"Unlike real cryptocurrencies, which are stored on distributed networks and use blockchain technology, e-coins were completely under the providers' control and stored locally on its servers," FINMA said in a statement.
"The providers had suggested that e-coins would be 80% backed by tangible assets, but the actual percentage was significantly lower. Moreover, substantial tranches of e-coins were issued without sufficient asset backing, leading to a progressive dilution of the e-coin system to the detriment of investors," FINMA said.
The developers of e-coin also lacked a licence to operate, it said.
"This activity is similar to the deposit-taking business of a bank and is illegal unless the company in question holds the relevant financial market licence," FINMA said.
The Quid Pro Quo Association has been issuing the e-coins since last year and offering a trading platform with Digital Trading and Marsela group, it said
FINMA has liquidated the association and the two companies, and launched bankruptcy liquidation proceedings against them. The watchdog has been able to seize and block assets to the value of approximately CHF2 million ($2 million), it said.
"FINMA welcomes innovation, but when innovative business models are misused for unauthorised activities, FINMA intervenes," it said.
Technology expert Charlie Clarence-Smith of Pinsent Masons, the law firm behind Out-Law.com, said: "It is important that financial regulators protect the digital token market from illicit scams in order to protect consumers and improve market credibility. This hard-line approach from FINMA should send a strong message that illegitimate crypto-coin scams will not last long post-issuance."
China told virtual currency exchanges to close earlier this month, after the People’s Bank of China (PBoC) announced a ban on all initial coin offerings (ICOs) in the country.