Blockchain, Tokenization and Raising Capital: What to Bear in Mind when Issuing Utility Tokens
Distributed ledger technology (DLT) has produced a range of tokens with various functions. Utility tokens basically grant access to a digital usage or service provided via a blockchain infrastructure. Depending on the economic purpose a token fulfils, certain financial market regulations must be observed (FINMA Guidelines for enquiries regarding the regulatory framework for initial coin offerings).
Utility token, asset token or payment token?
In contrast to utility tokens, asset tokens represent assets such as a debt or equity claim on the issuer. They are used to pledge interests in future company earnings or future capital flows. The category of asset tokens also includes tokens that allow physical property (e.g. real property or works of art) to be traded via blockchain.
Payment tokens are a cryptocurrency that are actually accepted or are intended by the issuer to be accepted as a means of payment for the purchase of goods and services, or for the transfer of value. Conceivably, it may take some time for a token to acquire the status of a means of payment. A distinction should in any case be drawn between privately issued payment tokens and legal means of payment (official currencies), with which financial debts can by law be validly settled.
Tokens that cannot clearly be placed in one single category are known as hybrid tokens. For example, a utility token can also have the properties of a payment token or asset token. If so, the corresponding regulatory provisions must also be observed.
What defines a utility token
The chief characteristic of utility tokens is the fact that they grant access to a digital platform or service. A specific service may be offered in exchange for tokens. The tokens then act in a similar way to vouchers. However, tokens may also be required simply to gain access to and use a platform. If this is the case, there is no need to transfer the tokens, and the tokens represent rights analogous to membership.
The multitude of use cases to which utility tokens can be put means that there is no general definition of them. The solution is to examine on a case-by-case basis which functions a token has and what is the economic purpose of its issuance.
Regulatory framework
Strict utility tokens, which bear no relation to the capital market and cannot be used as means of payment, are not subject to any particular regulatory provisions. This is true at least where the relevant use for the token is already possible at the time the token is issued. The situation is different where the functionality of the token or its underlying platform is yet to be developed.
If the issuer expressly or implicitly promises that the funds received as part of the issuance will be used to develop a project and the functionality of the token, the focus is no longer on utility but on financing.
If the token incorporates a claim against the issuer or the right to participate in future company earnings, it should be examined whether the token has the quality of a security and whether there is a prospectus requirement under Art. 35 et seq. FinSA (Financial Services Act).
If the token qualifies as a means of payment or is intended to be used as consideration for various goods and services at the time of issuance, the provisions of the Anti-Money Laundering Act must be observed: anyone who issues or administers means of payment is classified as a financial intermediary, and financial intermediaries are bound by specific duties of care and must join a self-regulation organization (SRO).