Token launch in 2024 in Europe: A compliance checklist

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The launch of a token can open new doors to raise capital, create decentralized ecosystems or create a unique digital economy. However, it is crucial to ensure compliance with regulatory standards to avoid legal complications. This checklist provides a detailed guide to navigating the compliance landscape, particularly from a Swiss regulatory perspective, but is also applicable to other regions such as the European Union.

Why do you want to launch a token? Before diving into the regulatory framework, it is crucial to clarify your purpose for launching a token. Whether it is to provide access to a platform, create a decentralized financial ecosystem, or as a means of payment, having a clear goal will impact both your token structure and your compliance obligations. But this is only the first step; Understanding the regulatory environment is critical.

1. Jurisdiction and regulatory environment

The jurisdiction of your target users determines the regulatory requirements of your token launch. Different countries have unique rules regarding token offerings, anti-money laundering procedures, and securities legislation. Under the guidance of the Swiss Financial Market Supervisory Authority, Switzerland has become a leading regulator for blockchain and token projects thanks to its pragmatic approach and clear regulatory framework.

Key factors to consider when choosing a jurisdiction:

Legal clarity on token categories and regulations (as seen in Switzerland). Cost and ease of compliance in jurisdictions such as Liechtenstein or the UAE. Cross-border offerings (especially in the EU where GDPR and token-specific laws apply). 2. Token categories based on Swiss regulatory perspective

Switzerland provides a detailed categorization of tokens through FINMA’s ICO Guidelines (2018) and Annex (2019). These categories are crucial in determining your compliance obligations:

Utility tokens. Utility tokens provide access to a specific service or platform. These tokens 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 a decentralized application, participating in governance, or rewarding users for their activity on the platform. Key compliance consideration: Utility tokens are not subject to AML or securities laws unless their use conflicts with investment functions.

Payment tokens. Payment tokens, synonymous with cryptocurrencies, are intended to be used as a medium of exchange. Cryptocurrencies such as Bitcoin (BTC) or Litecoin (LTC) fall into this category. Unlike utility tokens, payment tokens are generally treated like currency, and their issuers have no contractual obligations to their holders. Key compliance consideration: Payment tokens are subject to AML laws and must comply with KYC requirements, especially when used for money transfers or transactions.

Security/asset tokens. Asset tokens represent claims to real-world assets. They are similar to stocks or bonds and are considered securities under FINMA guidelines. For example, a token that grants a share of future company earnings or allows physical assets to be traded on the blockchain is classified as an asset token. Key compliance consideration: These tokens must comply with securities regulations, which require the use of exemptions from public offerings of securities or the maintenance of a prospectus registered with the relevant regulatory or designated authorities.

Hybrid tokens. Hybrid tokens can combine the features of utility, payment and asset tokens. For example, a service token that can also be used for payments must comply with both service and payment token regulations.

3. Important red flags for token categorization

To avoid being classified as a security or asset token (which would trigger stricter compliance), your project should avoid tying the following rights to utility tokens:

Promises of investment returns or rewards beyond utility value. Buyback guarantees that imply preservation of the token value.

Addressing these red flags early in your token design is crucial to staying within regulatory limits.

4. Obtaining legal opinion and no action letter to FINMA

It is crucial to seek legal advice from both Swiss and EU legal experts to understand the token’s classification and compliance obligations. Additionally, applying for a FINMA “no action” letter can ensure that your token will not be classified as a security or other regulated financial instrument.

FINMA’s no-action letter acts as a safeguard, giving your project and investors peace of mind that the token offering will not face unexpected regulatory challenges.

5. Establishment of legal entity

To issue a token in Switzerland, you need to create a legal entity to protect the founders of the project from personal liability. Legal packaging, including those reflecting the DAO, can also provide additional protection and operational flexibility, particularly in jurisdictions such as Liechtenstein or the UAE.

Your project should create corporate wallets and accounts to ensure transparent management of funds and reduce the risk of liability or financial abuse.

6. Issuing the token: Comparing self-issuing and using a launchpad

When launching a token, you can edit the token yourself or use a launchpad service. Both approaches bring their own compliance and operational considerations:

Self Giving. Advantages: Complete control over tokenomics, pricing and timing. Disadvantages: Requires in-depth legal expertise and technical infrastructure. Compliance measures such as KYC/AML procedures need to be managed internally.

Launchpad. Launchpads provide pre-vetted communities and facilitate the technical aspects of token sales. They also offer security checks, compliance measures and liquidity support. However, launchpads may charge significant fees and impose restrictions on token sales. Important consideration: Launchpads generally reduce compliance risks, but the project team must still ensure that the launchpad complies with 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, especially if the token has any payment functionality. AML compliance becomes even more critical if the project involves fiat-to-crypto transactions.

Including a KYC process ensures your project avoids dealing with blacklisted or fraudulent actors, thus reducing 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 before moving on to a public sale. An IPO may involve listing on a launch pad or self-issuance. Whichever method is chosen, it is important to prepare the following:

Terms and conditions for token buyers. Technical review and legal review of bid documents. Data protection for user information in accordance with GDPR or local privacy laws. 9. Public offering of tokens in the EU

For projects targeting the European Union, understanding the EU’s complex legal environment is crucial. Public token offerings in the EU are subject to prospectus requirements, securities law and consumer protection rules. Token issuers must also ensure compliance with the GDPR when processing personal data.

From the end of 2024, white paper content requirements and issuer obligations will apply for token issuers under the Crypto Asset Markets Regulation.

Launching a token involves numerous regulatory considerations, from understanding how tokens are classified to ensuring proper KYC/AML compliance. By following this checklist and seeking legal advice when necessary, projects can navigate the complex regulatory environment and launch their tokens with confidence.

This article was co-written by Alexander Ray and Janina Pietrowska.

Alexander Ray and Janina Pietrowska

Alexander Ray is the CEO and co-founder of JFactory, a Swiss company specializing in the development of the Albus Protocol, a regulatory-compliant DeFi framework for public blockchains, and decentralized financial technology. A technology executive and entrepreneur with over 20 years of experience developing infrastructure, cloud and data-based solutions for businesses in Europe. Working as a software architect and development leader at companies such as Deutsche Bank Frankfurt and General Electric, Alexander was involved in the design and development of predictive models for regulatory risk and financial figures, giving him deeper knowledge of DeFi algorithms and tools from an earlier era. financial perspective.

Janina Pietrowska advises entrepreneurs, start-ups, scale-ups and large corporations in Swiss and Liechtenstein law, specializing in financial market law, capital markets law and corporate law, with a particular focus on IT, fintech, blockchain, tokenisation, crypto, SDG and impact. investment projects. Ms. Pietrowska, who has more than ten years of experience in the field of international consultancy, has for years advised various international investors in the CIS countries, primarily in Germany, Switzerland, Austria and Liechtenstein, on all activities related to their subsidiaries, branches, joint ventures. and mergers and acquisitions worth up to 150 million euros. Ms. Pietrowska, one of the pioneers supporting blockchain projects in Switzerland and Liechtenstein since 2017, has successfully structured more than 100 web3 projects at various stages in various sectors worldwide, focusing on the tokenization of real-world assets such as real estate. commodities, diamonds, physical and digital art.