Switzerland Digital Assets Regulations: Licensing, AML/KYC, Stablecoins, and the Travel Rule

Is crypto legal in Switzerland?

Yes, it is legal to own and trade crypto assets in Switzerland. Crypto assets fall within the definition of digital assets. Switzerland has a very favorable framework regarding digital assets. Rather than adopting a regulatory approach that is focused on market participants, Switzerland has adopted a ‘token-based approach. The Swiss Digital Ledger Technology Act  (DLT) seeks to create legal certainty surrounding the ownership or transfer of digital assets. In fact, to further the tokenization of rights, the DLT act has created a new category of negotiable digital security known as uncertificated securities. 

Regulatory bodies governing crypto in Switzerland

FINMA - The Swiss Financial Market Supervisory Authority (FINMA) is an independent financial market regulator regulating persons and entities falling under the Swiss Financial Markets Act. This includes the supervision of banks, insurance companies, stock exchanges, and securities dealers, as well as other financial intermediaries in Switzerland. 

Categorization of digital assets in Switzerland

According to FINMA, the applicability of regulation usually depends on the type of digital assets. In its guidance of initial coin offerings, FINMA lays down the following categories: payment, utility, and asset token.

Payment tokens are those tokens that are meant to be used as a means of payment for acquiring goods or services. Crypto assets such as bitcoin, ether, and litecoin will fall under this category. Payment tokens do not represent any claims against the issuer or the third parties and hence do not fall within the regulatory ambit of Swiss security laws.

The main purpose of utility tokens is to provide users digital access to an application or service through a  blockchain-based infrastructure. However, the service or the application to which the access must be in operation at the time of token sale. Decentralized storage platform Sia’s Siacoin would be an example of a utility token. Siacoin is the native token of the Sia network and is used by renters to store their files on the hard drive. Utility tokens can also be classified as securities if they are issued for the purpose of bringing investment, they represent enforceable rights against the issuer or third parties, or the platform on which they are going to be used is not operationally read at the time 

For a token to qualify as an asset token, it should represent a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, these tokens are analogous to equities, bonds, or derivatives. If asset tokens will be regulated as securities if they are standardized and suitable for mass trading, represent uncertificated securities, or represent a derivative.

The DLT Act introduces the special category of tokenized rights “Registerwertrecht” aka uncertificated register securities. The Act defines this term as “digital securities that can be transferred without banks or brokers unlike traditional securities”. Further, DLT Act facilitates ownership of these tokenized securities; it allows these tokens to be issued and transferred as uncertificated register securities.

Licensing requirements

Banking license -  As per the provisions of the Swiss Banking Act (SBA), if a platform accepts deposits from the public, then such a platform has to apply for a banking license subject to some specific exemptions. Only those platforms that have a banking license are permitted to accept deposits from the public in a ‘professional capacity. A crypto custodian has to apply for a banking license when he merely holds or stores payment tokens on behalf of customers for safekeeping and does not lend them. Crypto trading platforms that accept fiat money for crypto from their clients and are themselves party to cryptocurrency transactions with their clients, for example generally do require a banking license.

Fintech license: Unlike the banking license, the Fintech license waives the deposit insurance and the minimum capital and liquidity requirements; however, it does impose the accounting and auditing requirements under the Swiss Code of Obligations. Under the DLT Act, crypto custodians offering pooled custody services for crypto-based assets will require fintech licenses.

DLT Trading License for crypto exchanges - The Blockchain/DLT Laws cater to a specific new license category for DLT trading facilities or – more plainly – crypto exchanges. This new “token security exchange license” presupposes that DLT securities are traded (respectively taken into custody, cleared, and/or settled) on the platform applying for the license. In addition to DLT securities, utility and payment tokens can be traded on DLT trading facilities.

Laws pertaining to AML/KYC/CFT

Financial intermediaries such as crypto exchanges, trading platforms, and custodians have to abide by the provisions of the Anti-Money Laundering Act (AMLA). Financial Intermediaries under FINMA  have to comply with the following requirements

• Identification of a contractual party
• Establishment of the identity of controlling persons and beneficial owners
• Identify Business relationships and transactions with increased risks - conduct enhanced due diligence for them
• KYC and AML rules under the AMLA

The Travel Rule requirements

On August 26, 2019, FINMA introduced Article 10 AMLO-FINMA, which provided guidance for the crypto industry that required information about the client and the beneficiary to be transmitted with payment orders. The Travel Rule came into effect on January 1, 2020.

As per the 2019 Guidance, financial intermediaries that are supervised by FINMA have to transmit the personal identifying information (PII) of their customers. Additionally, financial intermediaries also have to identify transferees in accordance with Swiss AML rules in the case where transferees are the clients of the financial intermediary but are using external, non-custodial wallets. Financial intermediaries are also required to verify the transferee's power to dispose of the wallet address used through appropriate technical measures as defined by the relevant Swiss financial intermediary

Personal Identifying Information required for crypto travel rule  : 

• Client's name
• Client's account number
• If no account number is available, the financial intermediary shall provide a reference number that refers to the transaction
• Client's address
• The address may be replaced with the originator's date of birth and place of birth, their client number, or national ID number.
• Beneficiary's name
• Beneficiary's address
• The originator VASP shall ensure that this information is accurate and complete. 

Regulations related to stablecoins

FINMA’s treatment of stablecoins under supervisory laws follows its existing approach of token categorization. Depending on the rights attached to these tokens and their functions, stablecoins may be classified either as hybrid tokens or asset tokens. For example, when a stablecoin is linked to a pool of fiat currencies or cryptocurrencies, such stablecoin will be considered a deposit under banking law and the issuer of such stablecoin will have to obtain a banking license.