Source: Building Blocks – Crypto asset developments in the wake of COVID-19. Would you like to read our Building Blocks magazine? Please sign up for your digital copy via the form at the bottom of the page.
The current regulatory and legislative response toward virtual assets results in evolving as well as new laws and regulations in certain jurisdictions, with Switzerland being at the forefront of these dynamic developments.
At times, private sector companies shape the regulatory landscape by initiating new technological projects, which require legal clarity and specification. For instance, this was the case when the Swiss Financial Market Supervisory Authority FINMA received a request from Facebook’s Libra Association to assess and classify the Libra project as well as the issuance of a stablecoin under Swiss law. In addition, the Geneva-based Libra Association applied for a payment system licence with FINMA in April 2020, which at this time is still pending with the Swiss regulator. Facebook is not the only company that is pushing for regulatory guidance in crypto assets. FINMA observed a steady increase in stablecoin projects since mid-2018. Consequently, in September 2019, the Swiss regulator issued its stablecoin guidelines – a supplement to its ICO guidelines from February 2018.  A stablecoin is a class of cryptocurrencies that is backed by underlying assets, such as fiat currencies, which can be a specific fiat currency, e.g. the US dollar or a basket of currencies, commodities such as precious metals, real estate or securities with the aim to offer price stability. In legal terms, stablecoins grant the holder a contractual claim on the underlying assets, i.e. a redemption claim or direct ownership rights. FINMA’s approach regarding the treatment of stablecoins is to focus on the economic function and purpose of a token (“substance over form”) and follows the tried and tested principle of “same risks, same rules”, while taking into consideration the specific features of each project. Stablecoins in Switzerland can be subject to licensing requirements under the Banking Act, the Collective Investment Schemes Act, the Financial Market Infrastructure Act, the Stock Exchange Act or the Stock Exchange Ordinance together with the requirements from the Anti-Money-Laundering Act, depending on the nature and features of the respective stablecoin. In its stablecoin guidelines, the Swiss regulator stresses that legal uncertainty prevails with regard to the transferability and the enforceability of civil law claims linked to tokens.
Legal uncertainty concerning stablecoins and virtual or crypto assets in general exists not only in Switzerland but also at an international level, where this is considered a legal and regulatory challenge. The Bank for International Settlements mentions in its report from October 2019 by the G7 Working Group on Stablecoins, the importance of a sound legal basis for stablecoin developers in all relevant jurisdictions emphasising the significance of legal clarity with regards to the nature of the claim for coin holders as well as issuers.
Switzerland aims to create the best possible framework and conditions in order to establish itself and evolve as a leading, innovative and sustainable location for fintech and distributed ledger technology (DLT) companies, according to the Federal Council’s DLT report from December 2018. At the end of November 2019, the Swiss Federal Council published the finalised draft of the Federal Act on the Adaptation of Federal Law to Developments in the Technology of Distributed Ledgers (DLT Draft Act), which intends to increase legal certainty, remove barriers for applications based on DLT and reduce the risk of abuse. The following are key elements of the DLT Draft Act.
I. Introduction of Uncertiﬁcated Register Securities
The amendment of the Swiss Code of Obligations (CO) will introduce Uncertificated Register Securities, which aim at facilitating the issuance and transfer of tokenised rights and financial instruments. The new concept of Uncertificated Register Securities enables a legally robust tokenisation of rights by enabling the electronic registration of rights with the same functionality and protection as a negotiable security. Uncertificated Register Securities cover rights against counterparties or issuers, such as contractual claims and membership rights (e.g. shares in a corporation). The new concept covers the issuance of asset tokens, utility tokens, hybrid tokens and stablecoins in the form of Uncertificated Register Securities, but not payment tokens, such as bitcoin as they do not grant claims against an issuer or a third party. The creation of Uncertificated Register Securities pursuant to the new provisions in the CO requires a registration agreement among the issuer of a financial instrument as the debtor and the holder of a financial instrument as creditor. In such an agreement the parties agree: (i) to enter the relevant rights or claims into a so-called Register of Uncertificated Securities; and (ii) that the respective rights or claims can only be asserted or transferred via such a register. The register must meet certain statutory minimum requirements such as the granting of actual power of disposal over the respective rights to the creditor but not the debtor and prevent unauthorised changes by ensuring appropriate technical and organisational protective measures.
II. Introduction of a new license category for DLT Trading Venues
The DLT Draft Act introduces a new license category for DLT Trading Venues making them subject to supervision by FINMA. DLT Trading Venues “are described as institutions carrying out the multilateral trading of standardised DLT securities (i.e. Swiss law DLT securities that are standardised and suitable for mass trading or comparable foreign instruments), enabling the simultaneous exchange of bids between several participants and the conclusion of contracts based on non-discretionary rules”.
Under the current regulatory setup in Switzerland, it is unclear whether virtual assets held by a custodian on behalf of a client will be segregated in case of bankruptcy. The Federal Council recognised the great practical need for such a segregation of virtual assets. The DLT Draft Act foresees, therefore, a new provision in the Swiss Debt Enforcement and Bankruptcy Act (DEBA) for a third party to request segregation of virtual assets from the bankruptcy estate of the bankrupt debtor in certain cases.
In May 2020, the Economic Affairs and Taxation Committee (EATC) of the National Council announced in its press release the acceptance of the Federal Council’s corresponding proposal in the final vote with only minor changes. The lower chamber of the Swiss parliament, the National Council, followed the EATC approach and unanimously approved the DLT Draft Act during its 2020 summer session in June with 192 out of 200 votes in favour. As a next step, the Council of States, the upper chamber of the Swiss parliament, will deal with the DLT Draft Act while the preparation of the necessary ordinances is simultaneously underway. The DLT Draft Act is expected to be enacted in 2021.
The Swiss regulatory and legislative approach advances legal certainty for the DLT industry and enables the advancements of projects with a nexus to blockchain technology as well as the virtual asset space. It also demonstrates that Switzerland is open to innovation and seeks to create attractive conditions for companies dealing with new technologies. It makes sense for other jurisdictions to follow Switzerland’s approach and address questions of legal uncertainty by developing a clear legal framework for the DLT space to allow the industry to mature and advance.
About the author
Magdalena Boškić is Head of Compliance at Crypto Broker AG. She is a member of the CVA’s Regulatory Working Group as well as the Virtual Asset Service Provider AML Task Force. Prior to joining Crypto Broker AG, she worked in Compliance at Credit Suisse AG within the IWM Central Control Unit covering Russia and CIS countries and was a member of the Cryptocurrency Working Group at Credit Suisse. Magdalena possesses extensive expertise on all regulatory and compliance related matters and is a regular speaker at conferences and events for virtual assets. She is fluent in six languages and passionate about law, compliance, blockchain technology as well as virtual assets. Magdalena studied law at the University of Zurich, the Kutafin Moscow State Law University (Bachelor of Law UZH), and the University of St. Gallen (M.A. HSG in Law). She holds a certificate from the Oxford Blockchain Strategy Programme at the University of Oxford’s Saïd Business School.Weiterlesen