A look at the highlights of Switzerland Blockchain Legal Framework
Federal Council “wants to create the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies and innovative companies in general. At the same time, the Federal Council attaches great importance to ensuring the integrity and reputation of Switzerland as a financial center and business location.”
Thus starts a very encouraging framework released by the Switzerland Federal Council.
We say encouraging because right in the Executive Summary page of the report Federal Council states “swiftly make targeted adjustments as needed where there are gaps or obstacles with regard to DLT/blockchain applications,” making it explicitly clear that they want to be global leaders in the Blockchain space.
Building a framework on the principle of Bottom-up
Federal Council bases its approach to Blockchain and DLT on certain core principles.
Principle number 1: Bottom-Up approach
First among these is Bottom-Up Approach which works on the premise that “preferences of the market and society should decide which technologies prevail” “Bottom-up approach: The preferences of the market and society should decide which technologies prevail, while policy should ensure optimal and innovation-friendly framework conditions.”
In other words, Federal Council wants to take a position that allows for technology to develop and prove itself.
Principle number 2: Targeted adjustments
Federal Council also proposed changed based on targeted adjustments to the existing framework to bring the required adjustments more swiftly.
Principle number 3: Technology Neutral framework
Every new technological advancement should not question the existing framework, rather the framework should be based on firm principles that are technology agnostic. Such Framework should be accommodating all technological advancements demanded by the times of change while nimble enough to make exceptions where it is in the best interest of all.
Principle number 4: Legal certainty to combat abuse
Friendly rules do not equate rules free. This is another principle that the Federal Council has considered in building the framework. It is the objective of the Federal Council to create a conducive environment for innovation while upholding the strict stand against fraudulent or abusive behavior.
Principle number 5: Cultivate dialogue with the industry
Develop an openness of the regulatory bodies with the industry experts to facilitate ongoing dialogue to position Switzerland’s legal framework up-to-date with innovation.
e-Franc to be available by end of 2019
Among other aspects of building this framework, Federal Council alludes to making Crypto Franc (e-Franc) available by end of 2019.
These other aspects in building the framework include creating a congenial tax environment, issuing digital identification (E-ID) and providing access to bank accounts.
Data protection issues related to blockchain and DLT space will be studied by an interdisciplinary group of experts appointed by the Federal Council and the report clarifying the requirements is expected to be available by Mid 2019.
Stable coins as the first step toward broader adoption
Among other things, the report talks about the basic structure of a blockchain (DLT), various features including how ICOs work.
On page 37/162, report talks about volatility as being a big concern and how a crypto token backed by conventional currency could help achieve stability so that technological advantages could be brought to masses.
Token exchanges do not need a license, securities token trading platforms do
“The operation of a trading platform for tokens classified as securities needs authorisation. By contrast, the operation of a trading platform for non-securities (e.g. pure payment tokens) does not require authorization as a financial market infrastructure.”
This means, exchanges that deal with digital assets like Bitcoin or Ethereum that have been concluded as non-securities – do not need to be registered. Trading platforms that deal with securities tokens need authorization.
CHF 100 million deposit is just tip
Fintech authorization proposed gives companies permission to accept deposits of up to CHF 100 million whether in conventional currency or cryptocurrency. However, if such a Fintech company accepts deposits for safe-keeping purposes – then there is no maximum limit in terms of deposits accepted.
The second part is very important.
It hands over right to operate a custodial service to Fintech companies. It is important to note that the Fintech company can accept both non-securities tokens as well as securities tokens without regard to maximum limits or additional registrations.
Adopting mutatis mutandis, meaning, changing what needs to change to accommodate an exception without changing the main principle, depending on a case-by-case basis the CHF 100 Million can be increased to accommodate any future needs.
Activities exempt under Anti Money Laundering Act (AMLA)
Following activities are specifically exempt from the AMLA rules.
Ø Non-custodian wallets providers
Ø Fully decentralized trading platforms
Ø Issue of pure asset and utility tokens
If in any of these activities, the provider has any access or control of accounts (and funds) – then the AMLA rules apply. The premise here is that the technology is enabling the transfer of value and while the providers ‘facilitate’ the service – they cannot control the movement of assets (crypto) on the platform.
For instance, wallets are completely in control of users who possess private keys. Fully decentralized platforms operate autonomously. Once issued, tokens are in possession and control of the users (purchases) and are no longer in the hands of the issuer.
If this not being the case, the issuer (or service provider) exhibits any control over the movement of funds – then such provider is subject to AMLA rules.
Step in the right direction
Switzerland has not banned any type of crypto tokens in this framework. Rather, it proposed that the utility tokens can be freely issued within the current legal framework without being regarded as unlawful.
Custodial services are not subjected to the CHF 100 Million limit whether such custodial service holds (for safekeeping) utility tokens or securities tokens. Anti Money Laundering rules do not apply to non-custodial wallet providers, fully decentralized trading platforms or issuance of asset/utility tokens.
Service providers and companies thinking to deal in securities tokens will have to comply with the existing legal framework that applies to traditional securities issuance.
All in all, Switzerland’s stance on encouraging the blockchain technology space is really commendable.
Thank you for reading this article.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.
RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says “what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.” Of course, that is just his opinion.