Trading in tokens is currently in the spotlight of the public's and the regulator's attention. Based on distributed ledgers-technology, blockchains are used to publicly issue tokens as tradable digital units and to record ownership and transactions of the issued tokens. At present, no specific laws or regulations on trading with tokens in Switzerland. In order to obtain public trust as well as to ensure proper functioning and transparency of token trading, a large number of legal issues have yet to be resolved. In particular, the question of insider trading and market manipulation with tokens needs to be clarified.

1) Introduction

Coinbase, a cryptocurrency exchange platform, is currently facing a class action due to alleged fraudulent behavior of its employees. Coinbase is accused of tipping off its employees ahead of its announcement of full support of Bitcoin Cash (BCH). The claimants allege that immediately after the announcement Coinbase's trading platform GDAX was swamped with buy and sell orders and prices were thereby artificially inflated.

This case and others show that fraudulent behavior, such as exploitation of insider information and market manipulation, is a real risk. This risk is likely further increased by the distinct lack of information in connection with trading in tokens on trading platforms and Initial Coin Offerings (ICOs) and the lack of specific rules and regulations in many jurisdictions including Switzerland. In order to prevent such behavior, the question thus arises whether existing regulations can be applied on trading with tokens or whether new regulation is require

As tokens have only recently emerged and as there are no specific laws on tokens so far, various types of tokens with different characteristics have been offered. However, in February 2018, the Swiss Financial Market Supervisory Authority (FINMA) issued (non-binding) guidelines regarding ICOs. These guidelines categorize tokens into three types:

  • Payment tokes are synonymous with cryptocurrencies and are designed as a means of payment. They have no further functions or links to any development projects or the like. They do not grant the holder any specific right other than to hold and act on the token itself.
  • Utility tokens are tokens which grant the holder the right to use certain services or provide access to an application.
  • Asset tokens represent assets such as a debt or equity claim against the issuer, e.g. participations in real physical underlyings or an entitlement to dividends or interest payments. Due to their economic function, such tokens have the characteristics of equity, bonds or derivatives.

The aim of this article is to briefly analyze whether the existing regulations on insider trading and market manipulation are applicable on trading with tokens. For the purpose of this article, the term "tokens" will include both tokens and cryptocurrency

2) Existing Regulation on Insider Trading and Market Ma

a) Insider Trading

Under Swiss law, insider trading is both, a criminal offence (art. 154 Financial Market Infrastructure Act (FMIA)) and a violation of public administrative law (art. 142 FMIA). Swiss law defines insider information as confidential information whose disclosure would significantly affect the prices of securities admitted to trading on a Swiss trading venue (art. 2 lit. j FMIA). Information is considered to be material and therefore pricesensitive if a typical investor would consider it important in deciding whether to buy or sell securities. It includes, for example, a change in the capital structure, a planned merger or an acquisition, financial results, the development of new products and other circumstances of similar importance. All persons who are in possession of insider information are considered insiders. Insiders are prohibited from (i) exploiting insider information to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use financial instruments derived from such securities, (ii) disclosing it to a third party, or (iii) exploiting it to recommend to a third party to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use financial instruments derived from such securities.

b) Market Manipulation

Market or price manipulation may also constitute both a criminal offence (art. 155 FMIA) and a violation of public administrative law (art. 143 FMIA) under Swiss law. According to art. 143 FMIA, a person behaves in violation of the rules on market behavior if (i) he or she publicly disseminates information or (ii) effects transactions or acquisitions or disposal orders that he or she knows or must know give false or misleading signals regarding the supply, demand or price of securities admitted to trading on a stock exchange or an institution which is similar to a stock exchange in Switzerland. The object of article 143 FMIA are also securities within the meaning of art. 2 lit. b FMIA. The relevant securities must either be traded, listed or admitted to trading on a Swiss trading venue. Within the scope of this provision the offender must have an intention to significantly influence the price of the relevant securities traded on a Swiss trading venue.

c) Applicability on Trading with Tokens

The question whether the aforementioned provisions are applicable on trading with tokens hinges on the following aspects:

  • whether tokens can be considered securities within the meaning of art. 2 lit. b FMIA; and
  • whether tokens can be admitted to trading on a Swiss trading venue, i.e. a Swiss exchange (art. 26 lit. b FMIA) or multilateral trading facility (MTF) (art. 26 lit. c FMIA).

i. Qualification of Tokens as Securities

According to art. 2 lit. b FMIA, the definition of securities comprises standardized certificated and uncertificated securities, derivatives and intermediated securities that are suitable for mass trading. With regard to tokens, a distinction needs to be made between the different types of tokes described above. According to FINMA's guidelines on ICOs, asset tokens are deemed securities within the meaning of art. 2 lit. b FMIA. Utility tokens can only be regarded as securities if the tokens embody, at least partially, an investment purpose, while payment tokes (cryptocurrencies) fall outside the scope of the definition altogether. Therefore, utility tokens without an investment purpose and payment tokens are, in principle, not considered securities under the FMIA. The rules on insider trading and market manipulation thus do not apply.

ii. Qualification of Trading Platforms as a Trading Venues

It remains to be seen whether tokens can be admitted to a Swiss trading venue. Pursuant to art. 26 lit. a FMIA, a trading venue means either a stock exchange or a MTF. Both are institutions for multilateral securities trading whose purpose is the simultaneous exchange of bids between several participants and the conclusion of contracts based on non-discretionary rules.

According to art. 23 of the Financial Market Infrastructure Ordinance (FMIO), rules are deemed to be non-discretionary if they grant the trading venue or the operation of an organized trading facility no discretion in the amalgamation of offers. The difference between stock exchanges and MTFs is that on a stock exchange securities are listed. Listing refers to the admission of securities to trading on a stock exchange in accordance with a standardized procedure in which requirements regarding the issuer and the securities specified by the stock exchange are examined. As tokens are not listed, it can be excluded that trading platforms for tokens are stock exchanges in the sense of art. 26 lit. b FMIA. However, token trading platforms could qualify as MTFs (and in Switzerland would thus be subject to FINMA's authorization and supervision) because they operate a simultaneous exchange of offers among several participants as well as the conclusion of contracts according to non-discretionary rule

3) Conclusion and Outlook

Tokens have given rise to numerous debates about whether existing laws are able and appropriate to govern these new technological applications or whether a new legislation needs to be adopted.

Taking a pragmatic approach, the trading of asset tokens and utility tokens may fall under the administrative provisions regarding insider trading and market manipulation of the FMIA (art. 142 and 143 FMIA). For the protection of investors and credibility in trading with tokens and the crypto world, in general, these provisions can and should be applied on payment and utility tokens that have an investment purpose – at least as a preliminary measure – at this stage of development. Based on the fundamental principle of "nulla poene sine lege" of the Swiss Criminal Code (art. 1), the criminal provisions (art. 154 and 155 FMIA) cannot be applied analogously on trading with tokens.

To ensure full protection and legal certainty in the long run, it would be desirable to introduce suitable regulations, preferably in form of self-regulation. Such self-regulation would be favorable as no established market practices have yet developed. In light of the dynamic market, self-regulation could be amended more easily and flexibly to meet changes of the technological environment and address uncertainties as they occur.

Originally published in CapLaw

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.