Governance tokens: what rights they grant
Governance tokens are at the heart of many Web3 projects: they promise to give the community a “voice”. But what do they really confer, from a legal standpoint? And where does the vote end and the financial right begin? Let’s look at it through the lens of Swiss practice.
What a governance token does
A governance token gives the holder the ability to take part in the decisions of a protocol or a DAO: proposing changes, voting on parameters, allocating the resources of a common treasury. In short, the typical rights are:
- Voting on proposals (upgrades, fees, use of funds).
- Proposing new initiatives put to the community.
- Delegating one’s own voting power to other addresses.
What it typically does not confer is a right to a dividend or a share of profits: that would move the token onto another plane.
The red line: governance is not equity
In FINMA practice the decisive point is the nature of the token:
- Utility / governance token: gives access and participation rights to a platform.
- Asset / security token: incorporates financial rights — profit-sharing, dividend, repayment — and is treated as a security.
A “pure” governance token stays on the first track. But as soon as mechanisms are added that promise an economic return — buybacks, revenue distribution, treasury shares redistributed to holders — the risk is that it will be reclassified as a security, with heavy consequences for marketing, prospectus and compliance obligations. Getting the qualification wrong upstream is the most expensive mistake: where needed, a legal opinion is produced.
The crux of the DAO and liability
Voting in a DAO is not the same as being a shareholder of a company. Two practical questions remain open:
- Absence of legal personality: many DAOs are not recognised entities. Those who hold the tokens may end up with voting power but without the protections — and sometimes with exposures — of a formal structure.
- Relationship with the legal entity: often behind the protocol there is a Swiss foundation or company. The governance token must be coordinated with the articles of association and the actual powers of that entity, to avoid misalignments between the “on-chain vote” and legally valid decisions.
How to structure them well
- Define the scope of the rights: what can and cannot be voted on, set out in black and white in the token documentation.
- Separate governance and economic return: if the project wants to distribute value, consider a dedicated security instrument rather than loading it onto the governance token.
- Anchor the DAO to an entity: a Swiss foundation or company gives legal stability to the governance.
- Document the qualification: a consistent legal opinion and whitepaper reduce the risk of reclassification.
Activities subject to authorisation — issuance, custody, VASP services — are carried out through authorised partners; the structuring of the token and the rights we handle as advisory.
Informational content, not legal advice on the specific case. The crypto regulatory perimeter is evolving: every project must be verified individually.
Are you designing a governance token and want to avoid the reclassification trap? Let’s talk.