Capital markets News

Swiss pass law supporting blockchain registries for security tokens

swiss regulation law

On 10 September 2020, the Swiss parliament passed a law to update existing corporate and financial regulations to make way for blockchain and distributed ledger technology (DLT), reported SwissInfo. The law comes into effect early next year. The ‘Blockchain Act’ aims to welcome decentralized technologies while maintaining Switzerland’s integrity and reputation as a business and financial hub. 

We contacted the SIX stock exchange because its Digital Exchange (SDX) is expected to launch in Q4. A statement from SIX has been added below.

The Blockchain Act

Unlike its neighbor Liechtenstein which created exclusively new laws for blockchain, Switzerland did not see the need to do so given its regulatory flexibility, therefore only amending its existing laws. The Swiss Federal Council specifically pointed out that because blockchain and DLT is still developing, fundamentally adapting its legal framework could have unforeseen consequences. Nevertheless, in line with the conclusion of its 2018 report that we explore below, amendments are necessary. 

The recommendations aim to increase legal certainty and remove potential hurdles for the technologies. A distinction is made between payment tokens or cryptocurrencies and security tokens, which have the same legal position as traditional securities. With respect to securities law, the main change is to support the existence of tamperproof electronic registries, although details will be left up to contract. Bankruptcy laws will also be amended to make room for crypto assets as will insolvency laws, particularly for custodians that go out of business. Financial market regulations will be adjusted to create a new license category for DLT trading systems, providing more flexible authorization. 

Interestingly, the Blockchain Act does not address central bank digital currencies (CBDCs) or the possibility of e-Francs for public use. The Swiss central bank will be free to decide on the matter of ‘registered values’ in the future, and CBDCs will be further explored in a separate document. Tax aspects are also not taken into account.

December 2018 Report

The Blockchain Act passed through the Swiss Senate unopposed this summer, after a consultation in December 2018. The consultation’s report on the legal framework for blockchain and DLT in the Swiss financial sector concluded that while its existing framework is flexible enough to accommodate blockchain and DLT opportunities, it does need some adjustments. 

As a general principle, the aim was to ensure innovation-friendly and balanced frameworks, which would allow them to make quick adjustments where necessary, especially if there were gaps regarding blockchain and DLT. There would need to be a technology-neutral approach to the legislation, with an ability to make exceptions where necessary. Wisely, the report recommended the Council to listen to market and societal demand on the technologies, a move warmly welcomed by the Swiss blockchain industry.

True to its word, for the Act, the Federal Council took recommendations from several academic, commercial and legal experts, for example, Swisscom’s Head of Technology Banking, Volkmar Beck, and SIX Digital Exchange Chief Digital Officer Sven Roth. 

As of next year, Switzerland will have a regulatory framework that is among the most advanced in the world.’ – Heinz Tannler, President of Swiss Blockchain Federation.

SIX Digital Exchange

Meanwhile, the SIX Digital Exchange (SDX) had planned to launch in Q4 2020. They explained that this legal change does not impact its timing. A spokesperson issued the following statement:

We very much welcome the fact that the Federal Council has presented a pragmatic approach to parliament with selective adjustments to existing laws and that a dedicated DLT/Blockchain law is to be dispensed with.

Switzerland will thus gain speed and flexibility. In addition, the chosen approach is better suited to maintain technology neutrality as far as possible. At the same time, the proposal creates legal certainty for the token economy in terms of reliable framework conditions.

In principle, trading in digital assets (i.e. trading in rights by means of manipulation-resistant electronic registers) is already possible now, based on the existing legal framework. Accordingly, SDX has submitted applications to FINMA for a license to act as a central depository and as a stock exchange. With these licenses, SDX will be able to list, offer for trading, hold and settle digital assets.

Since the SDX’s license applications are based on existing law, the new DLT legislation does not affect the licensing process and will not have a direct impact on the future operational activities of the SDX.

However, the revision will generally improve the existing legal framework for trading digital assets and clarify certain uncertainties, particularly in civil and bankruptcy law.

This will increase legal certainty, enhance the attractiveness of the entire Swiss financial center regarding DLT/Blockchain and ensure investor protection. It should be ensured that the DLT trading systems to be newly licensed are also subject to the same rules as the existing financial market infrastructures.

So you see, there is no foreseeable delay because of this law. We are still on track and keep doing so.

Update: The article has been updated with a response from the SIX Digital Exchange (SDX)