Switzerland is playing a leading role in creating optimal conditions for blockchain and cryptoassets. A “Distributed Ledger Technology” bill is currently being drafted in Berne to create legal certainty.
This article is part of a cooperation and was originally published on 10×10.ch.
There is a fascinating, still often misunderstood fact in the crypto world: A public blockchain is not just a line code, it represents a new kind of institution. An institution that, to a certain extent, has its own legal system programmed into it. Occasionally described as Smart Property Rights, property rights are autonomously enforced by the public blockchain. This development has consequences: First economists expect that today’s institutional landscape – states, markets, companies, etc. – could change fundamentally.
Although a public blockchain has its own law, it is only now that this is being brought into line with traditional law. For they are still relatively small plants whose growth depends in part on the liquidity, i.e. financial strength, of the established world. However, die-hard adherents of the new world often get the impression that adjustments to the current legal system would ultimately restrict the open, permission-free legal system of public blockchains. An objection that cannot be completely dismissed.
Nevertheless, a need for action has been identified in Switzerland. The plan is to upgrade the traditional world to a certain extent to the new standards. Switzerland is thus playing a leading role in creating optimal conditions for block chaining and crypto-assets.
A DLT proposal is currently being prepared in the federal state of Berne. DLT stands for “Distributed Ledger Technology” and is to a certain extent the technical-scientific term for everything involving block chain and crypto-assets. A total of ten federal laws are to be adapted selectively by means of a so-called “Mantelerlass”. In contrast to Liechtenstein, for example, Switzerland is not adopting an independent law, but is instead bringing the existing laws up to date.
Code of Obligations
Crypto-assets in the form of so-called installation tokens still fall through all the meshes (more about tokens: the token makes the difference). In order to legally ensure a change of ownership, neither intellectual property, copyright, securities nor book-entry securities laws are suitable. They all require written form, which is extremely unfavourable for digital assets.
The DLT proposal is intended to solve this problem by introducing the concept of register value rights. These create the legal basis on which tokenized shares, bonds and other financial assets can be transferred in a legally binding manner. Thus, any type of securities is linked to an investment token. This in turn implies that ownership of the securities is automatically linked to the investment token. The latter thus finally becomes the modern equivalent of the security.
This step creates the necessary legal certainty so that securities can be entered in a digital register as Registered Value Rights on issue and thus on a DLT basis. This register must meet very high requirements in terms of data integrity, functionality and transparency. The fact that this digital register is of a decentralized nature – provided the necessary technical security is maintained – is not explicitly excluded by the submission.
Debt enforcement and bankruptcy law
The revolutionary thing about cryptoassets is that they can be kept in one’s own hands, as they can be controlled by cryptographic methods. Like normal goods, they can therefore be held directly by the owner without an intermediary.
Of course, digital assets can still be held by a third party. In theory, this can basically be done in two different scenarios. A client and the custodian both have the corresponding private keys and thus access to the assets. In the other case, the customer stores his cryptoassets with the custodian and the latter is the sole owner of the access keys.
Especially in the latter case, the principle of collective safekeeping is often applied. However, this could lead to problems, especially in the event of bankruptcy: In the worst case, the crypto-assets would be included in the bankruptcy assets – and the actual owner could lose them.
The DLT proposal also aims to provide clarity in debt enforcement and bankruptcy law. If the assets are assigned to a community, but at the same time it is always clear who owns which share, separation should be possible. The cryptoassets would be safe in case of bankruptcy.
The possibility of segregation is ultimately also a prerequisite for cryptographic values to be kept in a customer’s securities account and thus off the bank’s balance sheet. In this way, it should also be finally clarified that cryptoassets do not require an exorbitant equity backing.
If cryptoassets are held off-balance sheet, no capital backing is required at all. And the custodians would no longer have to comply with the unofficial risk weighting of cryptoassets of up to 800 percent (Basel III).
Financial Market Regulation
Financial market regulation is about creating tailor-made licence categories for exchanges on which cryptoassets can be traded in the form of investment tokens. Under the applicable stock exchange regulations, it is not possible to list these tokenized securities on a Swiss stock exchange. The possibilities of trading investment tokens today are basically offered by the concepts of “multilateral trading system” and “organised trading systems”. Over the past few years, however, it has become apparent that these options are not very practicable. They simply do not pay off for companies.
However, these so-called security tokens will never be able to take off if we do not have functioning secondary markets. With the DLT proposal, the Financial Market Infrastructure Act is now intended to introduce a licensing category for DLT trading systems. This step is intended to simplify the creation of these secondary markets. Trading but not the listing of investment tokens is to be permitted. In practice, however, this should not make much difference in the short term.
Money Laundering Act
Finally, the DLT draft provides for the newly created DLT trading systems to be subject to the Money Laundering Act. This is because, unlike conventional exchanges, they will have direct contact with the end user. Banks, which are themselves subject to the Money Laundering Act, act as intermediaries between the stock exchange and the end user. Accordingly, they must ensure that the relevant requirements are observed.