Understanding Switzerland's Distributed Ledger Technology Act

Understanding Switzerland's Distributed Ledger Technology Act

Discover how Switzerland’s DLT Act regulates blockchain technology and cryptocurrencies to foster innovation and ensure legal clarity for digital assets.

Key Takeaways

Switzerland's DLT Act officially regulates decentralized ledger technology and blockchain.
It provides a legal framework for tokenization, trading, and custody of digital assets.
The Act advances legal certainty for cryptocurrency operations and enhances investor protection.
DLT trading facilities can provide services to both institutional and individual traders.
Switzerland aims to maintain its status as a leading financial hub while implementing anti-money laundering measures.

Introduction

With the rapid evolution of technology, particularly in the field of blockchain and cryptocurrencies like Bitcoin, legal frameworks are struggling to keep pace. Countries worldwide are developing various regulatory approaches to address these advancements, leading to a complex landscape of Distributed Ledger Technology (DLT) regulations. While some nations prioritize swift legal clarity for the growing token economy, others remain cautious.

Liechtenstein, for example, is creating a comprehensive legal framework encompassing all aspects of the token economy—from creation to custody and exchanges. Conversely, Switzerland has tailored its existing securities laws to effectively cater to new blockchain developments. This article delves into how DLT and cryptocurrencies are regulated in Switzerland, specifically examining the Swiss Distributed Ledger Technology Act.

What is the Swiss Distributed Ledger Technology Act?

Switzerland has emerged as a pivotal financial hub in the blockchain sphere, particularly in its Crypto Valley, located in Zug. This area has attracted numerous blockchain and fintech start-ups, largely due to supportive regulations from the Swiss Financial Market Supervisory Authority (FINMA), which began issuing licenses to these companies in 2015.

Interestingly, until recently, Switzerland lacked specific legislation around cryptocurrencies or blockchain technology. Instead, regulators relied on existing laws because the country's principle-based regulatory approach favorably allowed this flexibility.

In 2019, the Swiss Federal Council initiated consultations to amend federal laws in response to rapid DLT advancements. The Swiss DLT Act officially came into force in 2021 following a swift legislative procedure, aligning various Swiss legal standards with the needs of decentralized digital ledger technology. This Act primarily aims to provide regulatory clarity while safeguarding investors and consumers.

As a result, the DLT Act addresses numerous legal gaps in the country’s framework and enhances the legal position for crypto assets and custodians. It impacts tokenization, investments, and capital markets and introduces a formal definition of electronic records.

Importantly, this framework allows for the creation of digital assets and outlines the operational requirements for private entities utilizing DLT technology. Companies in Switzerland are now mandated to disclose their activities, thereby ensuring transparency. Additionally, the DLT Act improves protections for crypto assets in bankruptcy situations, segregating them from other assets if a custodian defaults.

Furthermore, banks and financial institutions are allowed to hold crypto assets off their balance sheets without adversely affecting their capital requirements, potentially expanding cryptocurrency custody services among financial players. This framework not only creates new business opportunities but also encourages innovation for both new and established institutions.

DLT Securities Under Swiss Law

The DLT Act led to the amendment of ten federal laws, particularly the Code of Obligations, Federal Intermediated Securities Act, and the Federal Act on International Private Law, enabling the introduction of blockchain-based ledger securities.

One of the key innovations is the establishment of a new legal class in the Swiss Code of Obligations—ledger-based securities, which facilitate the tokenization of various assets, such as shares and bonds. This legal framework allows for easier storage, transfer, and trading of tokenized assets while ensuring they possess corresponding qualities to traditional securities.

For instance, with this new legal framework, financial institutions can interact with DLT securities directly through blockchain transactions without needing cumbersome paperwork, provided all involved parties consent. This flexibility extends beyond traditional trading structures, as the new infrastructure allows both companies and individuals to trade.

DLT Trading Facilities in Swiss Law

The Swiss DLT Act also introduces regulations for trading DLT securities. A new licensing category for trading platforms has been developed specifically for these DLT trading facilities, which operate using blockchain technology and allow for multilateral trading in DLT securities.

These regulated trading facilities can offer services such as trading, clearing, settlement, and custody of blockchain-based assets not just to traditional market players, but also to individuals. Additionally, they are permitted to provide custody and other services without needing an extra license, streamlining the process significantly. Importantly, all trading entities using DLT must register with FINMA to maintain regulatory compliance.

However, all DLT trading facilities must be hosted by Swiss entities, which means that purely decentralized platforms may struggle to acquire the necessary licenses.

DLT Act and Anti-Money Laundering Provisions

As Switzerland enhances its standing as a financial hub, it prioritizes anti-money laundering (AML) regulations, which are critical to maintaining integrity in financial operations. The DLT industry is under obligation to follow the same AML rules applicable to fiat currencies to combat money laundering effectively.

The DLT Act expands existing AML regulations, positioning DLT trading facilities as financial intermediaries subject to these rules. The law also broadens the scope of AML regulations surrounding virtual currency payment services, although it exempts software providers and licensors without enduring business relationships with end customers from certain obligations.

However, some critics suggest that these strict regulations might discourage innovative decentralized finance (DeFi) models from establishing their businesses in Switzerland, potentially nudging them toward less regulated jurisdictions.

Is the DLT Law Future-Proof?

Different jurisdictions are pursuing varied strategies in crafting DLT regulations. Many regulatory bodies lack a clear understanding of the disruptive potential of DLT technologies, and government institutions may exhibit slow adaptability, leading to legal rigidities.

With its comprehensive DLT Act, Switzerland stands out as a pioneer in crafting a thoughtful and robust regulatory framework for cryptocurrency and blockchain applications. Rather than creating entirely new laws, the Act adeptly modifies existing legislation, striking a balance that allows for innovation while providing necessary legal parameters.

At its core, the Swiss DLT Act defines legal conditions for digital asset custody, DLT securities issuance, and trading through DLT facilities, fostering an environment of legal certainty. This initiative not only enhances Switzerland’s reputation as a global financial center but also opens the door to broader financial inclusion by permitting individual traders access to these markets. The long-term impacts of the DLT Act, however, remain to be observed.

Written by Alexandra Overgaag.

Blockchain Regulation
Cryptocurrency Laws
Tokenization
Financial Market Regulation
Anti-Money Laundering
DLT Trading Facilities
Swiss Crypto Law