Switzerland Has Decentralisation And Privacy In Its DNA
Switzerland has long been a champion of decentralisation and privacy, both of which are essential aspects of blockchain and decentralised finance. Committing to these ideals has allowed the country to become one of the leading hubs for cryptocurrency projects and exchanges.
With the Swiss financial market regulators (FINMA) matter-over-form approach, Swiss companies and investors have been given an assurance that their projects and investments will be assessed objectively and fairly under existing regulations, provided a legal framework that gives investors and entrepreneurs the confidence to operate in the cryptocurrency space.
FINMA has established a matter-over-form approach whereby every token/crypto-business must be assessed based on its own merits and under existing regulations.
FINMA divides tokens into payment, utility or asset categories, with a residual hybrid token classification. Payment tokens are generally considered to be cryptocurrencies, while pure utility tokens are not subject to Swiss financial market regulations. Asset tokens, however, may qualify as financial instruments or securities.
On 1 August 2021, Switzerland saw the full entry into force of a new DLT-Act, providing blanket adjustments to nine federal laws. Notably, it introduced ledger-based securities represented on the blockchain, a new authorization type for multilateral trading of DLT-securities and significant clarifications to Swiss insolvency and banking law regarding the segregation of digital assets, giving investors and entrepreneurs assurance when operating in the cryptocurrency space.
FINMA Adopts Practice of Assessing Token/Crypto-Business on Individual Merits
FINMA has adopted a practice of assessing each individual token/crypto business on its own merits and under existing regulation. Tokens are classified into payment, utility or asset tokens, plus the hybrid token. Payment tokens are typically classed as crypto-currencies.
The regulator follows a matter-over-form-approach, which means the specific use and characteristics of the token are taken into consideration, rather than the terminology. Pure utility tokens are not subject to Swiss financial market regulations, whereas asset tokens may be classified as financial instruments or securities.
Regulations on the exchange and trading of tokens that qualify as securities
Swiss law requires companies trading or exchanging tokens that qualify as securities to obtain a licence as a securities firm under the FinIA.
Further, certain activities such as custody, borrowing and lending, as well as yield/staking of asset tokens may trigger licensing requirements under the FMIA, BA/BO and FinIA. Financial institutions offering on-chain segregated custody of crypto-currencies or digital assets may not need a BA/BO licence if accepted ‘public deposits’ are used solely for client transactions and kept in the account for less than 60 days.
Setting Up A Crypto Asset Business
Timeframe
The timeframe for obtaining a bank license under the Banking Act and Banking Ordinance (BA/BO) or securities firm license under the Financial Institutions Act (FinIA) or a Distributed Ledger Technology (DLT) trading facility license under the Financial Market Infrastructure Act (FMIA) is estimated to be between 18 and 36 months. A Fintech license, however, can be obtained within a much shorter time frame, between five and nine months.
Costs
The application fee for each case will vary depending on the nature of the case, with additional legal and professional fees likely to be incurred.
Requirements
FINMA has set the bar high for obtaining a Fintech license, with more than 70% of applications requiring a clear business plan – including a fit-and-proper test for directors, executive members and qualified shareholders – and complete, well-organised documentation. However, for institutions such as banks, securities firms and DLT trading platforms, FINMA will generally investigate “heavy” licenses very thoroughly.
Fintech firms require a license in order to operate, with compliance and risk functions needing to be implemented, although they can be outsourced to a qualified third party if appropriately supervised. Other “heavy” licenses, such as those for securities firms, DLT trading facilities and banking, come with additional requirements, including corporate governance and financial requirements such as minimum capital, capital adequacy and liquidity ratio, although exemptions may be available.
Banking License
Obtaining a banking license involves meeting certain conditions, including a fully-paid-up minimum capital of at least CHF 10 million, effective management from Switzerland and separation of the board of directors and executive management.
Other prerequisites include effective internal control systems, an independent internal audit function and, if the bank is under foreign control, reciprocal rights from the countries where qualified participants are domiciled. If the bank is part of a financial group, adequate consolidated supervision by a recognised supervisory authority is also required.
Fintech License
For Fintech companies, the minimum capital requirement is more lenient, at 3% of accepted public deposits and crypto-based assets held in collective custody, but at least CHF 300,000. They too must have effective management from Switzerland and at least one third of the board of directors must be independent of the executive management.
Additionally, effective internal control systems and independent profit-oriented business within the company must be in place. If the Fintech is under foreign control, reciprocal rights from the countries where qualified participants are domiciled are needed.
If the Fintech is part of a financial group, adequate consolidated supervision by a recognised supervisory authority is also required. Facilitated regulatory requirements for Fintechs compared to banks include accounting and financial reporting being governed exclusively by the provisions of the Code of Obligations, audit under the law of obligations, supervisory audit by persons with less stringent admission requirements than bank auditors, exemption from the Capital Adequacy Ordinance or the Liquidity Ordinance and exemption from deposit insurance with Esisuisse. However, FINMA may impose a higher minimum capital requirement in individual cases if deemed necessary.
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