Subprime Crisis bubble burst already? EOY 2017 +/- 20k$ ➢ Crypto Crash….? Will it burst again?

+/-7k$ ?

Client Name here 2 ICOs1 carry the smell of ambiguity – the Swiss regulator found way to create clarity for market participants

Competitive location advantage: Blue Mountains

Situation Risk ICO Funding is undergoing a veritable ICOs bear significant inherent global hype risks, e.g. missing valuations, For startups ICOs offer a significant high crypto currency volatility, easier and quicker promise to raise hacker attacks / scams or capital opaque investors and The Swiss crypto valley (of thousand investments. and one crypto coins) attracts crypto tourism and crypto exploration endorsing it a cosmos of crypto brain, capital and a true innovation catalyst General Regulators Today, over 600 cross-industry, Regulators across the globe blockchain-related companies with a generally still seem to be total valuation of approx. 44 billion $ reluctant to step ahead and are located in Switzerland and provide regulatory guidance Liechtenstein, according to recent CV needed for ICOs. VC study 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 of blockchainClient-based Name coins here or tokens which are created and stored in a decentralized form either on a blockchain specifically created 3 for the ICO or through a smart contract on a pre-existing blockchain.” RoI - ICOs

The Risk of Ignoring Inevitable Compliance Obligations

Client Name here 4 FINMA – the Swiss regulator - creates clarity for all market participants

FINMA among pioneers on ICO regulation

➢ 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 standardization and 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

*prior to 02/2018 guidelines: government's Blockchain/ICO Working Group FINMA Guidance, 04/2017, Regulatory treatment of initial coin offerings

2009, 3rd Jan. 2010 2011 2015 2016 2017 EOY 2017 2018

Block #0 1st pizza order 1 BTC = 1 $ Slow but steady rise of BTC BTC boom ECB / EBA BTC ICO regulation rise paid in BTC 10 kBTC investor warning 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)

Client Name here 6 Missing out on FINMA’s key ICO definitions endangers successful ICO

Know your token

Token categorization focusing on its function and Payment tokens are synonymous with cryptocurrencies transferability* (no further functions or links to other development)

Payment services

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

Possible classification as security

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)

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 investmentClient Name herefund products) are not common in Switzerland 7 Example of eventual FIDLEG compliance impacts within financial service providers and financial instruments

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

Best execution Scope Client orders should achieve the best possible overall result for the client Financial service providers (e.g. wealth / asset managers, from the following perspectives: issuers of financial instruments) / client advisors operating in (i) Financial CH are in scope. (ii) Qualitatively Insurers / re-insurers are out of scope. (iii) Time Client classification Code of Conduct Extensive information / documentation requirements apply. Transparency and due diligence are to be exercised upon customer orders. Financial Client Information & Reporting Financial Service Comprehensive information should be provided to Organization Instrument Proper organizational measurers need Provider clients before concluding the agreement or to be taken to: providing services. (i) secure client advisor’s training Various information about the services, portfolio (ii) monitor service provider chain and costs should be provided to clients after (iii) handle conflict of interest provision of services. (iv) register client advisors Basic Information Sheet and Ombudsman’s office Disputes between clients or clients and Prospectus financial service providers can be handled Miscellaneous through a mediation process. Detailed rules apply for supervision, disputes, information exchange and documentation issue. Suitability & Fines up to CHF 500 apply depending on the various breach of obligations. Appropriateness Conflict of interest

Client Name here 8 Know your playground - Know your regulation

Examples of regulatory frameworks to consider

Cumulative regulatory requirements

Taxable events FATCA Foreign Account Tax Compliance Act Applicability of Anti-Money Laundering Act (AMLA) CRS Common Reporting Standard DAC6 Mandatory Disclosure for AMLA protects the financial system from money laundering and Intermediaries the financingApplicability of terrorism of Anti-Money Laundering Act (AMLA) GDPR ➢ AMLA due diligence requirements include the requirement to establish General Data the identity of the beneficial owner (KYO: know your customer) and Protection EMIR European the obligation either to affiliate to a self-regulatory organization (SRO) Regulation or to be subject directly to FINMA supervision Market Infrastructure Regulation MiFID II Markets in Financial Instruments Classification as security Directive Securities regulation (applicable for standardized certificated or uncertificated securities) aims at ensuring that market FinfraG: Financial Market participants base investment decision making on a reliable Infrastructure Act minimum set of information FIDLEG: Financial Services Act ➢ Trading should be fair, reliable and offer efficient price formation

Client Name here 9 Missing out on key compliance challenges may scare off potential partners

Key challenges to be considered as an ICO organizer

Which regulation is relevant to What e.g. financial market us? What about AMLA / KYC when How do we implement a regulation is relevant for us offering e.g. payment tokens? Or bullet-proof AML – BA, FMIA, FISA, SESTA, is there a prospectus liability (for Compliance framework, CISA, CO, AMLA or ICO white papers) or even considering e.g. KYC or upcoming FinSA? Banking license required, e.g. supervisory authority when offering an asset token? registration? Actual Path

Expected Path

How can we keep How can we maintain an How can we keep efforts and Compliance risks under overview of Compliance costs low whilst maximizing control in daily business? risks and systematically Compliance effect? E.g. are Are there any pragmatic screen investors, flow of there proven solutions, which best-practice approaches funds and make sure proper scale for us and we could we can apply? documentation? leverage?

Client Name here 10 Thank you! Contacts

Moritz Feuchter Cristina Gagiu Senior Manager Manager

BearingPoint T + 49 89 54033 6103 BearingPoint T + 41 22 747 0 558 Erika-Mann-Straße 9 M + 49 160 2784763 Route de Pré-Bois 29 M + 41 79 898 6212 80636 München 1215 Genève 15 Germany www.bearingpoint.com Switzerland www.bearingpoint.com

[email protected] [email protected]

Client Name here 12