Token launch in 2024 in Europe: A compliance checklist | Opinion

Launching a token can open new doors for raising capital, creating decentralized ecosystems, or building a unique digital economy. However, ensuring compliance with regulatory standards is crucial to avoid legal complications. This checklist provides a detailed guide for navigating the compliance landscape, particularly from the Swiss regulatory perspective, but also applicable to other regions like the European Union.

Why do you want to launch a token? Before diving into the regulatory framework, clarifying your purpose for launching a token is essential. Whether it’s for providing access to a platform, creating a decentralized financial ecosystem, or as a means of payment, having a clear objective will influence both your token structure and compliance obligations. However, this is only the first step—understanding the regulatory landscape is critical.

1. Jurisdiction and regulatory environment

Your target users’ jurisdiction determines your token launch’s regulatory requirements. 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 been 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 their regulation (as seen in Switzerland).
• Cost and ease of compliance in jurisdictions like Liechtenstein or UAE.
• Cross-border offerings (particularly 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 Supplement (2019). These categories are crucial in determining your compliance obligations:

Utility tokens. Utility tokens grant access to a specific service or platform. These tokens do not generally 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 activity on the platform. Key compliance consideration: Utility tokens are not subject to AML or securities laws unless their use overlaps with investment functions.

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

Security/asset tokens. Asset tokens represent claims on real-world assets. They are akin to equities or bonds 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 comply with securities regulations, requiring either using exemptions from public offering of securities or having a prospectus registered with the respective regulator or designated authorities.

Hybrid tokens. Hybrid tokens may combine features of utility, payment, and asset tokens. For example, 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 more stringent compliance), your project should avoid linking the following rights to utility tokens:

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

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

4. Obtaining a legal opinion and FINMA no-action letter

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

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

5. Establishing a legal entity

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

Your project should establish corporate wallets and accounts to ensure that funds are handled transparently, 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 the token or use a launchpad service. Both approaches come with their own compliance and operational considerations:

Self-Issuance. Advantages: Full 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 in-house.

Launchpad. Launchpads provide pre-vetted communities and streamline technical aspects of the token sale. They also offer security checks, compliance measures, and liquidity support. However, launchpads may charge significant fees and impose restrictions on token sales. Key consideration: Launchpads often reduce compliance risks, but the project team must still ensure that the launchpad adheres to the specific regulations of their chosen jurisdiction.

7. KYC and AML compliance

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

Incorporating a KYC process ensures that your project avoids dealing with blacklisted or fraudulent actors, thus reducing legal and reputational risks.

8. Private sale and public token offering

Many projects begin with a private sale using Simple Agreement for Future Tokens before moving to a public sale. A public offering may involve listing on a launchpad or self-issuance. Whichever method is chosen, it’s essential to prepare the following:

• Terms and conditions for token purchasers.
• Whitepaper and legal review of the offering documents.
• Data protection for user information in line 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 key. Public token offerings in the EU are subject to rules regarding prospectus requirements, securities law, and consumer protection. Token issuers must also ensure compliance with GDPR when handling any personal data.

Starting at the end of 2024, 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 how tokens are classified to ensuring proper KYC/AML compliance. By following this checklist and seeking legal advice where necessary, projects can navigate the complex regulatory landscape and launch their tokens with confidence.

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