Many digital currency issues, known as initial coin offerings (ICOs), will be treated as securities under regulatory guidelines published on Friday by Switzerland, which has become a global leader in the hot fundraising method.
ICOs allow start-ups founded on cryptocurrency technologies such as blockchain to quickly raise capital by issuing virtual tokens or coins.
Such offerings skyrocketed in 2017, reaching nearly $3 billion through September, according to data compiled by cryptocurrency research firm Smith + Crown, with Switzerland attracting around a quarter of the money.
The guidelines represent a step up in regulation for many early projects as they become subject to trading laws and detailed disclosure requirements, and offer more protection to investors.
Regulation has become a hot-button issue since the U.S. Securities and Exchange Commission -- weighing in last year on a project that had raised millions before being hacked -- deemed some ICOs could count as securities. Many other global authorities have followed suit.
Groups based in Switzerland have launched many of the world's biggest ICOs. Embattled cryptocurrency project Tezos in July raised $232 million through a Swiss-based foundation, but has since been delayed by internal turmoil and multiple lawsuits. http://reut.rs/2gocfFp
The guidelines' effect on Tezos remains unclear, but several class-action lawsuits in the United States allege the tokens, which have not yet been issued, are securities.
"The application of blockchain technology has innovative potential within and far beyond the financial markets," Financial Market Supervisory Authority (FINMA) chief Mark Branson said.
"However, blockchain-based projects conducted analogously to regulated activities cannot simply circumvent the tried and tested regulatory framework," Branson added.
Under the guidelines, most ICOs for tokens used to run a blockchain platform or representing underlying assets -- like a share in a company or physical goods -- will count as securities.
There are some exceptions, such as for tokens used to access a platform that is already up and running, or for cryptocurrencies that function only as a means of payment.
Neither will be considered securities, FINMA said, while the latter would be subject to anti money-laundering rules.
But most ICOs take place before the underlying technology platform has been launched and are linked to some project or purpose. The guidelines thus represent a step up in regulation for many early projects.
"For a lot of start-ups that are not operational yet, a compliant ICO will be difficult to achieve," said Olga Feldmeier, chief executive of blockchain investment start-up Smart Valor.
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