The New Swiss Regulatory Framework For Stablecoins And Crypto Asset Service Providers

Payment Instrument Institutions must hold any "client money" as deposits with a Swiss bank or another Payment Instrument Institution, or as HQLA with short term maturity in a bankruptcy-remote manner and segregated from their own assets. Additionally, "client money" of Swiss Payment Instrument Institutions will not be part of the Swiss deposit protection scheme, but will constitute special funds that have to be segregated for the benefit of clients or holders of Swiss Stablecoins.

For issuers of Swiss Stablecoins, the Bill stipulates that the Swiss anti-money laundering requirements will apply in full for the issuance in the primary market and for redeeming Swiss Stablecoins. On the other hand, anti-money laundering requirements for secondary market transactions may be met through transaction monitoring, blacklisting wallet addresses and being able to block, freeze or withdraw Swiss Stablecoins. Consequently, the current regulatory practice requiring a whitelisting for all acquirers of stablecoins on the secondary market will be relaxed.

3.2. Crypto Institutions

The new license category for Crypto Institutions will be subject to similar regulatory standards as securities firms. Accordingly, the Bill stipulates that licensed Swiss banks and securities firms may also act as Crypto Institutions, but not portfolio managers and trustees and managers of collective assets. A Crypto Institution license is required for:

• Custodial wallet activities for Swiss Stablecoins and Trading Crypto Assets;
• Brokerage activities for Trading Crypto Assets;
• Market-making activities for own account in respect of Trading Crypto Assets; and
• Operating an organized trading facility for Trading Crypto Assets.

Thereby, the Bill will introduce a new licensing regime for most custodial wallets providers and crypto assets brokers since custodial wallet solutions with on-chain segregated public addresses for each client and brokers for cryptocurrencies do, as of today, only fall within the scope of the Swiss Anti-Money Laundering Act (AMLA); they are not, however, subject to prudential supervision.

Conversely, the offering of non-custodial wallets will remain an unregulated activity provided that it does not qualify as an activity of providing assistance in transferring crypto currencies, as defined in the Swiss Anti-Money Laundering Ordinance. Furthermore, proprietary trading activities, including the provision of exchange services on a principal to principal basis, as well as asset management activities for Trading Crypto Assets or Swiss Stablecoins will not require a Crypto Institution license, but will remain a financial intermediation activities subject to the AMLA.

4. Conduct and documentation rules

The Bill introduces point of sale and organizational obligations for service providers for Trading Crypto Assets which are similar to those applicable to financial service providers under the Swiss Financial Services Act (FinSA). These obligations include a client classification obligation, information obligations towards clients, appropriateness and suitability assessments for providing advisory or portfolio management services and transparency and duty of care obligations. These obligations apply to Swiss as well as foreign entities providing cross-border services relating to Trading Crypto Assets to Swiss clients.

Moreover, the Bill stipulates that a whitepaper must be published for public offers of any Trading Crypto Assets in Switzerland, for their admission to trading on a Swiss DLT trading facility as well as for the issuance of Swiss Stablecoins. The whitepaper must incorporate all relevant information for investment decisions. It will also be possible to use whitepapers that have been prepared in accordance with an equivalent foreign regulation instead of a whitepaper prepared under the Swiss rules. Finally, the Bill introduces rules for advertisements for Swiss Stablecoins and Trading Crypto Assets that are similar to the current requirements for advertisements of traditional financial instruments. This means that any advertisement must be clearly labelled as such, reference the relevant whitepaper, and be consistent with the information in the relevant whitepaper.

5. Appraisal of the Bill

The Bill is a welcomed initiative to improve the Swiss regulatory framework for stablecoins and reform the current FinTech license, the practicability of which is limited by the applicable CHF 100 million cap on the acceptance of "client money". However, it remains to be seen whether the proposed regulation of Swiss Stablecoins is sufficiently attractive to encourage foreign groups to set up a Swiss Payment Instrument Institution for the purpose of issuing Swiss Stablecoins.

In practice, this will depend on the regulatory conditions applying to Swiss Stablecoins in cross-border transactions. Additionally, Swiss Stablecoin issuers will face competition from foreign stablecoin issuers which may issue stablecoins in Switzerland in the form of Trading Crypto Assets without a license requirement in Switzerland. Furthermore, for domestic banking groups, it would be worth exploring if also licensed Swiss banks should be permitted to issue Swiss Stablecoins, given that they are subject to the most stringent regulatory requirement available in Switzerland. According to the Bill, Swiss bank must not issue Swiss Stablecoins but are required to establish a separate entity that is licensed as Payment Instrument Institution. Moreover, it would be welcomed if the legislator also introduced a harmonized regulatory framework applicable to stablecoins that do not qualify as Swiss Stablecoins as their regulatory qualification depends on the design and the rights attached to such stablecoins. The Bill remains silent on this topic (other than the conduct and documentation rules that would apply if such stablecoins qualified as Trading Crypto Assets).

As regards the new license regime for Crypto Institutions, the Bill will introduce a more stringent regulatory regime for custodial wallet providers, brokers and market makers of Trading Crypto Assets. While many of the regulatory requirements are not yet known as they will only be defined in the secondary regulations, it remains to be hoped that the legislator will introduce a lighter regulation compared to securities firms in consideration of the different risk profiles of Crypto Institutions. Otherwise, there is a substantial risk that the new regulatory burden would strangle Swiss service providers. Also, in respect of brokerage activities for Trading Crypto Assets and Swiss Stablecoins, the Bill remains silent as to when such services may qualify as a crypto currency trading activity which is according to the practice of FINMA subject to a bank license requirement. These uncertainties should be eliminated in the legislative process, e.g. by defining safe harbor rules.

Finally, please note that the Bill, unlike MiCAR, does not set deadlines for FINMA to respond to license requests. As lengthy licensing procedures with FINMA have recently impacted Switzerland's attractiveness as a jurisdiction for crypto services, the definition of a licensing process with clear deadlines would be welcomed.

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