On 14 December 2018 the Federal Council released a comprehensive report on the inclusion of blockchain technology within the Swiss legal framework – in particular, the Swiss banking regulations. The report will pave the way for bringing greater legal certainty for the Swiss blockchain ecosystem.
However, reports also show that Switzerland:
- is open to new technologies;
- already has a well-established legal framework for blockchain technology and business models;
- intends to further improve its leading position in innovation; and
- denies the fraudulent use of such technologies.
With this comprehensive report, the Swiss government has confirmed its established approach of applying Switzerland's existing and principle-based laws in a technology-neutral way. However, it also acknowledges that the existing legal framework will require timely amendments to solve specific issues.
With regard to the Swiss banking regulations, the Federal Council elaborated its position on two interconnected key issues:
- the applicability of the Banking Act to distributed ledger technology and blockchain business; and
- the treatment of crypto-based assets in bank insolvency proceedings.
The first issue was largely dealt with in 2017 with the extension of the settlement accounts exception from seven to 60 days, as well as the introduction of the sandbox regime (innovation area) in banking law for up to Sfr1 million of public deposits and from 1 January 2019 with the new fintech licence.
From a general financial market law perspective, on 16 February 2018 the Federal Council confirmed the approach of distinguishing three token categories (payment, utility and asset tokens) as established by the guidelines of the Swiss Financial Market Supervisory Authority (FINMA). Therefore, as all liabilities towards clients are deemed to be public deposits according to the Swiss banking regulations, payment tokens will also be regarded as such if held for clients by a custodian with access to private keys.
From 1 January 2019, companies such as crowd-lending platforms, trading platforms and payment service providers that operate outside the core area for banks (ie, interest margin businesses) will be able to accept public funds of up to a maximum of Sfr100 million on a professional basis provided that they neither invest nor pay interest on these funds.
The Federal Council set into force an amendment to the Banking Act and the Banking Ordinance to promote innovation in the fintech sector during its meeting on 30 November 2018. Further, FINMA has published respective amendments to its Anti-money Laundering (AML) Ordinance and guidelines for the new fintech licence.
Among other characteristics, the new fintech licence:
- requires a minimum amound of capital (ie, 3% of the collected public deposits, but at least Sfr300,000);
- is not subject to the complex capital and liquidity requirements that apply to banks;
- has substantially reduced accounting and auditing requirements compared with banks;
- does not fall within the scope of the deposit protection system;
- imposes information duties on clients; and
- requires a registered office and management in Switzerland.
According to the Banking Ordinance, client assets (including payment tokens) booked in settlement accounts for the settlement of client business are not considered deposits if the settlement takes place within 60 days and no interest is paid. This exemption generally applies to all kinds of business (eg, trading platforms, securities brokers/dealers and asset managers), but explicitly excludes foreign exchange and currency dealers.
Only persons acting professionally are required to obtain a banking licence. Since 2017, persons accepting public deposits (whether fiat currency or payment tokens) with a total value of up to Sfr1 million without investing it or paying any interest have not been considered to be acting professionally even if they accept public deposits from more than 20 clients. However, clients must be informed beforehand that such person is not subject to FINMA supervision and that their deposits are not covered by the deposit insurance scheme.
Tokens in insolvency proceedings
The Federal Council's report states that if the accepted tokens (eg, payment tokens such as bitcoin and ether) can be classified as deposits, the same bank insolvency rules concerning the proportionate satisfaction of creditors apply as for the acceptance of deposits in traditional currencies.
However, the report also states that there is much uncertainty in the existing law about the segregation of tokens in bankruptcy or similar insolvency proceedings. However, it is crucial whether
- the assets in the domain of the bankrupt party can be assigned individually to the entitled party; or
- a claim to return or an action of recovery, in analogy to property law, is no longer possible due to the mixing of the assets at issue with other assets, thus transforming the claim into a contractual claim.
Therefore, if private keys are held exclusively by the wallet provider (custody wallet provider), a distinction must be made as to how crypto assets are allocated thereby (eg, whether they are allocated to separate wallets for each client (segregated wallets) or held in so-called 'omnibus wallets').
This clarifies that, in general, custodian wallet and storage providers will need neither a bank nor a fintech licence if they maintain a separate wallet for each client, even though the custodian has access to the respective private keys.
As part of a planned consultation, the Federal Council will propose a provision in the Bankruptcy Code setting out a right to the release of data in the event of insolvency, including a claim to the transfer of crypto assets, and review a possible new provision applicable to bank insolvency proceedings regarding the segregation of crypto assets.
Capital requirements for tokens
Banks and securities dealers must hold certain capital in relation to the assets which they hold. The Federal Council's report stresses that capital requirements also apply to tokens held by banks and securities dealers. The regulatory treatment of tokens with respect to capital requirements is being discussed by the Basel Committee on Banking Supervision. Switzerland has yet to introduce capital requirements specifically for tokens. However, FINMA is in contact with banks and securities dealers holding crypto assets and currently recommends a prudent approach with rather high capital requirements.
The Federal Council's report states that the existing AML Act is already drafted in a technology-neutral way and that the scope of the act, compared with other international AML regulations, is extensive with regard to crypto business models. In general, payment tokens are treated like fiat currency under Swiss AML regulations.
Further, the Swiss Banking Organisation has published guidelines for its member banks regarding the opening of bank accounts for blockchain companies.
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