Crypto regulations in Switzerland

It is allowed under Swiss law to provide services of cryptocurrency exchange and custodian. Thus, it is regulated by Swiss Financial Market Supervisory Authority FINMA and Swiss Federal Tax Administration SFTA. The fact that cryptocurrencies and virtual currencies are treated for the purposes of the law as assets or property reflects a pretty liberal approach toward the regulation of cryptocurrencies by Switzerland. In that respect, together with the providers of virtual currency, exchange offices are viewed by Switzerland as financial intermediaries and, therefore, should meet the local AML/CFT requirements, together with consumer protection. On the other hand, some banking regulations can be softer, but all cryptocurrencies fall under Swiss wealth, income, and capital gain taxes, which need to be declared in an annual tax return.

Regulation of Cryptocurrency Exchanges in Switzerland

Switzerland provides a formal process for listing cryptocurrencies and legally operating, for which a license from the Swiss Financial Market Supervisory Authority (FINMA) is needed. There is an exemption from licensing for government deposits of up to CHF 1 million, but exchanges have to inform their clients that their funds are not protected in the case that the firm is supervised by FINMA.

Initial Coin Offerings are influenced by Swiss regulations with regard to cryptocurrencies. In 2018, FINMA published guidelines on how existing financial legislation was likely to apply to various proposals – anything from banking and securities trading to collective investment schemes – depending on the structure used. In 2019, the Swiss government supported a proposal to force the Federal Council to change existing legislation to accommodate cryptocurrencies. Besides this, the Swiss parliament actually adopted so-called Blockchain Act back in September 2020, which under Swiss law further clarified the legality of the very process of cryptocurrency exchanges themselves and required compliance with local ICO, AML, and CTF requirements within cases when a token can already technically be transferred to blockchain infrastructure.

Overview of Future Cryptocurrency Regulations in Switzerland

The Swiss government has also promised to create a regulatory framework that would cultivate cryptocurrencies. The city of Zug, one of the global cryptocurrency hubs, introduced Bitcoin in 2016 as one of the ways of settling city dues. In January this year, Swiss Economy Minister Johann Schneider-Ammann unveiled his dream that Switzerland should become a “crypto nation.” In the same tune, Swiss Secretary of International Finance, Jörg Gasser, said it was necessary to open up to the cryptocurrency but at the same time apply the regular financial rules and regulations.

In late 2020, the Swiss Ministry of Finance began consultations on new all-inclusive cryptocurrency regulations that would place blockchain technology at the heart of fostering innovation.

Understanding the Regulatory Framework for Cryptocurrencies

Market Size of Cryptocurrencies in Switzerland

Switzerland hosts the famous crypto valley in Zug, near Zurich. It hosts an active community of enterprise players within the space of cryptocurrency. It is hard to define with any certainty a fixed position that Switzerland holds in the highly dynamic global cryptocurrency market. However, over the years, Switzerland has emerged to be a leader within this particular field. It is one of the most important jurisdictions as far as initial coin offerings, STO, among others go, offering solid infrastructure and a trustworthy legal framework to players operating cryptocurrency business there.

Legal Basis for Cryptocurrency Regulations

The legal environment of Switzerland is extremely friendly regarding cryptocurrency assets. Although there is no special legal framework regarding cryptocurrency assets, the legal ground for issuing and trading cryptocurrencies was regulated long ago.

Switzerland has introduced an enhanced regulatory regime for rights-carrying tokens, such as asset tokens or service tokens, in respect of claims against the issuer or third parties. The Federal Act on Amendments to the Federal Act due to Adaptation to Changing DLT has extended the possibilities of using distributed ledger technology in order to more fully exploit its potential. The DLT Act provides for a new class of assets, which are DLT rights, being the digital equivalent of certificated securities. For their transfer, blockchain is the only possible way. Furthermore, Swiss law has also provided for a new license category regarding trading platforms where DLT rights can be traded, with additional rights for protection of crypto assets held by third parties in bankruptcy.

FINMA has also reiterated its adherence to the principle of “same business, same rules,” whereby similar activities are subject to the same regulatory standards regardless of the technology employed. The Swiss laws on the financial markets are no exception in regard to blockchain-based crypto assets and their applications.

Normative Classification of Tokens

On February 16, 2018, FINMA published the Swiss Guidelines for the Application of Financial Market Law in its ICO Guidelines. The guide explained how cryptocurrencies and other tokens fall under Swiss law. The ICO guidelines have illustrated that FINMA defines the following token categories, to wit:

• Payment tokens or cryptocurrencies destined to be used only as a means of payment, without claims against the issuer;
• Service tokens are tokens that give a right to access an already operating or a soon-to-be-operated digital application or service for which the token sale is organized. Asset tokens represent a claim against the issuer or third parties.

Besides that, the FINMA is also aware that tokens might take hybrid forms, combining elements from several categories. In such a case, each of these hybrid tokens must pursue each respective regulation category. In addition, token categorization can vary with time and, therefore, is going to be subject to reevaluation for the regulatory categorization given to an ICO.

Apart from the above ICO Guidelines, on September 11, 2019, FINMA provided its view regarding regulatory classification of stable tokens, which are usually qualified as a hybrid of an asset and payment token because of the rights assigned to them.

As such, according to Swiss law, payment tokens are not legal tenders but may be used as private means of payment if the parties using them accept this kind of payment. In such a case, even issuance of payment tokens would fall under the realm of Swiss laws of anti-money laundering.

Questions to FINMA about Crypto-currency Regulation

Given the fact that cryptocurrency is a fast-moving space, there have been numerous requests for interpretation by stakeholders from FINMA. The authority encourages such requests for “inaction” to determine its regulatory position on various proposals.

Application of the Securities and Investment Act

In other words, the issuance of an asset token or hybrid forms, including stable tokens, insofar as the same constitutes rights against an underdeveloped platform would, without any doubt, be subject to securities law under Swiss securities laws. However, the same payment token or services token, either representing no claims against any issuers or any third party, shall not be considered securities under Swiss law for the sake of not creating any rights and shall be treated as digital intangible assets.

Issuance of Rights Shares Against the Issuer or Third Parties

The DLT Act created a new class of asset under Swiss law in the form of DLT rights. Tokens as documentary or non-documentary securities of rights relating to assets or services, which give rise to claims against the issuer or third parties, are treated by Swiss law in the same way as the Swiss Code of Obligations (CO). Token means a digital representation of documentary or non-documentary securities wherein the right is not combined with a physical security document but attached only with the token. DLT rights may be exercised and transferred only within the applicable distributed registry environment.

The parties shall agree to the booking of that right with that distributed registry, insofar as it shall be transferred and exercised only on that registry. In this respect, parties are advised to clearly state their intention of creating rights under the DLT law by declaring the applicability of Swiss law.

The DLT Act, concerning distributed registries, provides for the possibility of access to DLT rights by the rightful owner, including protection against unauthorized access or modification. The integrity of the Registry shall be guaranteed by appropriate technical measures, and it shall make the terms and conditions of transactions publicly available.

Eventually, the rights under DLT may be employed for the issuance of undocumented securities pursuant to Swiss FISA by transferring the mentioned rights to a custodian, who credits such rights to one or more securities accounts.

Question to FINMA about the Crypto Law

Despite advice from the Monetary Authority, the nature of cryptocurrency demands an openness of approach. The nature of token proposals is constantly changing insofar as implementation of WCO guidelines on practical projects go. This takes place in terms of issuance of no-action requests to the Monetary Authority, exemptions from regulatory bodies in order to reassure a variety of stakeholders.

FINMA calls for such applications for “inaction” in view of confirmation of regulatory interpretations for this dynamic sector.

Securities and Investment Act: How to Understand Its Applicability

Swiss securities law is thus applicable to the issuance of asset tokens and hybrid forms, including stable tokens or service tokens representing underdeveloped platforms. However, to such end, payment tokens and service tokens without claims against their issuer or third parties are not treated as securities for the purpose of Swiss securities law, since they represent no rights. In that respect, both the payment and service token are dealt with as intangible digital assets.

Issuance of Tokens Representing Rights Against Issuers or Third Parties

The DLT Act therefore introduced new legislation into Switzerland, considering DLT rights as an asset class. Claims which provide tokens of assets or services with claims against the issuer or third parties are considered as DLT rights falling under the Swiss CO. In this regard, DLT rights represent the token being the right, rather than traditional certified security instruments or entries in a non-documentary securities register.

These DLT rights can only be invoked and transferred within that specific distributed registry. This regime allows those rights which are normally in documentary or documentary forms in security form to be represented as DLT rights, which normally comprise fungible contractual claims such as debt obligations. Ownership or any effective control over the assets cannot be formalized as rights on DLT.

The agreement between the parties should provide for the constitution of such rights in a distributed registry in the case of valid constitution of rights in that regime, but always on an undertaking corresponding to that agreed with respect to the transfer and exercise of those rights taking place only within that selfsame distributed registry. Parties are recommended to clearly indicate that their DLT rights are subject to DLT law and to positively confirm the application of Swiss law. Without such a choice of law, the Swiss Private International Law Act, as revised by the DLT Act, provides for the applicability of the statutory law of the issuer’s registered office or domicile, considering the particular statutes on property rights.

In addition, the DLT Act provides for some of the main features of the distributed registry where the DLT rights are listed. In such respect, the registry shall:

• enable only owners, excluding the debtors, to dispose the DLT rights;
• protect integrity from unauthorized access or amendment by providing appropriate technical and organizational measures;
• publish, in a publicly accessible manner, the terms and conditions of the transactions and the applicable rights;
• provide a record of the distributed registry that is more transparent and publicly accessible.

On the other hand, the DLT Act does not enumerate what such technical requirements would be, such as minimum amount of participants in the registry and consensus mechanisms employed.

Once the DLT rights are transferred to a custodian within the meaning of FISA, undocumented securities can finally be created in accordance with FISA by crediting such DLT rights to one or more securities accounts by such custodian. The custodian shall block rights on DLT which can be transferred under FISA. This shall only be to the extent that these DLT rights are held as undocumented securities.

Requirements Under Swiss Law Relating to the Transfer of Tokens

As the tokens under Swiss law-as far as payment tokens and service tokens do not constitute any claim against their issuer or third parties-may, under the respective conditions provided in their distributed registries, be created and transferred, in particular such a transfer may thus be effectively carried out by means of a transaction between two digital wallets (purses).

On the other hand, asset tokens or service tokens, as claims against the issuer or third parties issued as DLT rights, have to be transferred pursuant to the rules of the applicable distributed registry. The mode of transferring the relevant rights under the DLT legislation becomes irrelevant with respect to asset tokens or service tokens that are not DLT rights. The DLT Act finally provides for the finality of these transfers, even upon the insolvency of the transmitting party. Holders of DLT rights are also accorded provisions similar to those conferred on holders of traditional paper security certificates, more so if holders move to acquire DLT rights from unauthorized sellers.

Classification of Tokens as Securities

According to Sec. 2 para. 2 FMSA, securities either represent certified or undocumented securities, derivative securities, intermediary securities or rights to DLT, provided the securities in question are standardized and can be traded en masse. Sec. 2(1) FMSA provides that such an instrument must be offered to the public in the same form and denomination or sold to 20 or more customers under the same terms.

FINMA further detailed its token categorization perspective with the release of an ICO guideline which, for instance, explained the following about token types:

FINMA added that legally secured rights arising from a pre-sale, such as a simple agreement for future tokens, of investors to receive or purchase tokens in the future are also treated as securities if these rights are publicly proposed or offered under identical conditions to more than 20 individuals. However, the pre-sale rights are not treated as securities if the terms of the pre-sale are not standardized or varied for each investor-for instance, with different types of variations related to the amount of right quantities, prices, or blocking position. Also, the following are provided by FINMA as regulations on debt securities:

If liabilities represent debt securities issued in the form of standardized products apt for mass circulation or documentary credits with similar functions, creditors have the right to obtain disclosure in a form and substance compatible with minimum content requirements as foreseen by Article 5(3)(b) of the BDM at the time of the offer. Those commitments would not be considered as deposits.

The Liabilities associated with customer cash held in clearing accounts of securities brokers, asset managers, and other types of intermediary are not considered deposits provided these funds are used specifically for the settlement of those particular customers’ purchases and sales. Moreover, settlement, except for that involving the firm’s own securities accounts, shall be conducted within 60 days.

Article 6(2) of the BORO also grants a sandbox exemption under Swiss law. This provision allows organizations to accept public deposits-that is, deposits received from more than 20 persons-of up to CHF 1 million without a bank license, provided the deposits in question do not earn interest. Investors must be informed that the receiving entity is not under FINMA supervision and that their investment is not protected by any deposit protection scheme.

Organizations that accept public deposits of up to CHF 100 million can apply for a “light” banking license with lower requirements compared to the ordinary banking license when it comes to organizational structure, risk management, compliance, auditor qualification, and capitalization. The light banking license was only introduced on January 1, 2019, and may, therefore, be an interesting solution for those organizations within the crypto space willing to accept deposits below the CHF 100 million threshold.

Now, in respect to token storage services, it is very important to establish whether a license from the bank is required or not. This is when the provider stores a payment token in a common client account, such as on a shared public address for many customers rather than separately for each client. In case of storing tokens in this fashion, one needs a license from the bank.

Regarding the token brokerage service, the bank license may be required in the case of a service provider when he or she receives fiat currencies or tokens in his personal account, public key, or keys. He then will have to rely on the exemption explained above; this exemption does not apply to the traders of the cryptocurrency whose practice results in similar bankruptcy risks the conventional currency traders also bear.

Prospectus Requirement for Token Offerings

While there have been different ways of categorizing tokens, in particular, tokens of the category representing a digital form of an entitlement to exercise rights vis-à-vis the issuer of such tokens, the Swiss Financial Services Act (FinSA) requires analyzing whether or not such tokens are subject to the prospectus duty. Pursuant to FinSA, the prospectus duty generally applies in respect to all public offers of securities including tokens qualifying as securities; see Section II.iv below.

In this respect, with regard to financial instruments issued to retail investors, a new requirement under the Financial Services Act-in particular the so-called Investor’s Master Document-was issued as an additional disclosure document. The respective applicable regime within the European Union is under the auspices of the Regulation on Packaged Retail and Insurance-based Investment Products. This new duty will also be extended to specific token types, representing financial instruments, such as asset tokens relating to structured products or derivatives.

Regulatory Consequences of a Token being Categorized as a Security

If tokens are classified as securities, they are consequently caught under the FinSA regime and, accordingly, also under the Financial Institutions Act (FinIA). Under this regime, brokering for third-party clients of such tokens on behalf of those clients who are not institutional clients, and market-making in such tokens, require licensing as a securities firm. In addition, the underwriting of tokens and the issuance of tokens falling within the derivatives definition have to be licensed when undertaken on a professional basis. In each of these cases, the activity becomes subject to licensing when it is pursued professionally.

Secondly, the characterization of tokens as securities has implications with respect to the FMIA licensing of any secondary markets on which those tokens are traded.

Collective Investment Laws and Token Issuance

Where tokens represent an investment with funds or collective investment schemes, or where tokens represent units of such a scheme, respectively, the rules under the Swiss Collective Investment Schemes Act, CISA, and its executive provisions must be considered. Pursuant to CISA, a collective investment scheme shall mean any pool of assets, collected from investors for the purpose of investment under collective management. CISA regulations apply without distinction as to the form taken by the collective investment scheme or fund.

This would mean that the issuance of tokens, and related business activities with tokens, if qualified as such, could become subject to the scopes of CISA and FinIA if assets across customers are pooled together for investment-e.g., there is no segregation of investments per investor-or, alternatively, if a third party takes care of management of client assets on behalf of the clients. A thoughtful review from a Swiss collective investment schemes regulatory perspective therefore follows.

Whereas business undertakings generally do not fall under the coverage of CISA, differentiation between a business undertaking and a collective investment scheme can be made only on a case-by-case basis.

Banking Operations and Money Transfers

According to the Swiss Banking Act (BA), in principle, a license as a bank is required whenever a financial institution accepts deposits from the public or advertises such activities publicly. Pursuant to the Swiss Banking Regulation, any undertaking will, in general, be considered to raise deposits unless exceptions – as provided for in Articles 5(2) and (3), respectively – apply.

Excluding the context of token sales, some of the most essential exceptions include :

This would apply: provided that liabilities consist of debt securities issued as standardized products suitable for mass trading or non-documentary rights with similar functions; creditors are granted a disclosure – prospectus or private placement memorandum – containing at least the content referred to in Article 5(3)(b) of the BDM upon offering those liabilities.

With regard to liabilities arising from clients’ money held in settlement accounts maintained by the firm, asset manager, or otherwise, financial intermediary, where all such money is used to settle client transactions, does not bear interest and has a maturity of less than 60 days, except securities accounts of the firm.

Evidently, Swiss law also allows for a sandbox exemption under Article 6(2) of the BORO. This article allows organisations to receive deposits from the public-which means coming from more than 20 persons-up to a maximum amount of CHF 1 million, without having a bank licence. The only proviso is that such deposits must not carry interest. It shall be necessary to inform any investor in advance that the recipient does not stand under the supervision of FINMA and that the investment is not covered by any deposit protection system.

Organizations that accept up to CHF 100 million in public deposits may apply for a “light” banking license. This allows some flexibility within the organizational structure, risk management, compliance, auditor qualifications, and capitalization requirements compared to a full banking license. Since January 1, 2019, this light banking license has been available, which is an attractive option for organizations in the crypto sector to be able to accept deposits below the threshold of CHF 100 million.

In offering the service of token storage, what is important is considering at what particular level the bank licensure would be required. The general rule will be that licensure as a bank would be necessary if the provider stores payment tokens in some form of an aggregate, in other words, for example, for multiple customers on a single public address, rather than on an individual basis for each client. Activities of this sort require that the activities constituting storage be licensed as a bank.

With regard to the token brokerage services, authorization would be required in the event that the relevant service provider accepts fiat currencies or tokens into their accounts, namely public keys. In that scenario, the provider must have recourse to the exemption outlined above. The latter is, however, unapplicable in the case of a cryptocurrency trader offering services similar to those traditionally carried out by currency traders since they present their clients with identical bankruptcy risks.

COMBATING MONEY LAUNDERING

Rules that apply

Under Swiss law, the anti-money-laundering regulation consists of the Swiss Anti-Money Laundering Act (AMLA), complemented by the Anti-Money Laundering Act (AMLA). Among others, the Anti-Money Laundering Act applies to financial intermediaries. In short, other than the persons subject to supervision, any person receiving or holding assets belonging to other persons or assisting in the investment of such assets in a professional manner, Article 2 para. 3 of the Anti-Money Laundering Act considers as financial intermediary. The Programme of Action, on the other hand, enumerates a list of activities considered as financial intermediation in a non-exhaustive manner. In the context of the ICOs and tokens, the issue of payment means that cannot be exclusively used with the issuer, the activities of provision of services related to payment transactions in the form of money and asset transfer, and currency exchange services are significant financial intermediation activities.

The Financial Intermediary within the meaning of the EPA needs to be affiliated with an authorized SRO in conformity with the AML. Moreover, the financial intermediary shall also comply with the obligations under the Anti-Money Laundering Act, among others, the obligation to identify and identify its customer FCA, which is related to a Contracting Party and its beneficial owner; and reports to the Finance Division. The Swiss Money-Laundering Reporting Office in cases of suspicion of money-laundering or financing of terrorism.

In the FINMA 02/2019 Blockchain Payments Guide dated August 26, 2019, FINMA heralded the fact that FINMA-controlled financial intermediaries should comply with the blockchain traffic rules. The same applies to other financial intermediaries for AML purposes due to affiliation to the SRO. Under the travel rule, the relevant Swiss financial intermediary must send the same information required for electronic transfers of fiat money. Alternatively, it must: (1) identify the recipient according to the Swiss UNDER rules as if the recipient were a customer. The Swiss financial intermediary and verify, by appropriate technical means determined by the relevant Swiss financial intermediary, the right of the recipient to dispose of the wallet used by him.

ICO

Depending on the tokens to be issued class, the question can be qualified as financial intermediation. FINMA provides clarity in its ICO Guidance on this matter as set out below.

The issuance of payment marks is classified as issuance of payment instruments and, therefore, constitutes financial intermediation under the AMLA.

Issuance of service tokens, whatever form of a means of payment function in a particular application or on a specific platform, whereby it could be used to pay for services used on such a platform. Under the AMLA, financial mediation is an activity that is within the realm of mediation. Such an issuance of service tokens, however does not constitute financial intermediation if the respective service token does not possess any kind of payment function, or such a payment function is exceptionally qualified as an ancillary function of service tokens. For this exemption to apply, it would be necessary that “the primary purpose of the payment tokens is to provide access rights to a nonfinancial application in order for the provider of payment functions to be an organization managing a nonfinancial application or access to a nonfinancial application without including additional payment functions built into the token of service “. Please note, however, that FINMA applies this exception very restrictively, and in practice any token of service with any payment function is treated as financial intermediation within AMLA.

The issuance of asset tokens is not regarded as financial intermediation under AMLA, provided asset tokens are qualified as securities, provided they are not issued by a bank, securities firm or other entities under prudential supervision. In practice, however, due to compliance with requirements from banks into which the revenues of the ICOs will fall, asset token issuers are often required to conduct some CACs and identification processes on a voluntary basis.

The advance transaction including any entitlement with the right to purchase tokens in the future is not financial intermediation, provided the issuer does not fall under prudential supervision, being neither a bank nor a securities firm, nor anything else. However, the subsequent issuance of tokens, which constitute, as a matter of fact, means of payment falling under AMLA, namely payment tokens and, subject to the aforesaid exceptions, service tokens, to pre-ICO investors, is financial intermediation. The Anti-Money Laundering Act duties are thus triggered as of its date of adoption.

Regarding ICOs falling under the scope of AMLA, FINMA proposes that the corresponding duties under AMLA, in particular KYC, may be delegated to Swiss financial intermediaries which are affiliated with SRO or supervised by FINMA, provided all funds of the ICO are received via a financial intermediary, meaning all tokens and fiat currencies contributed by investors must be transferred to the public keys or to the accounts of the outsourcing partner before being forwarded to the relevant issuer.

The exchange and intermediary services

Exchange of fiat currencies for tokens or vice versa, or exchange of two different tokens, falls under financial intermediary as per the condition of AMLA.

Where an undertaking itself provides the exchange service in question, thus being an exchange partner to its customers, then that service definitely falls under currency exchange as specified by the AMLO. To such services, the threshold applies of at least CHF 1,000 where foreign exchange transactions relate to cryptocurrencies, and for transactions below this threshold, no KCS or AMLA identification obligations apply.

If the service provider offers an exchange service in a way where there is any other person involved, such as being a token exchange platform, or if the service provider acts as an intermediary of the provision of services that are linked to the transfer or exchange of tokens or fiat currencies and actively participates in the payment flow; Such services are money and asset transfer services within the meaning of article 4(2); Pursuant to the AMLA, the service provider is a financial intermediary.

Further, FINMA, in relation to the provision of payment services by persons subject to its control, specified that crypto-Assets could only be transferred to third-party wallets in cases where the recipient’s wallet address is in the name of one of his customers and this should be checked. FINMA legitimises this approach in that, at present, there is no possibility to provide identifying information about the sender and recipient of a transaction on blockchains, as is possible on traditional bank transfers, such as SWIFT.

Custodian services

In general, if a custodian service provider has discretionary power over the private keys of the stored tokens, it will already be considered a financial intermediary; that will probably be subject to a banking license in turn.

REGULATION OF EXCHANGES

Tokens that qualify as securities

The DLT Act, which entered into force in August 2021, created a new category of license for trading platforms, whereby DLT rights qualify as securities. Thus, the legislature is derogating from its technology-neutral regulatory principle to eliminate barriers to entry that have up until now prevented the establishment of trading platforms for trade tokens qualifying as securities under Swiss law-at least until such securities are structured as non-documentary DLT securities. securities). In the context of previous licensing options, trading venues were not allowed to combine post-trading activities with the trading venue. Besides, transaction clearing and settlement require different central counterparties and central securities depositories. As far as transactions in distributed registries are concerned: The said transactions normally take place at the time of the transaction through recording the transaction in a distributed registry but without the help of any more intermediaries involved in clearing or settlement. Further, trading platforms shall not provide direct access to retail customers.

By the DLT Act, FCIA defines the DLT trading systems as those which provide the platforms for multilateral trading of either DLT rights or other rights law governed by foreign law, which in the distributed registry are qualified as non-discretionary-based securities that meet at least one of the following requirements: the trading system allows trade of unregulated legal or natural persons as participants; or the operator of the trading system centrally deposits the DLT Securities on the basis of a distributed register based on uniform rules; or a trading system operator carries out post-trade transactions with DLT Securities, such as clearing and settlement, on the basis of uniform rules and procedures.

Furthermore, the DLT Act provides that a firm authorized as a securities firm or as a bank can operate an organized trading mechanism for the purpose of trading DLT rights.

Other tokens

Excepted from such licensing under Swiss law, though, is exchange of payment tokens and service tokens not considered securities; there is no business licensing requirement in regard to such exchange activities, other than in conformity with Swiss AML requirements (Section V). However, because transactions of such exchanges usually involve the acceptance of fiat currencies or tokens into the accounts or public keys of the exchange operator, for which a bank license is required, the latter would be an acceptance of deposits from the public-which is the acceptance under section IV.

Similar to brokerage services, an exchange would also be able to take advantage of an exemption from a clearing account provided clients’ funds received into its accounts or public keys are solely applied for the purposes of exchange transactions, interest-free, and transferred within 60 days. This would also apply only if clients are not exposed to an increased risk of bankruptcy similar to those of a currency trader.

Furthermore, the exchange may be exempt under the sandbox exemption pursuant to Article 6(2) of the SBO, inasmuch as it receives fiat currencies and tokens below CHF 1 million from the exchange participants, and the participants are in a position to know that there is no one or prudential supervision of the exchange operator and any protection against deposit protection.

Anyway, the token exchange operation is a service of transferring money and asset according to Article 4(2) of AMLO. Thus, the exchange operator is a financial intermediary who, among others, is obliged to join the SRO or obtain a license from the FINMA financial intermediary.

Virtual currency mining regulation

In an unlimited decentralized network, such as Ethereum or Bitcoin blockchain, extraction usually involves native tokens of the respective distributed registry, one of which is usually a payment token-a significant constituent of recording in a distributed registry. Due to the absence of a central authority that may control financial transactions, verification of each transaction should be performed by crypto miners-miners-with their further addition to the distributed registry for the purpose of securing financial transactions from possible fraud.

The work of miners is open to the whole ecosystem of a distributed registry: anybody can potentially connect to this network and become a miner of tokens. The miners apply mathematical protocols, which confirm the transactions in each block of the transaction and verify it by distributing the result over the network. A new virtual currency is created in this process because miners receive a new virtual currency for the mining activity.

Crypto regulation in Switzerland overview

Regulatory framework

There is, as yet, no specific legislation in Switzerland regulating the status of miners. Under Swiss legislation, token mining-as self-issuance of tokens-does not require a license, inasmuch as the miner does not perform any activities falling within regulated activities as described under sections II-VI.

As a general rule, the independent issuance of tokens qualifying as securities does not require a license as a securities firm pursuant to FinIA. This is also the case if the tokens qualify as derivatives, provided that these derivatives are not offered to the public on a professional basis.

FINMA audit and enforcement proceedings in connection with mining

FINMA is normally friendly towards blockchain technology; however, it keeps a close eye on all the market players with the aim of making the Swiss blockchain network free of fraud, especially regarding the concept of the so-called ICO. He regularly points out risks linked to investors and undertakes to take action against models of the ICO business in the case of violation or circumventing regulatory legislation.

For example, in July 2018, FINMA launched enforcement proceedings against the Swiss mining company Envion AG for its violation of Swiss financial law in connection with its ICO. In this respect, FINMA considered that the company was accepting public deposits without a bank license, ordering its liquidation due to bankruptcy.

As the regulatory status of token mining activities may be viewed as somewhat ambiguous in certain instances, for instance, the so-called non-action letter from FINMA, among others, regarding a proposed mining activity is always desirable to attain legal certainty that said proposed activity does not breach any regulation (Section II.IV).

Issuer regulations

Anyway, in respect to legal and organizational form for token issuers, there are two common types of forms: a fund and a joint stock company.

The Fund provides complete independence and control of the Board of Directors of the Fund because there are no shareholders. The assets, on the other hand, must be disposed according to the purposes of the fund as those included in the constituent instrument. Therefore, the distribution of profit can serve only this very goal and it is not allowed to distribute profits among the founders. Moreover, every foundation is also subject to additional control from the State. Please note that partial tax exemptions are accorded to either foundations or joint stock companies pursuing both government and non-commercial goals. However, conditions to such exemptions are very strict and usually are not met by the ICO organization.

ICOs, insofar as there is at least a partial commercial purpose and no non-commercial purpose of the issuer, the legal form of the Swiss foundation is generally unsuitable. Yet, the inflexible structure did not provide flexibility usually needed, especially in view of founders not having property rights or other control over the assets or funds of the fund and having no legal means to influence the implementation of the fund’s activities. Rather, a joint-stock company is more suitable in kind under the corporate form for the issuers of the ICOs. In particular, where an ICO issuer is registered as a joint-stock company, paid-up capital of CHF 50,000 shall be deposited with a Swiss bank subject to at least CHF 100,000 authorized capital. There are no restrictions with regard to the place of management of the account following registration. The account may also be held with a foreign bank. The Issuer shall comply with the regulatory requirements to the extent that they are applicable to it in accordance with Sections II to VI below.

Depending on the category of the tokens issued, a token issuer will already be subject to AMLA if it acts as a financial intermediary. With regards to the ICO and tokens, the issuing of means of payment that cannot be used exclusively with the issuer and services connected with a payment transaction in the form of money and asset transfer services or money exchange services for example constitute financial mediation.

Sponsors

While there are no activities falling within the scope of regulated activities described in sections II–VI, token sponsorship, including marketing, advertising and promotion of tokens, is currently not subject to licensing in Switzerland. However, this is due to the following:

1. License requirement under SBA or FinIA: if the sponsored company has foreign regulatory status as a bank or securities firm because it has appropriate regulatory status under foreign law, it conducts activities which, under Swiss law, constitute banking or securities transactions, or it uses the names “bank” or “securities firm” in the name of its company, every marketing activity in Switzerland or from Switzerland for such foreign bank or broker-dealer – provided such activity is conducted by individuals employed in Switzerland on a professional and permanent basis.
2. Reason – might bring a foreign bank or broker-dealer activity within the license requirement of a FINMA branch or representative office; or
3. Issue prospectus requirement: public offering of tokens if they qualify as securities in accordance with FinSA or alternatively and only until December 1, 2020 in accordance with CO.

Cryptocurrency Tax in Switzerland

In August 2019, the Swiss Federal Revenue Authority (FTA) published a working paper on the tax regime of cryptocurrencies and ICOs for property tax, personal income and corporate income tax purposes, as well as for tax withholding and stamp duty purposes. The practices described in this working paper are described below. However, it should be noted that this is just a brief review and that not all of the tax issues related to cryptocurrencies or ICOs have yet been considered and final answers have been given to them. It is therefore possible that the tax administration practices described below will develop and change. Therefore, it is strongly recommended to obtain prior tax decisions from the responsible tax authorities before the ICO.

In addition, the following explanations are limited to the tax consequences for issuers registered in Switzerland that have issued coins or tokens with monetary rights against any counterparty in the form of asset tokens and utilities.

Finally, tax treatment of tokens at the investor level is not considered, as well as the tax regime of cryptocurrencies in the form of purely digital means of payment (native tokens or payment tokens).

Taxation of tokens

Asset tokens are rights of an investor vis-à-vis the issuer that consist of a fixed compensation or a certain, predetermined investor stake in the controlling value (e.g., earnings up to interest and taxes (EBIT)) of the issuer’s business. Thus, the tax classification of asset markers largely depends on the civil structure of legal relations.

So far, asset tokens have been divided into the following three subcategories for tax purposes:

The tax treatment of these three types of asset markers for the issuer is described below, provided that the issuer is a corporation with a tax residence in Switzerland.

Debt tokens are treated as bonds for tax purposes and are therefore processed as follows:

Share tokens are considered derivative financial instruments for tax purposes and are therefore treated as follows:

Participatory tokens are also considered derivative financial instruments for tax purposes, so they are treated in the same way as token stock for tax purposes. The reference is made in accordance with the above clarifications on the taxation of equity tokens.

Taxation of service tokens

In all cases that involve tax analysis, it is presumed that the issuer commits to using income generated from the sale of service tokens solely for the development of the digital service and granting the investor access or usage of the service. Additional obligations towards the investor are not given by the issuer. Utility tokens should in principle be qualified as a contract between the issuer and the investor. The mandate is that the issuer ought to act in concert with a contractual agreement between it and the investors. Service tokens, in line with that therefore, are processed for tax purposes as follows:

MiSA

The DLT Act removed several of the largest hurdles that previously stood in the way of the establishment of a workable primary and secondary digital asset market under Swiss law and provided a sound legal basis for the issuance and trading of rights represented in tokens.

Even more emphasis needs to be directed to new aspects that have been included in the practical application of the DLT Law. For cross-border cases, the new laws may be bound in their future effect by new legislation already in force in the other relevant markets, such as the Proposal of the EU Regulation for Crypto Asset Markets known as MiCA, published by the European Commission dated 24 September 2020, which may establish further requirements with respect to the distribution of tokens issued in Switzerland within the European Union.

Lawyers of our company are always glad to answer all your questions about obtaining a cryptocurrency license in Switzerland and also accompany your company throughout the whole licensing process.

Establish a Crypto Company in Switzerland

With Switzerland’s very positive attitude toward this modern and innovative industry, it remains one of the most attractive countries in which to found a cryptocurrency business. Switzerland thus provides a sound yet dynamic environment for crypto companies to innovate.

If you would like to open a company in world-famous Crypto Valley or another prestigious Swiss region, among the main issues, notice the requirements for a crypto license that you shall obtain before starting your crypto business in Switzerland if your crypto activities fall into any of the categories regulated. These licenses are issued by the Swiss Financial Market Supervisory Authority, FINMA, which has the principal objective of ensuring the enforcement of laws related to AML/CFT.

The nature of crypto activities determines administrative prerequisites for every company and the involvement of regulatory bodies, which is why it is very important to clearly describe the scope of crypto operations before starting your company’s incorporation process.

When you become a proud founder of a Swiss crypto company, consider getting backing from such influential organizations as the Crypto Valley Association: its objective is to build the world’s leading blockchain and crypto ecosystem by facilitating collaboration between market participants and the authorities.

Types of Business Entities

In Switzerland, all companies are incorporated in pursuance of the provisions of the Swiss Commercial Code. The following types of capital companies can be eligible to obtain a crypto license: a GmbH, KmAG, or AG. You can choose any of them based on your business model and size. The formation process may take as long as four months, depending on your selected legal business structure and quality of documents.

Any of these companies can be established either by a legal entity or by an individual shareholder who legally resides in Switzerland and does not necessarily have to be a Swiss citizen but needs to be in possession of permit B, which allows them to engage in economic activities or be employed in the country.

The initial share capital requirements depend on the type of the legal business structure and the type of the crypto license you’re applying for. For example, applicants of the Fintech licence need to transfer a full amount of 300,000 CHF (approx. 289,000 EUR) to the account of the initial share capital.

Whichever type of capital company you decide to set up, the following general aspects must be taken into consideration:

• Though the availability of the company name should be checked in advance of the registration, it cannot be reserved. The name should be distinctive and true, plus it has to include the abbreviation of the legal form of the company name, i.e., AG, SA, KmAG, or GmbH.
• The registration cost will depend on the level of business complexity and on cantonal charges. It may amount to several thousand francs, inclusive of notary fees.
• Shareholders and board members must be fit and proper to perform senior management functions, making measured and effective decisions.
• Similarly, it is obligatory to hire local employees.
• You will also be required to appoint a Swiss corporate lawyer, which is also a requirement in most instances.
• Design and implement internal AML/CFT and other risk management policies corresponding to the peculiarities of the planned economic activities, as well as to the company’s size. It is allowed to have an operational corporate bank account in a foreign bank.
• It’s required to have a registered office in Switzerland, where its business activities are carried out and local staff is employed. Alternatively, you can seek domicile with another company or individual.

Documents needed:

• A business plan and a detailed review of a company’s commercial activities
• Identification documents of the founders
• Residence permits
• A copy of a rental agreement proving the existence of the registered office in Switzerland
• Statutes
• Company’s bylaws
• Stampa declaration under certification that no other in-kind contributions and recoveries of assets besides those stated in the Articles of Association exist
• Lex Friedrich declaration, a permit given to a foreign citizen to purchase real estate in Switzerland

Limited Liability Company (GmbH)

This is an abbreviation of the name given to a Swiss limited liability company and it requires at least CHF 20,000 (around 19,668 euros) as share capital, deposited in a newly opened Swiss bank account or covered with a contribution in kind such as cryptocurrencies.

The following are some of the key features of a GmbH:

• Appropriate for small and medium-sized enterprises
• At least one founder (natural or legal person)
• Unlimited number of quota holders
• Only liable for debts, though the statutes can give an additional requirement for capital contribution
• Taxation at the level of the legal entity – quota holders are taxed on the dividends distributed
• The right to manage is conferred to all partners
• Annual audit report is mandatory, except for small companies

The Statutes of a Ltd. Company GmbH shall contain:

• Well defined business purpose and principal activities to be carried out
• Precise sum of share capital and contributions (in cash, in kind, or as bank debt)
• Precise means utilized in giving notice to interested third parties

Corporation with unlimited partners (KmAG)

This is the least utilized form of enterprise by cryptocurrency businesspeople. However, it always proves helpful whenever a business with unlimited liability, for instance an individual entrepreneur or general partnership, requires additional capital.

Characteristics of the Unlimited Partners Corporation KmAG:

• The minimum in-stock capital does not exist
• Stock capital divided by shares
• A minimum of two partners is required; at least one natural person must have unlimited liability and thus be the general partner
• Legal persons can only be partners in a limited liability partnership and therefore become limited liability partners whose liability is limited to the amount that they declare to the Commercial Register
• If registration of the limitation of liability in the Business Register has been omitted, the partner becomes an unlimited liability partner, unless a third party can prove that the limitation of liability was known.
• A limited liability partner has fewer rights and obligations, meaning one cannot be responsible for the general management of the company

The Articles of Incorporation of Unlimited Partners Corporation – KmAG

• Special and suitable company name
• Registered office address in Switzerland
• Clearly defined business objective and core activities to be implemented
• Specific amount of equity and contributions in cash, in kind, or as an external debt
• Details regarding shares-type, number, face value
• Rules regarding the organization of general meetings and voting rights of shareholders
• Information about the persons appointed to manage—a board of directors—and audit the company—statutory auditors
• Special form of notification or declaration of shareholders

Limited Company on Shares (AG)

Minimum share capital – 100,000 Swiss francs (approx. 98,000 euros), not less than 20% and not less than 50,000 Swiss francs (approx. 49,000 euros) should be transferred to the Swiss bank account or contributions in another form, such as crypto or other assets.

The main peculiarities of the company Limited by Shares (AG):

• Minimum one founder – physical or legal entity
• Taxes at the corporate level
• Unlimited number of shareholders
• The liability of a shareholder is limited to the amount of subscription shares
• The shareholders are being taxed on distributed dividends
• The Board of Directors is the body with authorized powers to represent the company in an external manner
• The day-to-day management can be delegated to third parties by the Board of Directors with the help of organizational by-laws
• Annual audit report is necessary, except for small companies.

The Statutes of the Limited Liability Company – JSC should contain the following:

• Distinctive and harmonious name of the company
• Explicitly defined business purpose and main activities to be carried out
• Registered office address in Switzerland
• The specific amount of share capital and the contributions thereto in cash, kind, or by debt contribution, as well as the number and value of the shares held by each shareholder
• The particular method to be adopted for notifying the shareholders

How to proceed

In a nutshell, the following steps have broadly to be performed in order to found a Swiss company:

• Register your firm name via EasyGov, which automatically registers the company with the Swiss Business and Corporate Register and assigns a Unique Enterprise Identification Number – UID
• Verify the name has not already been registered using the Central Index of business name
• Opening an account with the Swiss bank for transferring the minimum required share capital. The minimum paid-in share capital of the company—equal to or in excess of CHF 1,000,000, or approximately EUR 983,000—includes stamp duties for 1% of the minimum share capital, which is due within 30 days from the date the company was registered.
• The Swiss Bankers Association has published guidelines on opening a corporate bank account for blockchain companies. Download here.
• Find a notary who will review the charter and the rest of the corporate documents, and prepare a statement of registration of the company against presentation of proof of transfer of original equity
• Companies whose turnover exceeds CHF 100,000 – approximately EUR 98,000 shall register with the Commercial Register of the Canton where the Company is located. Costs 600 Swiss francs – approx. 590 euros. Notarised documents may be filed by post or online via a specific website.
• Applying at FINMA for a Cryptography license
• Registration with the Federal Tax Office and cantonal tax administrations
• Also, register your employees with the Federal Social Insurance Office and the Cantonal Compensation Office (Ausgleichskasse)
• Collect commercial insurance

Once the application is processed, the Business Register publishes its data in the Swiss Commercial Gazette once the new company is considered as fully registered.

Upon your crypto license, you can start your crypto activities in Switzerland. If there will be future changes in your company—new top management, different technical adjustments, or updates of key documents—notification to FINMA will be required. Further permission from FINMA can give you permission to reboot your business.

Depending on your business model and the nature of activities you engage in with regards to cryptography, you may apply for one of the following licenses:

• The most sought-after is a FinTech or Financial Intermediary license that allows you to accept government deposits of up to $100 million CHF (approx. 96 mill. EUR) or store and trade crypto assets that cannot be invested, and no interest can be paid on them.
• Banking licence: Unlimited number of deposits from individuals or legal entities could be allowed.
• Investment fund licence: The fund managers may oversee the collective fund assets on behalf of their clients.
• Licence for DLT trading facility: Multilateral trading of DLT securities is allowed.

Taxation of crypto companies in Switzerland

Swiss taxes are collected and administered by the Federal Tax Office – FSA, the cantons, and the municipalities. Federal tax rates are stable while cantonal tax rates are determined annually and published on the official website of each canton.

All types of companies performing crypto activities in Switzerland will be generally subject to the following federal, cantonal or communal taxes:

• Direct federal tax
• Corporate income tax – 12%-21%
• Capital Gains Tax – 0.001%-0.5%
• Value Added Tax – 7.7%
• Dividend withholding tax – 35%
• Social security contributions – 0.5 – 5.3%
• Stamp duty – 1%

Switzerland has concluded international agreements on the elimination of double taxation with some 100 countries, allowing taxpayers to protect their tax revenues in two different countries.

Our team of dedicated and quality-oriented lawyers will be happy to support you with customized, added value in creating a cryptocurrency company in Switzerland, including the submission of a crypto license application. You will be supported from the very beginning of this process by specialists in the field of company formation, in rapid development legislation on money laundering, financial accounting, and taxation.

Also, lawyers from Regulated United Europe provide legal support for crypto projects and help with adaptation to MICA regulations.