The draft DLT-law introduces selective amendments to different existing federal laws in order to improve the legal and regulatory framework and to increase legal certainty for business models based on DLT. One of the central pieces of the draft DLT-law consists of the creation of a new category of securities with substantially the same features as certificated securities that allow the digital transfer. The new category of securities will be able to embody so-called asset tokens, e.g. shares or bonds registered on the blockchain.
1. Background and Report of the Federal Council
In December 2018, the Swiss Federal Council published a report on the legal treatment of DLT solutions in the financial sector with the aim to create the best possible framework conditions so that Switzerland can establish itself and evolve as leading, innovative and sustainable location for fintech and blockchain companies.
Even if the Swiss legal and regulatory framework is generally well suited to embrace new technologies due to its principle based approach, the report of the Swiss Federal Council highlighted the following areas that should be amended in line with the above-mentioned goals:
- Civil law: Increase legal certainty for the digital transfer of rights, mainly rights that can be referred to as asset tokens, embodying shares, bonds and derivative instruments.
- Bankruptcy laws: Introduce provisions for the segregation of crypto-assets and data without asset value in the event of bankruptcy of a financial service provider (including corresponding amendments to the banking insolvency procedures).
- Financial markets laws: Create a new licence category for blockchain-based financial market infrastructures which allows access to individuals with the possibility of simplified requirements for small players.
- Anti-money laundering laws: Confirm the application of the Anti-Money Laundering Act (AMLA) to decentralised trading platforms.
The draft DLT-law addresses each of these items as amended after the public consultation and as outlined below.
2. Civil law amendments: New uncertificated registry securities (Registerwertrechte) created to embody so-called asset tokens
2.1 Issues to solve
Asset tokens are usually defined as claims or rights against an issuer and are mainly treated as securities by FINMA. The transfer of claims (Forderungsabtretung) is currently subject to the written assignment, i.e. the signature of the transferor is required. Asset tokens would also not fit into the current system of intermediated securities. This had led to uncertainties regarding whether the assignment of asset tokens by digital means is permitted, even though certain scholars and state bodies have positioned themselves to answer this question positively.
2.2 Definition and denomination
The Swiss Federal Council initially suggested to create “uncertificated DLT securities” (DLT-Wertrechte), a new legal instrument sharing the same main features as traditional certificated securities (Wertpapiere) but allowing their transfer by digital or electronical means. After public consultation, the draft DLT-law has kept this new instrument but re-named it to “uncertificated registry securities” (Registerwertrechte, URS). Corresponding to the legitimating function of certificated securities, the debtor of URS is only obliged to fulfil towards the holder of the right as shown in the registry.
2.3 Creation of security interests
In line with the above, the draft DLT-law permits the creation of security interests over URS without physical transfer. It is provided that a security right over a URS can be perfected if the security right is recorded and visible on the registry and the security taker can get the power of disposition in case of a default. In addition, the provisions governing the pledge of certificated securities shall apply to the pledge of URS.
2.4 Registry requirements
The requirements for the registry of URS are kept to a minimum, following a principle based regulation and leaving the service providers sufficient room for the development of competitive solutions. The new regime requires an agreement between the issuer and the URS holder – for shares in the articles of incorporation and for bonds in the particular terms of such bonds – on the following terms:
(i) URS are created and registered in a registry of uncertificated securities with the following features;
- through the registry, the holder of URS acquires the sole power of disposition of its rights;
- the integrity of the registry system is protected by technical and organisational measures, e.g. that the management by different independent participants protects the system against unauthorised interferences or changes – which is a typical feature of blockchain;
- the content of the rights conferred by URS, the functioning of the registry and the agreement to register URS are recorded in the registry or in the accompanying data linked to the registry; and
- the holders of URS can access the information relevant for them and register their rights without any intervention of third parties.
(ii) URS will only be enforceable and transferable by means of the registry.
According to the draft DLT-law, it will be the duty of the debtor (issuer) of URS to ensure that the registry is administered according to the aforementioned agreement. The debtor will be liable for any damages arising from the malfunctioning of the registry system following the principles of contractual liability (Vertragshaftung). The comments of the Swiss Federal Council to the draft DLT-law also mention a possible pre-contractual liability during negotiations (culpa in contrahendo). In addition, the draft DLT-law creates a statutory liability of the debtor for the damages caused to holders of URS by a negligent provision of false, incomplete or misleading information, following the example of the prospectus liability.
2.6 Amended provisions
The new provisions are inserted in Art. 622 and Arts. 973d to 973i of the Code of Obligations (CO). In order to align the amendment with other laws:
- URS shall also qualify as “securities” (Effekten) according to the Financial Services Act;
- The Federal Act on Intermediated Securities shall also be amended and shall include URS as possible instrument to create intermediated securities (Bucheffekten);
- Documents of title to goods (Warenpapiere) may also be issued in the form of URS;
- The Private International Law Act shall be amended in order to clarify that URS are also covered by the relevant provisions on certificated securities and documents of title to goods.
3. Amendments to the bankruptcy laws: segregation of crypto-assets
The draft DLT-law also aims to protect so called crypto-assets, i.e. asset tokens and payment tokens, in the case of bankruptcy of an intermediary having the power of disposition over such tokens.
3.1 Amendments to the Debt Enforcement and Bankruptcy Act (DEBA)
The draft DLT-law introduces two new provisions as Arts. 242a and 242b into the DEBA, according to which crypto-assets that are held by an intermediary can be segregated from the bankruptcy estate for the benefit of the owner of such assets. The same segregation framework applies to data without an asset value. Under the current law, both, the crypto-based assets and data without an asset value, are not clearly covered by the concept of “objects” or rights in rem as opposed to contractual rights or claims, and the applicability of segregation is not certain.
3.2 Amendments to the Banking Act (BA)
Similarly, when banks act as depository of crypto-assets, their segregation in case of bankruptcy shall be made possible. For this purpose, the draft DLT-law qualifies crypto-assets as deposits under Art. 37d of the BA provided that they can be assigned to individual customers. Accordingly, no deposit insurance (Einlagensicherung) is applicable to such assets given that they shall not become part of the balance sheet of the bank and they shall be segregated in case of bankruptcy.
4. Amendments to the financial market laws: Creation of a new category of DLT-trading facility (Handelssystem) for the trade of URS
The new regime proposes an amendment to the Financial Markets Infrastructure Act (FMIA) to create a new category of license for DLT-trading facility to which also natural persons can be participants. The DLT-trading facility shall be an institution for the multilateral trading of DLT-securities, with DLT-securities being defined as URS according to the draft Art. 973d CO mentioned above (including so called asset tokens but excluding so called payment tokens). Even though the general licensing requirements of FMIA apply, the draft DLT-law empowers the Federal Council to issue simplified rules in order to allow new players to enter the market.
The draft DLT-law includes a new Art. 73a in the FMIA, according to which DLT-trading facilities share the following features: (i) they are run professionally and are intended for multilateral trading in standardized DLT-securities; (ii) they have the purpose of the simultaneous exchange of bids between several participants and (iii) the conclusion of contracts is based on non-discretionary rules. Additionally, in order to distinguish the DLT-trading facility to a multilateral trading facility, DLT-trading facilities must additionally fulfil at least one of the following three conditions: a) it admits to trading natural or legal persons different from the financial institutions that usually have access to traditional trading facilities; b) it provides custody services based on unified rules and procedures; or c) it provides clearing and settlement of transactions with DLT-securities based on unified rules and procedures.
The allowance to conduct post-trading services such as depository services and clearing and settlement makes DLT-trading facilities different from other trading facilities such as multilateral trading facilities and stock exchanges.
5. Other laws amended by the draft DLT-law
5.1 Regulatory requirements for banks amended for the deposit of crypto-assets
Due to the fact that crypto-assets which can be segregated in case of bankruptcy do not appear in the books of the bank, they do not qualify as public funds or deposits which would trigger the banking license requirement. Leaving the deposit of crypto-assets unregulated may, according to the comments of the Swiss Federal Council to the draft DLT-law, entail important operational risks. Accordingly, other regulatory mechanisms shall apply to the collection of crypto-assets. On the one hand, the collection of such assets is planed to trigger the application of the fintech licence according to a revised Art. 1b of the BA and on the other hand a new provision is planed to be included as Art. 4sexies of the BA according to which FINMA can determine a maximum amount of such crypto-assets to be collected based on the risks of the particular business.
5.2 AML regulations
Following the creation of the DLT-trading facility, such institution shall be considered as financial intermediary according to Art. 2(2) AMLA, and therefore become subject to AMLA.
5.3 Swiss National Bank Act (SNBA)
DLT-trading facilities shall, according to the draft DLT-law, be included in Art. 19 and 20 SNBA as financial market infrastructures that, in case of systemic relevance, are under oversight of the Swiss National Bank and respectively subject to a duty of information at the request of the Swiss National Bank.