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Last Friday, the Swiss Parliament approved the new regulations for Blockchain and Distributed Ledger Technology (DLT Framework). Thereby, Switzerland has taken a further step to remain a key jurisdiction for FinTech, Blockchain and DLT Technologies and respective projects. The new legal framework is expected to enter into force early of 2021.
This new DLT Framework delivers advanced regulatory solutions and specific amendments in key areas, namely Civil law, Insolvency law and Financial market law, but also Anti-Money laundering regulation and International private law. These changes will bring increased legal certainty and remove obstacles surrounding blockchain applications, as well as reduce the risk of abuse.
In a nutshell, the core DLT activities that will benefit from the new DLT Framework are the following:
- (Security) Token Exchanges: Introduction of a new license type for trading venues focusing on digital assets (DLT Trading Facilities)
- Custody Service Provider: Clearer and lighter regulatory regime for digital asset custody providers
- Security Token Issuer: Introduction of a Civil law concept for digital securities (“asset token”), enabling the creation and transaction of digital uncertificated securities in a DLT ecosystem without legal uncertainties.
Digital Security Trading Facilities
The first central element of the new regulation is a new licence category for “DLT Trading Facilities” (DLT-Handelssysteme) introduced in the Financial market infrastructure law (FMIA). This new licence type has been defined as a professionally operated venue for the multilateral and non-discretionary trading of Digital (DLT) Securities, whose goal is to offer services in trading, clearing, settlement and custody with DLT based assets not only to regulated financial market players, but also private customers.
“DLT Securities” are securities suitable for mass trading that can take the form of either Uncertificated Register Securities, or other uncertificated securities provided they are held in distributed electronic registers and grant the creditors the exclusive power over the rights. The system allows entry to entities that hold a licence or recognition by the FINMA, but also foreign entities subject to an equivalent organ of supervision and even unregulated entities and individuals if they declare to be acting in their own name and on their own account.
Entities with a DLT Trading Facility license will be able to operate Organised Trading Facilities (OTF) as well, something which is notable as this was so far only possible for banks, securities firms and other authorised or recognised trading venues.
The licensing requirements for the DLT Trading Facilities are largely modelled on existing requirements for traditional trading venues, with adjustments made with respect to the specificities the distributed ledger technology brings. To meet the expected needs of Fintech-start-ups and larger players alike, the DLT Trading Facility License can be applied for in two versions: A smaller, leaner license with lower requirements as well as a more comprehensive license type for higher transaction volumes.
New regulatory framework for custody providers
The second major change brought by the DLT Framework is the clarification of the regulatory treatment of custody service providers for digital assets. In a nutshell, the provision of (pooled) custody services without a banking license requirement is made substantially easier.
Due to changes in the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) (as well as the banking regulations), the treatment of digital assets in a bankruptcy event of a custodian is clarified in favour of the client: The new regulation allows the segregation of the digital assets for the benefit of the relevant creditors or investors, provided certain requirements are met. If the digital assets are held by the custodian in a way that unambiguously allows the identification of the owner on-chain or off-chain (through a sufficient internal ledger), the property to the digital assets remains with the client. In such case, banking regulations are not triggered, even if the digital assets of various clients are pooled within the custody solution of the custodian.
New digital securities (DLT Uncertificated Register Securities)
Under the existing legal framework, the Civil law treatment of “security token” has created uncertainty. To solve this, the new law introduces a new type of digital securities, the so called “Uncertificated Register Securities” (Registerwertrechte). Alongside, new rules for corporations looking to issue shares in a tokenized form are being released. The goal of the legislator is to allow for a stable and legally robust tokenization of rights, through the electronic registration of rights, that entails the same protection and functionality as a security.
To create those Uncertificated Register Securities parties must meet a certain set of requirements put forth in the Code of Obligation: The register must through technical means grant only the creditors the power to dispose over their rights, excluding the debtors. The information regarding the content, functionality and agreement of the register must either be saved on the register itself or linked to the associated data. Similarly, creditors must be able to access all information concerning them in link to the register without the intervention of a third party. Most importantly, appropriate technical and organizational protective measures must be implemented to prevent any unauthorized changes to the register.
The creation itself is made by the parties, through a registration agreement according to which the relevant right is entered into a “Register of Uncertificated Securities” and may exclusively be asserted based on and transferred via the register.
It is still possible to register the Uncertificated Register Securities with a custodian (Verwahrungsstelle), which will give the register the same value as a “traditional” book-entry security.
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