You have questions about FinTech and crypto offers

The term FinTech is an abbreviation for ‘financial technology’. FinTech includes all financial services that are provided with the aid of new and innovative technologies. Examples include financial services that are available only on a smartphone, automated investment advice, blockchain technologies or, in very general terms, the efforts to digitalise the financial services sector. FinTech offers are often launched by start-up companies seeking to use financial technology as a way of competing with established financial service providers. However, FinTech offers are also available from established financial service providers.

In many cases, FinTech companies offer services that are already on offer from established financial service providers. However, FinTech companies use technical innovations to try and offer these services for cheaper rates and/or to make them more easily accessible. In doing so, however, they sometimes also introduce completely new offerings. Examples include:

• Payment services that enable transfers of national currencies via smartphones, or of private cryptocurrencies by means of a blockchain.
  
• Internet platforms that enable projects to be financed by a large number of persons instead of by a bank or an individual investor (crowdfunding).
  
• Internet platforms that enable management and trading of traditional financial products, or cryptocurrencies and other blockchain-based tokens.
  
• Investment advice and asset management with the support of algorithms and other computer programmes (robo-advisory).
  
• Issuance of traditional financial products such as shares or bonds, or other rights in the form of blockchain-based tokens (known as initial coin offerings, initial liquidity offerings, etc.).
  
  

FinTech companies frequently offer their clients services that are already on offer from established financial service providers. Swiss financial market law does not address individual technologies but rather business models and their risks for investors and clients. Hence, FinTech companies frequently require authorisation from FINMA. However, the question of whether or not an activity requires authorisation depends on the specific form that the services take. Information on the potential authorisation requirements for various business models can be found here. You can check here if you wish to find out whether or not a company has been authorised by FINMA.

FinTech providers are often start-up companies established specifically for this purpose. They first want to build up a business and require funds from investors in order to do so. In this respect, their success or failure cannot usually be predicted. Hence, just as with other start-ups or innovative business models, the market success of FinTech providers and FinTech products is uncertain. In view of this, you should always ask yourself a few questions prior to investing, such as: What am I investing in? Can I absorb a total loss? Am I dealing with a reputable provider? You can find further information and tips on investor protection here (see also Question 12.9 on identifying unscrupulous FinTech offers)

Cryptocurrencies are a means of payment that are privately issued and exist in purely digital form on a blockchain. In addition, they can only be transferred on this blockchain. Bitcoin and Ether are well-known cryptocurrencies. A wide range of other blockchain tokens with various designated purposes are also offered for investment.

Cryptocurrencies, or rather blockchain tokens, are a relatively new phenomenon in financial markets. However, they are enjoying growing levels of popularity among investors. But nobody can predict whether they will be able to assert themselves in the market over the long-term.

Furthermore, cryptocurrencies and blockchain tokens are subject to significant price fluctuations, sometimes amounting to more than 20% in a day. Compared with traditional offerings on the financial market, this is considerable and presents major loss potential, particularly for inexperienced investors.

The high levels of interest shown by investors for individual projects in this investment class has repeatedly led to rapid price rises, which are often unsustainable and, in some cases, are even instigated fraudulently (known as “pump and dump”). Investors should be aware that it is particularly in cases of rapid price rises that total losses are also potentially possible.

Crowdfunding is a generic term for an alternative form of financing (in the form of both equity capital and debt capital) of projects or companies. The basic idea of crowdfunding involves a borrower being financed (funded) by a large number (crowd) of persons acting as lenders. This also means that the individual lenders only need to contribute a small portion of the total amount. Crowdfunding is most commonly subdivided into the categories of crowddonating (donations), crowdsupporting (support), crowdlending (loans) and crowdinvesting (equity capital). Further information can be found here.

When investing in crowdfunding offers you should inform yourself about the integrity of both the borrower and the platform brokering the financing transaction prior to proceeding with the investment (in this respect, see also: case example under 12.11 and the general information on protection against investment fraud). You should then check exactly which rights are associated with your investment (for example, are you making a donation or purchasing a stake?). Lastly, you should consider whether, how quickly, and at what price, you would be able to resell any rights that you have acquired with your investment.

Specific information from the notarial profession on crowdinvesting in real estate can be found here.

An initial coin offering (commonly abbreviated to “ICO”) is when investors transfer funds (usually in cryptocurrency form) to the ICO organiser. In return, they receive blockchain-based coins or tokens that are created and issued either on a newly developed blockchain or on an already existing blockchain. The ICO organiser will usually use the received funds to develop a business that was not yet in existence at the time of the ICO. The tokens typically represent rights against the ICO organiser, or are intended for use as a future means of payment. In this respect, the rights against the ICO organisers can be very varied (e.g. rights to a share in future profits or to use a future service). The business model adopted by the ICO organiser and the rights associated with the token are usually described in a white paper.

If you wish to purchase tokens as part of an ICO, you should first inform yourself about the integrity of the offeror (in this respect, see also: case example under 12.11 and the general information on protection against investment fraud). Investors should be aware that ICOs generally involve companies and business models that are still in a very early phase and are therefore particularly high-risk investments. Lastly, you should establish which rights you will be acquiring with the token and how these compare to the investment made.

Internet platforms for trading in financial products typically offer their clients investments in all types of financial products, or they operate trading venues for such products. In order to use such platforms, clients are required, in most cases, to pay their funds into an account operated by the platform provider. Depending on the offer, the client receives a promise that the deposited funds will be invested in financial products (e.g. cryptocurrencies), which will then be managed for the client and, where applicable, used for further trading. The offer may thus comprise exchanges of money, foreign exchange trading, securities trading, asset management and traditional account management.

Users of internet platforms for trading in financial products should first inform themselves about the integrity of the provider (in this respect, see also: case example under 12.11 and the general information on protection against investment fraud). They should then consider whether the financial product that they wish to invest in is appropriate and sensible for them. Investors who lack the necessary knowledge to make such an assessment should consult a specialist (e.g. a bank, investment advisor or asset manager) or refrain from making the investment.

In recent times FINMA has increasingly observed companies which offer to sell investors their (own) virtual currency with the alluring prospect of price gains similar to those experienced in the past with Bitcoin. Virtual currencies of this kind are often tied into a so-called “multilevel marketing system”. Under this system, if investor A recruits new investors B and C, he or she receives commission. If investors B and C in their turn recruit new investors, investor A benefits again.

However, exactly how the business model works is often unclear. The virtual currencies in these cases, unlike Bitcoin, are often not managed in a decentralised way. If the companies offering these currencies enter into (conditional) repayment commitments vis-à-vis investors on a commercial basis, they must be authorised by FINMA under the Banking Act. There is often also the possibility that these companies are engaging in activities which are subject to supervision under the Anti-Money Laundering Act. FINMA therefore recommends that potential investors in virtual currencies examine these investments carefully and only enter into them if the provider’s business model is comprehensible and transparent. Fraudsters may simply want to exploit the hype around virtual currencies.

Unscrupulous providers can also be encountered in the area of FinTech services. Such providers do not actually intend to provide clients with a service. But distinguishing reputable providers from unscrupulous ones is not always easy. However, taking some simple precautionary measures will often be sufficient to avoid losses.

Example: In order to comply with anti-money laundering rules, reputable providers will often need to identify their clients. To this end, they will need to demand documents such as passport copies from their clients. By contrast, unscrupulous internet sites will often not demand any such documents.

It should be noted, however, that gains are never guaranteed, even in the case of reputable providers. General information on protection against investment fraud and tips for investors on how to protect themselves against unscrupulous providers can be found on our website.

In the following example, a fictitious investor is seeking an investment opportunity, for example, in the Bitcoin cryptocurrency. In addition, the investor would also like to acquire some foreign shares. After learning of a provider through spam emails or advertising, the investor registers on its website. The provider then contacts the investor by telephone or email and the investor is persuaded to make a small investment. However, the investor does not investigate the provider before making the investment.

Subsequently, the investor’s account on the internet platform indicates that they have made a return on their investment. But in actual fact, the money was never invested. The displayed gains are fictitious. The investor, who is now dazzled by the supposed gains being displayed, is then persuaded by the provider to make further investments of larger amounts. The identity of existing companies is also often misused (e.g. Cloned websites: a trap for the unwary).

After a period of time, the investor then tries to get the provider to pay out a portion of the credit balance but the provider keeps on stalling. For example, the investor is told that additional funds must first be paid in to cover the taxes or fees before a payout can be made. After some toing and froing, or as soon as the investor refuses to pay in any more money, all contact ceases. The investor, who is by now suspicious, conducts some research on the internet and thus realises that it was probably an unscrupulous offering. The investor then contacts the police, the public prosecutor’s office or FINMA. However, many investors can feel embarrassed and keep quiet about their bad investment.

In many cases, since the fraudsters frequently spend the investors’ money immediately, or siphon it abroad via various accounts, the authorities are no longer able to retrieve the money. However, it is still worthwhile to report problems to the competent authorities as quickly as possible.

If investors have fallen prey once to unscrupulous providers, their contact details are often passed on to third parties. The investors are then contacted by seemingly new service providers, promising that they will be able to help recover the lost money, or win it back through new transactions. In order to receive this “help” the investor is once again required to pay in money up front. The investor becomes even more tightly entangled in the web.

Further information, including on other business models, can be found here.