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In Switzerland, the government’s general attitude towards cryptocurrencies is positive. Switzerland sees an opportunity to take a global lead in this sector and evolve as an innovative and sustainable location for fintech and distributed ledger technology (“DLT”). Thus, laws and regulations are flexible and accommodating towards new technologies and business models.

Moreover, legislative and government bodies are willing to accommodate such innovative approaches[1].

From 1 January 2020, financial service providers must comply with the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). However, there is no specific regulation of cryptoassets in Switzerland. The Financial Market Supervisory Authority (FINMA), responsible for the supervision of Swiss-registered STOs and ICOs, published a set of guidelines that every issuer must observe in order to be legally compliant.

This newsletter aims to give a brief overview of the legal and regulatory framework in the current crypto scene.

Cryptoassets

The Swiss Financial Market Supervisory Authority (FINMA), in its initial coin offering guidelines[2], differentiates cryptoassets between the three following types:

Payment tokens – payment tokens (synonymous with cryptocurrencies) are tokens which are intended to be used, now or in the future, as a means of payment. Collecting or transferring such cryptoassets will usually be subject to the Anti-money Laundering Act (AMLA)[3]. Examples of such cryptocurrencies are Bitcoin or Ether.

Utility tokens – utility tokens are tokens which are intended to provide access digitally to an application or service by means of a blockchain-based infrastructure. FINMA will treat such tokens as securities.

Asset tokens - asset tokens represent assets such as a debt or equity claim on the issuer. FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens, as well as civil law requirements under the Swiss Code of Obligations.

The individual token classifications are not mutually exclusive. Asset and utility tokens can also be classified as payment tokens (referred to as hybrid tokens)[4].

Let's focus on the asset token (or security token), which represents an asset value. It is therefore "backed" by much more concrete assets and is subject to stricter regulations, which is why most specialists are betting on a sharp rise in this type of ICO, commonly known as STOs, since they use "security tokens"[5].

Legal and regulatory implications of STO’s

As the regulations in the blockchain space gain more importance, so are STOs experiencing significant growth while the use of ICOs is in decline. Let’s make a brief comparison between ICO’s and STO’s:

In Switzerland, there is no uniform law to govern the conduct of, and investment in, initial coin offerings (“ICOs”). The offering of cryptoassets qualifying as securities require an authorisation (as securities house or banking licence) from FINMA only if the cryptoassets in question are derivatives or if an intermediary places the securities on behalf of the issuer in the primary market[6].

ICO of a payment token intended to function as a mean of payment and which can already be transferred will require compliance with the AMLA, while an ICO of a utility token is not subject to the AMLA if its functionality mainly pertains to access to a blockchain for mainly non-financial purposes.

As for an ICO of asset tokens, which FINMA regards as securities, there are securities law requirement for trading such tokens.

Security Token Offerings (“STOs”) are a means for companies to emit securities. Profits could be distributed to the token holders directly, which gain in efficiency due to a potential reduction of the number of intermediaries and lower transaction costs[7].

The ability to issue programmable and traceable securities is an interesting prospect for companies. Investors need to identify themselves before they are allowed to buy the token and the transaction history of the token provides a simple way to identify beneficial owners. This offers benefits as regards to the owner's legal rights, the prevention of illegitimate voting and much more.

The difference between ICOs and STOs is that in case of ICOs, only a token is being sold in terms of a "virtual asset", which is only determined by supply and demand. ICO tokens did not entitle investors to receive profits and are much easier to conduct from a regulatory point of view.[8].

Swiss Civil Law

In 2019, the Swiss Federal Council submitted for approval the preliminary draft act to strengthen DLT and create legal safety by distinguishing the uncertificated securities[9] as per Article 973c of the Swiss Code of Obligation (CO) from the DLT uncertificated securities[10].

In Switzerland, rights can be securitized by way of a deed. According to a report of the Swiss Federal Council it is, however, difficult to classify security tokens accordingly[11]. FINMA considers asset tokens to be securities if they represent an uncertificated security and are standardized and suitable for mass trading[12].

Against that background, the Swiss Federal Council has proposed an amendment of the law to enable the legally secure transfer of uncertificated securities by way of an entry in decentralized registers, including blockchains.

The proposal was adopted by Parliament on September 25th 2020 will provide legal certainty for the application of DLT in the financial sector gives Switzerland the opportunity to further strengthen its position as a leading location for DLT companies[13].

The DLT proposal creates legal certainty: among other things, it ensures that the Anti-Money Laundering Act and the Financial Services Act also apply to market participants using DLT. Adjustments to the securities law will ensure that the investment tokens, which are structured like registered uncertificated securities, can perform a “securities-like” function[14].

Securities regulation

Swiss securities regulation applies to the issuance of security tokens, depending on the type of investor, geographical reach and total volume of funds raised. Financial regulators role is to maintain market confidence, financial stability and to protect unsophisticated / retail investors.

The type of investors the issuer can accept capital from and the filings and disclosures that the issuer must perform are subject to the Financial Services Act (FinSA), which introduces an investor segmentation regime, under which financial service providers must classify their investors in three main categories:

  • Professional investors, such as financial professionals;
  • Institutional investors, such as banks;
  • Retail investors, which are essentially investors who do not fall under the two other categories.

STOs are often issued directly on the platform (website) of the issuer. According to the FinSA, issuers of securities must publish a prospectus to be approved by a reviewing body authorised by FINMA[15]. Exceptions[16] to this rule include:

  • Offerings to professional investors;
  • Offerings to fewer than 500 investors;
  • Offerings to investors that invest more than CHF 100’000.-;
  • Offerings securities that have a minimal denomination of CHF 100’000.-; and
  • Offerings which are limited to a total amount of CHF 8 million.

Anti-Money Laundering

In the context of a fundraising operation, the concern of the regulator and partner banks is the origin of the funds and the ultimate beneficiaries of the investment. Under Swiss law, both issuing cryptocurrencies as well as the subsequent trading of such tokens may be subject to anti-money laundering requirements[17].

If a person or company is engaged in any activities, which constitute so-called financial intermediation, it is considered a financial intermediary under AMLA.

The AMLA provide for a series of obligations that financial intermediaries must fulfil, e.g., verification of the identity of the contracting parties as well as the beneficial owners of funds held (Know Your Customer KYC).

Other comments

With the increased focus on asset tokens, the market for digital assets, from ICOs to STOs, is rapidly penetrating the regulated world of financing possibilities, as evidenced by the traditional treatment of securities[18].

FINMA is expected to issue further licences to banks, securities dealers and trading institutions focusing on DLT/blockchain, which should enable institutional investors to enter the digital asset market on a larger scale[19].

The DLT proposal will enable targeted, selected adjustments to existing legal frameworks and will enable rapidly developing DLT technology to be flexibly integrated into the Swiss legal framework if required[20].

Footnote

[1] Haeberli D./Oesterhelt S./Wherlock A., Blockchain & Cryptocurrency Regulation, éd. gli, 23 October 2019.

[2] FINMA guidelines dates 16 February 2018: https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[3] Vogel A./Luthiger R./Lezzi L., Cryptoassets & Blockchain, in : Lexology, 16 December 2019, p. 6.

[4] FINMA guidelines dates 16 February 2018, p. 3.

[5] Yazgi A., ICO, STO, token: comprendre ces nouvelles formes de financement, in : Le Temps, 12 March 2019.

[6] Vogel A./Luthiger R./Lezzi L., Cryptoassets & Blockchain, in : Lexology, 16 December 2019, p. 7.

[7] Hostettler M., Securities Token Offerings (STOs) in Switzerland, in: MME Legal, 22 October 2018

[8] CMS Expert guide to security token offerings : https://cms.law/en/int/expert-guides/cms-expert-guide-to-security-token-offering

[9] An uncertificated security is a paperless security and can document” everything what a security can document, such as the ownership right to goods, gold or shares and claims

[10] Vogel A./Luthiger R./Müller W., ICOs vs STOs vs IEOs, in : Capital Market Switzerland 2019, 16 December 2019.

[11] Federal Council report: Legal framework for distributed ledger technology and blockchain in Switzerland: An overview with a focus on the financial sector, 14 December 2018, p. 94-95

[12] FINMA guidelines dates 16 February 2018, section 3.2.3.

[13] Schatzmann A. / Ruesch S., Distributed ledger technology – Switzerland’s pioneering role, Swissbanking, 25 September 2020

[14] Schatzmann A. / Ruesch S., Distributed ledger technology – Switzerland’s pioneering role, Swissbanking, 25 September 2020

[15] Article 35 FinSA.

[16] Article 36 FinSA.

[17] Haeberli D./Oesterhelt S./Wherlock A., Blockchain & Cryptocurrency Regulation, éd. gli, 23 October 2019.

[18] Vogel A./Luthiger R./Müller W., ICOs vs STOs vs IEOs, in : Capital Market Switzerland 2019, 16 December 2019.

[19] Vogel A./Luthiger R./Müller W., ICOs vs STOs vs IEOs, in : Capital Market Switzerland 2019, 16 December 2019.

[20] Schatzmann A. / Ruesch S., Distributed ledger technology – Switzerland’s pioneering role, Swissbanking, 25 September 2020

Joris Fasel
Joris Fasel
Senior Associate