Blockchain in Switzerland: An Overview
Swiss digital assets regulation
Switzerland was an early adopter of blockchain technology and continues to have an active community of blockchain and crypto-asset ventures. This development was facilitated by favourable regulation and the pragmatic approach of the Swiss Financial Market Supervisory Authority (FINMA).
A key milestone was the token classification by FINMA that has applied since 2018 and distinguishes the following types of tokens.
- Payment tokens or cryptocurrencies are digital assets intended only as a means of payment without giving rise to any claims against the issuer or third parties.
- Utility tokens are digital assets constituting rights to access or use a digital application or service, provided that such application or service is already operational at the time of the token sale.
- Asset tokens are digital assets representing an asset (eg, a debt or equity claim against the issuer or a third party) or a right in an underlying asset.
While this token classification has not changed since it was first introduced, the Swiss legal framework had to be improved in order to facilitate the issuance of "asset tokens" and to provide for better protection of clients using the services of wallet providers and trading platforms for digital assets. For these purposes, the Federal Act on the Amendment of Federal Laws to take into account developments in Distributed Ledger Technology of 25 September 2020 (the "DLT Act") was adopted. As the name suggests, the DLT Act is not a separate legal framework for digital assets, but rather an amendment of existing acts in order to expand the scope of the relevant rules, to the extent necessary, to make them workable for the issuance of digital assets.
The DLT Act, inter alia, introduced:
- "DLT Rights" as a new category of assets that may be created with registration on a distributed ledger and that are available for securities issued on a blockchain;
- "DLT MTFs" as a new licence category for trading venues where such DLT Rights can be traded and the expansion of the regulation of organised trading facilities (OTFs) to also allow trading activities in digital assets; and
- legal certainty regarding how digital assets can be set aside in the insolvency of a wallet provider where such assets are held.
The DLT Act has been fully in force since August 2021. It aims to establish a framework that can work in a "technology-neutral" way without having to regulate any particular technology. The Swiss regulator continues to adhere otherwise to a "same business, same risks, same rules" approach by applying the same legal and regulatory framework to business activities as it applies generally to the issuance and trading of digital assets.
As regards services provided in the field of decentralised finance (DeFi – eg, staking, yield farming or decentralised exchanges), Swiss regulation does not provide for separate rules as yet.
Anti-money laundering (AML) rules
In the context of initial coin offerings (ICOs) and tokens, the following relevant financial intermediation activities are subject to the Swiss AML regulation under the Swiss Anti-Money Laundering Act (AMLA) and the Anti-Money Laundering Ordinance (AMLO):
- the issuance of means of payment that cannot be used exclusively with the issuer;
- the provision of services related to payment transactions in the form of money and asset transmission services; and
- money exchange services.
A financial intermediary in the sense of the AMLA must be affiliated with an authorised AML selfregulatory organisation (SRO). Furthermore, a financial intermediary has to comply with the obligations defined in the AMLA, including (without limitation) identification and know-your-customer (KYC) obligations relating to the contracting party and its beneficial owner, and has to file reports with the Money Laundering Reporting Office in cases of suspected money laundering or terrorism financing.
In the FINMA Guidance 02/2019 on payments on the blockchain dated 26 August 2019, FINMA also specified that financial intermediaries supervised by FINMA must comply with the travel rule for blockchain transactions. This also applies to other financial intermediaries for AML purposes, as a result of their SRO affiliation. Under this travel rule, the relevant Swiss financial intermediary has to transmit the same information as required for wire transfers in fiat money or, alternatively, has to:
- identify the transferee in accordance with the Swiss AML rules as if the transferee was a client of the Swiss financial intermediary; and
- verify the transferee's power to dispose of the wallet address used by it through appropriate technical measures as defined by the relevant Swiss financial intermediary.
Issuance of DLT Rights as a digital security
Under Swiss law, payment tokens and utility tokens that do not represent any claims against an issuer or third parties can be validly created and transferred in accordance with the terms of the respective distributed ledger. A transfer can therefore be validly made by executing a transaction between two wallets.
The DLT Act introduced the possibility to issue digital assets representing enforceable rights under Swiss law as governing law in the form of DLT Rights. This is a new type of asset that is issued by way of registration on the blockchain and, as a result of such registration, may only be transferred and exercised on such blockchain. For these purposes, the distributed ledger must meet all of the following requirements.
- It must create a link between the DLT Rights and the distributed ledger in the sense that the holders of the DLT Rights (but not the debtor) must have the power to dispose of the DLT Rights.
- It must protect the integrity of the DLT Rights by utilising appropriate technical and organisational measures against unauthorised access and changes. Such measures include cryptographic validation procedures for access to, and the transfer of, DLT Rights. However, the DLT Act does not require a minimum number of participants in the ledger and does not provide rules as to the consensus mechanism (proof of work, proof of stake, etc).
- Its terms of operation, the terms of the DLT Rights and the terms governing the registration must be recorded on, or be accessible through, the distributed ledger.
- The entries relating to the DLT Rights in the distributed ledger must be public.
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Originally Published by Chambers And Partners
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