Switzerland is moving forward fast as the government proposes DLT-uncertificated rights with securities nature, wrote authors Alexander Vogel and Reto Luthiger from Switzerland-based international law firm Meyerlustenberger Lachenal.
Switzerland’s Federal Council initiated during its meeting on 22 March 2019 a public consultation on the adaptation of specific federal law provisions to developments in DLT and blockchain. This further underlines the emphasis of the government on creating the best possible framework to allow Switzerland to establish itself as a leading, innovative and sustainable location for fintech and DLT companies. At the same time, it wants to prevent abuses and ensure the integrity and good reputation of Switzerland as the Crypto Nation as well as a major financial center and business location.
New instrument of DLT-uncertificated rights
The Federal Council proposes to create in the Swiss Code of Obligations the possibility of an electronic registration of rights that can guarantee the functions of negotiable securities with the intention to increase legal certainty in the transfer of DLT-based assets.
Inter alia, the Swiss Code of Obligations shall be amended with a new distinction between uncertificated rights without securities nature and uncertificated rights with securities nature (so-called DLT uncertificated rights). All rights that can be securitized are eligible to be a DLT uncertificated right, e.g. almost all types of contractual rights, rights in rem only with regard to bonds and debentures with security rights over real property (i.e. in particular not pure ownership rights) or corporate member rights in the form of shares.
Uncertificated rights have security nature, i.e. qualify as DLT uncertificated rights, if they
- are – based on a contractual agreement of the parties – recorded in a distributed electronic ledger (i.e. a register based on DLT); and
- can only be invoked through this register and transferred to others.
Such DLT based register must fulfil some requirements, in particular
- the functions of DLT uncertificated rights, the functioning of the DLT based register and the registration terms must be disclosed in the register itself or in data linked to the register;
- the register has to ensure state-of-the-art functional reliability and data integrity; and
- the parties may at any time consult the entries in the register and the information concerning them.
As a consequence, DLT uncertificated rights can be transferred validly according to Swiss civil law by amending the register, i.e. by transferring a token from one wallet to another wallet.
Tokens in insolvency proceedings
In the Federal Law on Debt Collection and Bankruptcy, the segregation of cryptoassets in the event of bankruptcy shall be expressly regulated in order to increase legal certainty.
Four situations have to be differentiated according to the proposed amendments if a wallet provider holding crypto assets for users is subject to bankruptcy or similar procedures:
- If the wallet provider has no access to private keys (non-custody wallet provider) the affected crypto assets obviously build not part of the bankruptcy estate of the wallet provider;
- If the wallet provider has not access to all private keys of a multisignature wallet, the user can request the private key based on a new provision regarding the access to data;
- If the wallet provider has access to all private keys (custody wallet provider) and the DLT based register can assign them at any time to the individual users, the user may claim for restitution;
- If the wallet provider has access to all private keys (custody wallet provider), but the DLT based register cannot assign them at any time to the individual users, the private keys and as a consequence thereof the crypto assets build part of the bankruptcy estate of the wallet provider.
In case a bank has access to all private keys of crypto based assets of clients and the DLT based register can assign them at any time to the individual clients, such crypto based assets will be regarded as separable deposited assets in the event of the bank’s bankruptcy.
New license for DLT trading facilities
In financial market infrastructure law, a new authorization category for so-called “DLT trading facilities“ is to be created. These are intended to be able to offer regulated financial market players and private customers services in the areas of trading, clearing, settlement and custody with DLT-based assets. Such DLT trading facility would allow for multilateral trading of DLT securities based on non-discretionary trading rules with direct access for all kinds of participants (including retail clients).
Finally, it should also be possible in future to obtain a license to operate an organized trading facility (OTF) as a securities firm. This requires an adaptation of the future Financial Institutions Act because as of now, a license as a securities dealer is not being granted for the only purpose of operating an OTF by the Swiss regulator FINMA.
AML and terrorist financing
The Federal Council has also asked for clarification as to whether legislation in the area of the prevention of money laundering and terrorist financing should be adapted with regard to crowd-donating and crowd-supporting platforms. At the moment, relatively modest donations are collected via these platforms. In addition, other jurisdictions are currently also refraining from regulating such activities. The Federal Council is therefore of the opinion that it would be disproportionate at present to subject crowd-donating and crowd-supporting platforms to the Anti-Money Laundering Act. It will continue to monitor developments and, if necessary, reassess whether such platforms should be subject to the Anti-Money Laundering Act.