Blockchain and distributed ledger technology are among the most remarkable and potentially promising developments in digitalisation. Switzerland has taken a pioneering role in the crypto-community with the home of the “Crypto Valley” in the Canton of Zug, the technology-neutral DLT Act and the FINMA-approved SIX Digital Exchange.
Tokens are no longer an insider tip for “digital natives”, but have gained increasing interest among investors. Those who are not fintech specialists probably have many unanswered questions about them, in particular regarding the applicable legal and regulatory framework.
General classification of tokens
Swiss financial regulation in general, and FINMA’s regulations and guidance in particular, is principle-based and technology-neutral. This is also true for the legal framework applying to tokens that mainly focuses on their economic function (“substance over form”). Swiss law provides some flexibility to explore innovative business models, but requires that projects be reviewed and evaluated on a case-by-case basis by applying a “same risks, same rules” assessment. For projects related to the issuance, trading or custody of tokens, FINMA has made a basic classification, acknowledging that hybrid forms and transformations are possible, with three groups.
Payment tokens / cryptocurrencies
Firstly, payment tokens are intended only as means of payment and do not give the holder any claims against the issuer. Although payment tokens do not qualify as legal tender under Swiss law, they can be used as a private means of payment (e.g. Bitcoin).
Secondly, utility tokens provide access to a digital utility or service (e.g. not a financial consideration) against the issuer on an already operational blockchain (e.g. Ethereum).
Thirdly, asset tokens (or security tokens) are tokens that contain, for example, claims to dividends, interest payments, membership rights or represent shares in a company. From an economic point of view, asset tokens represent in particular a share, bond or derivative financial instrument and can, therefore, be compared with conventional financial assets.
The relevance and application of Swiss laws and regulations to tokens has to be assessed according to the individual case. In generic terms, it can be said that asset tokens are rather heavily regulated, payment tokens are less regulated and utility tokens are rather unregulated.
In 2020, the Swiss Parliament unanimously approved the DLT (distributed ledge technology) Act, a framework act comprising a bundle of amendments to various existing Swiss federal laws, in particular addressing the following two areas:
Civil securities law / DLT rights
With the introduction of so-called DLT rights (Registerwertrecht), the legal basis for uncertificated register value rights as an instrument for the digitalisation or tokenisation of assets (rights), respectively, was created. DLT rights can include all types of rights under private law that can be securitised and are, therefore, customised for asset tokens and utility tokens. The introduction of DLT rights removed the main obstacles to the creation of a functioning primary and secondary market for digital assets.
Insolvency law / segregation of crypto-based assets
In practice, crypto-based assets are often not held in custody by the beneficial owner but by a third party (e.g. wallet provider). Investments in tokens must be chosen carefully, since in the event of the provider’s bankruptcy the power of disposal is of fundamental importance for segregation and the costs of segregation could be a barrier for investors.
SIX Digital Exchange (SDX)
On 10 September 2021, FINMA approved for the first time a stock exchange and a central securities depository for token trading. The SDX is a platform which intends to operate a fully integrated end-to-end trading, settlement and custody service based on DLT for digital assets.
The principle-based regulation creates a legal framework with legal certainty, but without unnecessarily restricting market participants. There is a good chance that the existing growth in digital assets will receive a new boost, not least from the DLT Act and the SDX. Since transactions in tokens are very risky, they require in-depth expertise or advice from a trusted advisor/partner.
- DLT is the logical consequence of securitisation, which potentially affects many processes in the financial industry. With SDX, a FINMA-regulated digital market infrastructure is based on DLT.
- Although legal certainty has significantly increased, this is still a business area that is extremely risky and requires expertise.
- Intermediaries are well advised to familiarise themselves with this business field and, in particular, to prepare the corresponding contractual documents and risk clarifications/disclosures.