The legal framework for DLT in Switzerland has been developed for years according to the principle of ‚technological neutrality‘, i.e. it should not be geared towards individual technologies, but rather should treat comparable activities and risks equally in principle wherever possible and reasonable. However, more recently, the pragmatic approach followed by the Swiss Parliament has been to adapt the existing principles-based law to the specific technological innovations and challenges in the context of DLT, creating certain exceptions to the ‚technological neutrality‘. A bill on DLT (‚the Bill‘) was introduced in 2019 and was adopted in September 2020. On 11 December 2020, the Federal Council (‚FC‘) brought into force, with effect from 1 February 2021, the parts of the Bill that enable ledger-based securities to be introduced, namely the amendments to the Code of Obligations (‚CO‘), the Federal Intermediated Securities Act, and the Federal Act on International Private Law. The remaining provisions of the Bill, namely the amendments to the Financial Services Act (‚FinSA‘), the National Bank Act, the Bank Act, the Financial Institutions Act (‚FinIA‘), the Anti-Money Laundering Act (‚AMLA‘), the Financial Market Infrastructure Act (‚FMIA‘), and the Debt Enforcement and Bankruptcy Act (‚DEBA‘) will most likely enter into force on 1 August 2021.
In a nutshell, the FC introduced three key adjustments to the existing federal legal framework.
The first adjustment concerns the CO and is the one that most of the others hinge upon. Originally, the CO did not recognise DLTs as an electronic register of rights (cf. art. 965 et seqq. CO). The new DLT law now implements such recognition by guaranteeing the function of negotiable securities to such registrations. The result is the creation of legal certainty around the issuance and trading of such registered securities on the blockchain.
The new art. 973a et seqq. CO concerns the introduction of a new type of share, the simple register uncertificated securities (known also as ledger-based securities). In principle, the DLT law has been meant to be technology-neutral and nowhere have been used the terms ‚DLT‘ or ‚distributed ledger technology‘, but only very general descriptions. Thus, the DLT law functionally describes the key elements of DLT. This brand new immaterialised security has been created with the aim to secure the transferability of rights such as claims or memberships, on the newly created DLT/blockchain platform. To create a registered certificated security, the parties must enter into a registration agreement or agree on a registration clause, while the register needs to fulfil certain requirements. Even if no technical requirements for the DLT platforms are detailed in the current DLT bill since they will be defined by the following regulation (i.e. a government ordinance), the register must ensure:
The new register of uncertificated securities is linked with the traditional securities market and can be used as a basis to create traditional intermediated securities, i.e. derivatives, or to exchange traded products with cryptocurrencies. The technology can be chosen like other types of securities, assuming that the articles of association of the company issuing it foresee such possibility and that all the conditions for the type of shares are met.
The second amendment relates to the FMIA, which does currently not provide specific regulation tailored for DLT securities traded on DLT trading systems; in particular, private parties cannot trade without an intermediary (Art. 34(2) of the FMIA) and two phases are needed for trading and post-trading (Art. 10 of the FMIA). The new DLT trading systems will be recognised as a whole and thus will require a single approval. The new type of authorisation will entail both trading and post-trading services, such as clearing, settlement, and custody of DLT-based securities. It has been created to regulate both financial institutions and private clients and will be subject to the AMLA.
The new DLT securities trading licence regulated by the FMIA has been defined as a professionally managed venue for DLT securities trading, the purpose of which is to offer trading, clearing, settlement, and custody services with DLT-based assets not only to regulated financial market participants but also to retail clients. The licensing requirements for DLT trading facilities are largely modelled on existing requirements for traditional trading venues and can be required in a smaller licence with lower requirements as well as a more comprehensive licence type for higher transaction volumes. With respect to the changes to the FinSA and the FinIA, an affiliation with an Ombudsman is no longer required if the financial services provider provides financial services only to institutional or professional clients. Besides, financial institutions that do not provide financial services do not have such affiliation requirements. To summarise, the new legal tools are designed to frame and make the DLT securities trading to retail clients safer, to facilitate the supply of DLT financial services to institutional or professional clients, and to make providing non-financial services related to DLT products less burdensome.
The third adjustment relates to the DEBA and governs the segregation of DLT-based assets in the event of a custodian’s bankruptcy.
In the context of the regulatory treatment of custody service providers, the treatment of digital assets in the event of a custodian’s bankruptcy is clarified in favour of the client. Therefore, the new regulation allows for the segregation of digital assets for the benefit of affected creditors or investors, provided that certain requirements are met. If the digital assets are held by the custodian in such a way that ensures the unique in-chain or off-chain (through a sufficient internal ledger) identification of the owner, the ownership of the digital assets remains with the client. In such a case, banking regulations are not triggered, even if digital assets from different clients are pooled.
In conclusion, the new legal framework allows Switzerland to stay at the forefront of the huge innovation made by the DLT systems in the corporate, financial markets, and banking law practice. As of 1 February 2021, companies will have the tools to incorporate DLT tokens into their organisation, since the latter will have the same features and legal treatment as certificated securities. In addition, the brand new FMIA licence ensures the implementation of safer and more convenient DLT securities trading venues, as they will offer a one-stop-shop solution for their clients, which is more apt for a DLT-based solution. In addition, the FinSA and FinIA rules concerning the Ombudsman affiliations will be more flexible by granting more latitude to financial institutions that do not provide financial services in the field of DLT. Finally, the legal certainty linked with the enforcement of DLT assets will be increased because of the segregation of DLT-based assets in the event of a custodian’s bankruptcy.