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.
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.
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.
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