Introduction
Applicable laws
Switzerland has not enacted specific legislation governing the provision of custody services for crypto assets. As a result, Swiss financial market laws applicable to custody services for traditional financial assets may also apply to custody services (and related services such as brokerage services) for crypto assets. These laws include, without limitation:
- the Swiss Banking Act of 8 November 1934 (the Banking Act);
- the Swiss Financial Institutions Act of 15 June 2018 (the Financial Institutions Act);
- the Swiss Financial Services Act of 15 June 2018 (the Financial Services Act);
- the Swiss Financial Market Infrastructure Act of 19 June 2015 (the Financial Market Infrastructure Act); and
- the Swiss Anti-Money Laundering Act of 10 October 1997 (the Anti-Money Laundering Act).
That said, Switzerland adopted the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the DLT Act), which came into force in 2021. The DLT Act introduced various amendments to Swiss laws to take account of the potential offered by distributed ledger technology (DLT).
Notably, the Banking Act and the Swiss Federal Act on Debt Enforcement and Bankruptcy of 11 April 1889 (the Debt Enforcement and Bankruptcy Act) were amended to clarify the conditions for the segregation of crypto assets in the event of a crypto custodian's bankruptcy. These amendments enhance Switzerland's appeal as a jurisdiction for the safekeeping of crypto assets.
Notion of cryptoassets
There is no universally accepted definition of the term 'crypto assets'. For the purposes of this publication, crypto assets are defined as any type of financial assets, whether natively digital or digitised, registered on a blockchain or another digital, distributed and encryption-based ledger or based on similar technology, including, without limitation, cryptocurrencies as well as digital assets that qualify as or represent securities or other financial instruments.
In this publication, we primarily use the term crypto assets, although we may also refer to them as 'tokens' or 'digital assets'. Unless stated otherwise, these terms are intended to have the same meaning.
Regulatory classi-cation of cryptoassets
In 2018, the Swiss Financial Market Supervisory Authority (FINMA) issued guidance on the regulatory classification of crypto assets (referred to as 'tokens' by FINMA) in its Guidelines on initial coin offerings (the ICO Guidelines).
FINMA identifies three categories of tokens:
- payment tokens, which are intended solely as a means of payment, without granting any claims against an issuer. Bitcoin is an example of a payment token;
- utility tokens, which provide rights to access or use a digital application or service, provided that the application or service is already operational at the time of the token sale; and
- asset tokens, which represent an asset (eg, a debt or equity claim against the issuer or a third party) or a right in an underlying asset.
FINMA has further clarified that tokens can take a hybrid form, incorporating elements from more than one category. These hybrid tokens must comply with the regulatory requirements applicable to each relevant token category. FINMA acknowledges that a token's classification may change over time.
In 2019, FINMA issued supplementary guidance on the regulatory classification of stable tokens (ie, tokens backed by an underlying asset such as a pool of fiat currencies or other assets) in a supplement to the ICO Guidelines. FINMA clarified that stable tokens are not considered a separate type of token category under Swiss regulation. Instead, their classification depends on the rights attached to them, with most stable tokens falling under asset tokens or a hybrid of payment tokens and asset tokens.
Under Swiss law, payment tokens do not qualify as legal tender or official means of payment. However, the Swiss Federal Council has clarified that payment tokens may be used as private means of payment if the parties to a transaction agree on the use of payment tokens as the applicable means of payment for such a transaction.
Notions of custody and crypto custodians
The custody of digital assets generally refers to the generation, management and safekeeping of electronic data, including in particular private keys, seeds and passwords, that enable access to, and control over, public addresses on the blockchain.
In this publication, we use the term 'crypto custodians' to refer to custody service providers that have exclusive possession of the private keys or equivalent security elements, thereby having direct control over the crypto assets entrusted to them. Consequently, this definition excludes providers of non-custodial wallet solutions, which do not have access to private keys or equivalent security elements.
While a distinction can be drawn between custodial wallet providers that exercise exclusive over entrusted crypto assets and non-custodial wallet providers, other custody models also exist. For instance, certain custody service providers may only have partial control over the private keys or equivalent security elements (eg, multi-signature schemes and custody solutions using multiparty computation technology). We will not examine these alternative custody models in this article.
Self-custody v sub-custody
Crypto custody typically follows two main approaches. Pursuant to the first approach, the crypto custodian retains direct control over private keys or equivalent security elements using its own custody solution, either developed in-house or licensed from a third-party vendor (the self-custody model). According to the second approach, the crypto custodian relies on another sub-custodian, which holds the private keys or equivalent security elements on its behalf (the sub-custody model).
Regulation of crypto custodians
Generalities
The activities of Swiss-based crypto custodians may be regulated by different Swiss financial market laws, with various licensing requirements depending on several factors, including without limitation the type of custody model chosen by the crypto custodian as well as the type of crypto assets held in custody. It is therefore necessary to examine the main characteristics of the business model adopted by the crypto custodian in order to determine which Swiss financial market laws, if any, apply. In many cases, it is advisable to seek a regulatory assessment by FINMA before commencing the custody activities.
It is worth noting that providers of non-custodial wallet solutions generally are not subject to any licensing requirement or other regulatory requirements, as long as they do not have any control over the private keys or other equivalent security elements.
We will discuss below some of the key regulatory requirements that may apply to crypto custodians depending on their business model. However, this is by no means an exhaustive presentation and other regulatory requirements may be applicable depending on the specifics of the business model followed.
Licence requirements
Banking licence
According to the Banking Act, a banking licence requirement is generally triggered if a company conducting primarily a financial activity accepts on a professional basis deposits from the public (ie, from more than 20 persons) or publicly advertises this activity. According to the Swiss Banking Ordinance (the Banking Ordinance), entering into any liabilities would generally qualify as a deposit-taking activity, unless one of the exceptions defined in article 5 paragraphs 2 and 3 of the Banking Ordinance applies.
With respect to crypto custodians, article 1a paragraph 2 of the Banking Act specifies that a banking licence is required if, cumulatively, the crypto custodian (1) accepts 'crypto assets defined by the Federal Council' in deposit, or publicly advertises to obtain such crypto assets, and (2) invests or remunerates these crypto assets.
The notion of 'crypto assets defined by the Federal Council' refers to crypto assets held in collective custody in accordance with article 16 paragraph 1-bis letter b of the Banking Act and that are used to a large extent, either actually or according to the intention of the organiser or the issuer, as a means of payment for the acquisition of goods or services, or which are used for the transmission of funds or values (article 5a paragraph 1 of the Banking Ordinance). Article 16 paragraph 1-bis letter b of the Banking Act refers to crypto assets that the bank has undertaken to keep available for the depositing client at all times and that are allocated to a community and the depositing client's share is clearly determined.
It follows from the above that crypto custodians must generally have a banking licence to provide their custody services if the following cumulative conditions are met:
- they provide custody services to more than 20 clients or publicly advertise such services;
- they hold the crypto assets in collective custody (no segregation, see 'Exemptions' below);
- the crypto assets have a payment purpose (eg, cryptocurrencies); and
- they pay interest on the deposited crypto assets or reinvest them.
A detailed description of the conditions for obtaining a banking licence would exceed the scope of this article. It can nevertheless be mentioned that Swiss banks generally have to meet the following licensing conditions.
- Legal form: the Banking Act does not provide for any special rules regarding the legal form of banks, with the exception of the cantonal banks that are established as public entities or joint-stock corporations under the relevant legislation of the canton pursuant to article 3a of the Banking Act.
- Minimum capital: the bank must have a fully paid-up minimum capital of 10 million Swiss francs (article 3 paragraph 2 letter b of the Banking Act and article 15 of the Banking Ordinance).
- Business activity description: in accordance with article 3 paragraph 2 letter a of the Banking Act and article 9 of the Banking Ordinance, a bank is obliged to precisely define its business area in the articles of association and organisational regulations in terms of subject matter and area of operation. The scope of tasks and the geographical area of operation must be aligned with the financial possibilities and the administrative organisation.
- Organisation: article 3 paragraph 2 letter a of the Banking Act requires that separate bodies must be set up for management and for the supervision and control of at least three members. According to article 11 of the Banking Ordinance, no member of the body responsible for the overall supervision and control may be a member of the management. In accordance with article 12 of the Banking Ordinance, the bank must also ensure an internal separation of functions between trading, asset management and settlement.
- Internal controls: the bank must set up an internal control system and appoint an 'internal audit' function that is independent from the management, in addition to appointing external auditors.
- Fit and proper requirements: members of the management and the material shareholders (ie, shareholders holding at least 10 per cent of the capital or voting rights) must meet the relevant fit and proper requirements.
- Operation in Switzerland: the bank must be managed in Switzerland, with the management being present in Switzerland.
- Foreign-controlled banks: if a foreign shareholder holds at least 50 per cent of the capital or voting rights or otherwise exercises control, FINMA may require the relevant jurisdiction to grant reciprocity.
- Consolidated supervision: if the bank is part of a foreign-controlled financial group, FINMA may require that it is subject to appropriate consolidated supervision by foreign supervisory authorities (article 3b of the Banking Act), and the licence may be subject to the approval of the relevant foreign supervisory authority. Not all jurisdictions meet the requirement of 'adequate consolidated supervision' within the meaning of the Banking Act.
It should be mentioned that pursuant to article 4-sexies of the Banking Act, FINMA may, on a case-by-case basis, limit a bank's ability to accept crypto assets on deposit to a maximum amount, depending in particular on the risk generated by this activity.
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Originally published by Lexology In-House View
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.
