On September 25, 2020, the Swiss Parliament adopted
certain amendments to Swiss legislation pursuant to which the Swiss
legal framework will specifically recognize a new type of
dematerialized securities, based on DLT or similar technologies,
and financial infrastructure laws will be adapted to be compatible
with such new financial instruments.
1. Background
In December 2018, the Federal Council published a report on the
legal framework governing blockchain and distributed ledger
technologies (“DLT“) in the Swiss
financial sector. The report concluded that Swiss legislation was
generally well suited and compatible with the use of new
technologies, including DLT. However, a few points for improvement
were identified and after a consultation process, the Federal
Council prepared and introduced a draft aimed at adapting Swiss law
to DLT on November 27, 2019 with targeted adaptations to nine
federal laws affecting both civil law and financial market
laws.
The new legislation aims at removing barriers and limiting the
risk of abuse associated with DLT applications, such as Blockchain,
and making Switzerland an innovative and sustainable leader for
companies specializing in new financial technologies
(“FinTechs“).
Parliament made only a few changes to the original draft
proposed by the Federal Council.
2. Purpose and concept
In substance, the draft legislation focuses on (a) improving
legal security as regards the creation, transfer and custody of
DLT-based assets (and in particular the “tokenization”
process through which financial instruments are represented by
digital tokens), (b) data restitution in insolvency situations and
(c) introducing a new financial market infrastructure, better
adapted to the realities of DLT-based assets.
- Legal security – DLT-based
assets
The amended law makes it possible to represent uncertificated
financial instruments and securities by digital tokens, so that the
instrument cannot be transferred without the token. Only rights
that can be securitized and that are freely transferable may be
incorporated in a ledger and then transferred digitally on the said
ledger (so-called “registered
rights“).
These registered rights must meet certain requirements, in
particular be entered in an electronic register based on a
technology which offers protection against manipulation, on which
the registered rights may be checked by creditors and validly
transferred by a transaction carried out exclusively in the
register.
The type of technology used is not a defining criterion, so that
the concept of registered rights does not refer to either
blockchain or DLT as a defining criterion. The relevant provisions
describe the central characteristics of distributed ledger
technologies which justify granting such registered rights the same
effects as a certificated security. The model implemented into
Swiss law is similar to the tokenization models that trade bodies
such as the Capital Markets and Technology Association (www.cmta.ch) developed
over the last few years, and which served as a basis for offerings
of tokenized equity securities so far.
The specific technical requirements for registers will not be
specified in the ordinance. The practical implementation of the
legal provisions will not be in the hands of the government, but in
those of the industry who are expected to develop and agree on best
practices or standards for creating and dealing with registered
rights in compliance with the amended law.
The treatment of digital assets (including cryptocurrencies and
other DLT-based assets) in case of bankruptcy or insolvency of
intermediaries and custodians has been clarified, to ensure that
digital assets held by professional intermediaries be segregated in
case of bankruptcy, provided certain minimal requirements are
complied with.
- Data restitution
At this stage, the law did not go as far as proposing a data
ownership framework generally, but this notwithstanding a person
who certifies a legal or contractual right to data will not only be
able to demand access to such data, but also to have it returned in
case of bankruptcy or insolvency. The amended law provides a
framework for handling such requests and sets the respective
requirements.
In particular, the new procedure allows the recovery of data
from the bankruptcy estate, it being specified that the costs would
be at the data subject expense, and in case of dispute the data
would not be destroyed or exploited prior to the availability of a
final court decision.
- New financial infrastructure for
DLT-securities
A new category of authorization for blockchain- or DLT-based
financial market infrastructures is created. The new DLT-trading
facility will be able to provide trading, clearing, settlement and
custody services for DLT-based assets as part of a single
integrated market infrastructure, something which was not possible
under current law. Further, DLT-trading facilities will be allowed
to admit not only regulated financial intermediaries as
participants, but also other legal entities and private clients,
provided they trade in their own name and for their own
account.
The requirements are adapted to ensure that small DLT-based
infrastructures be able to become licensed without setting
excessive barriers to entry in terms of capital and other
requirements.
The Financial Institutions Act (FinIA) is also amended to allow
for a securities firm license to operate an organised trading
facility (OTF) only, something which was not possible under the
current law and FINMA practice.
3. Implications
This targeted revision of the Swiss legislative framework to
improve legal certainty in relation to new technologies such as DLT
is a welcome development not only for FinTechs and the broader
adoption of new technologies in Switzerland, but also for capital
markets and the digitalization of the Swiss economy as a whole.
In particular, Swiss and foreign issuers will be in a position
to securely harness the benefits of digitalization and DLT for
raising capital through tokenized debt or equity issuances at a
time where access to funding is critical. Likewise, the new
legislation paves the way for the completion of the full value
chain for digital assets and tokenized financial instruments, with
the introduction of a new specific license for digital trading
infrastructures.
Parliament also used the opportunity to clarify the requirements
for financial institutions to become affiliated to an ombudsman
(mediation office), namely: (a) waiver of the requirement for
financial service providers who service exclusively professional
and institutional clients, and (b) clarification that only
financial institutions which actually provide financial services
(other than exclusively to professional and institutional clients)
are subject to such requirement. The first change is a welcome
simplification which will lower the administrative burden for Swiss
and foreign financial service providers. The second is a
clarification most relevant for trustees (assuming they do not also
provide financial services) and proprietary traders who are subject
to licensing as a securities firm.
4. Next Steps
The amended legislation will still be subject to a possible
referendum, once it will have been published in the official
version. A referendum is unlikely given the broad support the
legislative amendments have seen so far, as evidenced by the fast
adoption of this new legislation in Parliament.
In terms of next steps, significant additional work will be
required on implementing ordinances, which are expected to be
issued for consultation before the end of the year. If things go
according to plan, the new legislative framework may enter in force
as early as mid-2021.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
