Crypto regulations in Switzerland
The provision of a cryptocurrency exchange and custodian services in Switzerland is legal and regulated by SFTA and FINMA. In Switzerland, cryptocurrencies and virtual currencies are classified as assets or property. The exchange is legal and, depending on the nature of the assets and investor protection, the country has taken a progressive stance on cryptocurrency regulation. Exchange offices and virtual currency platforms are considered equivalent to financial institutions in Switzerland and therefore must demonstrate compliance with local AML/CFT and consumer protection obligations, although some banking rules and thresholds are less burdensome. The Swiss Federal Tax Service (SFTA) considers cryptocurrencies assets: they are subject to Swiss wealth, income and capital gains taxes and must be declared in annual tax returns.
Cryptocurrency Exchange Rules
Switzerland is introducing a registration process on cryptocurrency exchanges and requires a license from the Swiss Financial Market Supervisory Authority (FINMA) to operate. While the cryptocurrency licensing exemption is available for public deposits of funds up to 1 million Swiss francs, exchanges must write and inform their clients that their funds are not subject to protection if the firm is under FINMA supervision.
Cryptocurrency rules in Switzerland also apply to ICOs: in 2018, FINMA published a set of guidelines that applied the current financial legislation to proposals in various fields, from banking to securities trading and collective investment schemes (depending on their structure). In 2019, the Swiss government also approved a proposal instructing the Federal Council to adapt existing regulations to include cryptocurrencies. In September 2020, the Swiss Parliament adopted the Blockchain Law, which additionally defines the legality of the exchange of cryptocurrencies and the conduct of cryptocurrency exchanges in Swiss law. The legislation requires compliance with local ICO, AML and CTF requirements as soon as the token can technically be transferred to the blockchain infrastructure.
Future Cryptocurrency Rules
The Swiss government has stated that it will continue to work on creating a regulatory framework favorable for cryptocurrencies. In 2016, the city of Zug, a well-known global cryptocurrency center, introduced bitcoin as a way to pay city fees, and in January 2018, Swiss Economy Minister Johann Schneider-Ammann stated that he was striving to make Switzerland a “crypto nation”. Similarly, the Swiss Secretary for International Finance, Joerg Gasser, stressed the need to promote cryptocurrencies while complying with existing financial standards.
Based on these goals, at the end of 2020, the Swiss Ministry of Finance began consultations on new general cryptocurrency rules that will allow it to take advantage of blockchain technology without suppressing innovation.
Familiarity with the regulatory framework
Switzerland is home to the crypto valley in Zug, near Zurich, and has an active community of businesses operating in the crypto space. Although it is difficult to attribute a place to Switzerland in the rapidly developing global crypto community, Switzerland has taken on the role of a pioneer in this field. It is an important jurisdiction for initial coin offerings (ICOs) and securities token offerings (STOs) and offers a well-developed infrastructure and a reliable legal framework for companies that are active in the crypto space.
Switzerland has a favorable and attractive legal framework for crypto assets, although it does not have a separate legal framework for them. For cryptocurrencies, the regulatory framework permitting the issuance and trading of these assets has been in place for several years.
Currently, Switzerland has improved its regulatory framework for tokens representing rights, such as asset tokens and service tokens representing claims against the issuer or a third party, by adopting the Federal Law on the Adaptation of the Federal Law to Developments in the Field of Distributed Registry Technology (DLT Law), which has made various amendments to Swiss legislation to consider the potential offered by distributed ledger technology (DLT). In particular, the DLT Law introduced DLT rights as a digital alternative to certified securities as a new asset class. DLT rights must be transferred exclusively through the blockchain. In addition, a new type of license category has been introduced into Swiss legislation for trading platforms where DLT rights can be traded. In addition, additional rights were introduced to segregate crypto assets held by a third party (for example, a wallet provider) in the event of a third-party bankruptcy.
The Swiss Financial Market Supervisory Authority (FINMA) has repeatedly stated that it will not distinguish between different technologies used for the same activity: that is, it will apply the principle of “the same business, the same rules” to any new technologies. FINMA currently adheres to this principle when applying Swiss financial market laws to blockchain-based crypto assets and applications, and this will also apply in the future with the DLT Law.
Regulatory classification of tokens
On February 16, 2018, FINMA published a guide to the application of Swiss legislation on financial markets in its recommendations concerning the regulatory framework for ICOs (ICO Guidelines). 3 In the ICO Guide, FINMA explains how to classify cryptocurrencies and other coins or tokens (together with cryptocurrencies, tokens) or other assets registered in distributed registries in accordance with Swiss law.
According to the ICO Guidelines, FINMA identifies the following categories of tokens:
- payment tokens or cryptocurrencies intended only as a means of payment and not causing any claims against the issuer;
- service tokens that grant rights to access or use a digital application or service, provided that the application or service is already running at the time of the token sale;
- asset tokens that represent an asset, such as a debt or equity claim against the issuer or a third party, or the right to an underlying asset.
FINMA also explained that tokens can also have a hybrid form that includes elements of more than one of these categories. These hybrid tokens must collectively comply with the regulatory requirements applicable to each respective token category. FINMA recognizes that the classification of the token may change over time. To assess the regulatory consequences of the ICO, the moment of the token release is important. However, the initial classification may change after the ICO. In the case of any trading activity on the secondary market with tokens, it is necessary to take into account their classification at the time of the corresponding trading activity.
In addition, FINMA published its opinion on the regulatory classification of stable tokens (i.e. tokens backed by an underlying asset, such as a pool of fiat currencies or other assets) in addition to the ICO Guidelines dated September 11, 2019. tokens are not considered a separate type of token category in accordance with Swiss law, and that, depending on the rights assigned to stable tokens, they are usually classified as asset tokens or as a hybrid of payment tokens and asset tokens.
Payment tokens are not considered legal tender or other means of payment in accordance with Swiss law. However, the Swiss Federal Council clarified that payment tokens can be used as a private means of payment if the parties to the transaction have agreed to use payment tokens as an applicable means of payment for such a transaction. In addition, the issuance of payment tokens requires compliance with Swiss AML rules (see Section V).
Requests to FINMA
Despite the guidance provided by FINMA, given that this area is new and the structures of token offerings are constantly evolving, with regard to the application of ICO Guidelines in real projects, it is common practice to send a request to FINMA for confirmation, and receive a rejection letter from the regulator, thereby providing comfort.
FINMA offers the possibility of submitting such “inaction” requests to confirm the regulatory interpretation.
Securities and Investment Laws
Swiss securities laws apply to the issuance of asset tokens or any hybrid form of tokens that includes the functionality of asset tokens (for example, a stable token or a service token in relation to the use of a platform that is not fully developed).
However, payment tokens and service tokens that do not represent any claims against the issuer or a third party are not subject to Swiss securities legislation, since they do not represent any rights. Such payment tokens and service tokens should currently be classified as intangible digital assets sui generis.
Issue of tokens representing rights against the issuer or a third party
The DLT Law introduced DLT rights (DLT rights) as a new asset class. The Swiss Code of Obligations (CO) for asset tokens or service tokens representing any claims against the issuer or third parties. DLT rights are developed as a digital equivalent of documentary securities or non-documentary securities by linking the right to a token instead of a certified security tool or registration in the register of non-documentary securities. DLT rights cannot be implemented or transferred outside of the corresponding distributed registry. As for the scope of DLT rights, any rights that can be issued as documentary or non-documentary securities can be issued as DLT rights. Consequently, they can be used to represent interchangeable contractual claims (for example, debt obligations. However, cryptocurrencies or ownership of assets or actual control over them cannot be formalized as DLT rights.
In accordance with the Law on the Distributed Registry, in order to grant rights to a distributed registry, registration of the right to a distributed registry is required on the basis of an agreement between the issuer and the first holder, which provides for registration of the corresponding rights to the distributed registry and an obligation that such rights can be transferred and exercised only in the corresponding distributed registry. In addition, it is recommended that the parties explicitly state their intention in the terms of DLT Rights to create DLT Rights and that Swiss law be the applicable law. Without such a choice of law, the Swiss Law on Private International Law, as amended by the DLT Law, provides that the laws of the place of registration or residence of the issuer apply, taking into account special rules regarding proprietary rights.
Moreover, the DLT Law defines certain characteristics that must be met by the distributed registry on which the DLT right is granted. Such a distributed registry should grant the right to dispose of DLT rights only to the owners of DLT rights (and not to the debtor), protect its integrity with appropriate technical and organizational measures from unauthorized access and changes, record or make available through the distributed registry, its terms of operations and the terms of the corresponding rights of the distributed registry, and ensure that registry entries the distributed registry was visible to the public. However, the DLT Law does not define any technical requirements, for example, regarding the minimum number of registry participants or the consensus mechanism used.
Finally, DLT Rights can be used as a basis for the creation of undocumented securities in accordance with the Swiss Federal Securities Intermediation Act (FISA) by transferring them to a custodian within the meaning of FISA and by this custodian crediting the DLT Right to one or more securities accounts. The custodian must block DLT rights that can only be transferred in accordance with FISA if they are held as undocumented securities.
Token Transfer Requirements
According to Swiss law, payment tokens and service tokens that do not represent any claims against the issuer or third parties can be legally created and transferred in accordance with the terms of the corresponding distributed registry. Thus, the transfer can actually be carried out by performing a transaction between two wallets.
On the other hand, asset tokens or service tokens representing any claims against the issuer or third parties that are issued as DLT rights can only be transferred in accordance with the rules of the corresponding distributed registry. It no longer matters how the relevant rights represented in DLT law will be transferred without digital representation in DLT law, as is the case with any asset tokens or service tokens representing any claims against the issuer or third parties that are not issued as DLT rights. The DLT Law provides for a rule on the finality of such transfers, even if the transferring party becomes insolvent. Holders of DLT rights will also receive the right to fair protection, similar to holders of paper-based security certificates, if they purchased DLT rights from an unauthorized seller.
Classification of tokens as securities
In accordance with article 2 (b) of the Financial Market Infrastructure Act (FMIA), securities are certified or undocumented securities, derivative securities, securities with intermediation or DLT rights that are standardized and suitable for mass trading. According to article 2(1) of the Financial Market Infrastructure Ordinance, “standardized and suitable for mass education” in this context means that instruments are offered for public sale in the same structure and denomination or that they are placed with 20 or more clients on the same terms.
FINMA explained in the ICO Guide that it will apply these rules to tokens as follows:
- Payment tokens are not considered securities because they are intended to be used as a means of payment in accordance with FINMA. Payment tokens cannot fall under the definition of securities, since they do not represent any rights that can be exercised against the issuer or third parties.
- Utility tokens may qualify as securities if the platform on which they can be used is not ready for operation at the time of the token sale or if the tokens represent rights that can be applied to the issuer or a third party. It is believed that these service tokens have an investment purpose. FINMA also explained that an individual analysis is needed to find out whether the service token can be used for its intended purpose. In particular, it states that the verification of concepts or beta versions of platforms or applications on which utility tokens cannot (yet) be used is not enough to go beyond the definition of securities for FMIA purposes. However, based on the fact that the qualification of tokens may change over time,
- Asset tokens are considered securities provided that they have been offered publicly or to 20 or more persons for sale.
FINMA stated that any legally enforceable rights of investors to receive or purchase tokens in the future as a result of a pre-sale, for example, under a simple agreement on future tokens, qualify as securities if the rights were offered publicly or on identical terms by more than 20 persons. On the other hand, rights issued as part of the pre-sale are not securities if the conditions used in the pre-sale are not standardized or different conditions are used for each investor: for example, by changing the number of rights, the price or any blocking provision.
Requirement for the issue prospectus
Regardless of the classification of tokens as securities, with respect to any tokens representing a digital representation of rights that can be exercised against the issuer, the question arises as to whether the tokens are subject to the prospectus requirement in accordance with the Swiss Financial Services Act (FinSA). In accordance with FinSA, the prospectus requirement applies, generally speaking, to all public offerings of securities, including tokens that qualify as securities (see Section II.iv).
In addition, with respect to financial instruments offered to retail investors, FinSA has introduced an obligation to prepare a key investor document as an additional disclosure document, similar to how it is currently applied in the European Union in accordance with packaged retail and insurance investment products. Regulation. This new obligation also applies to certain types of tokens that qualify as financial instruments (for example, asset tokens with the economy of a structured product or derivative).
Regulatory Implications of Classifying Tokens as Securities
If tokens qualify as securities, they are subject to the FinSA regulatory framework and the Financial Institutions Act (FinIA). In accordance with this regulatory framework, a securities firm license is required for any brokerage activity on behalf of clients (other than institutional clients) in relation to such tokens and any market creation activity in relation to such tokens. In addition, the underwriting of such tokens and the issuance of tokens that qualify as derivatives are subject to licensing as a securities firm or bank if this activity is carried out on a professional basis. 8 The license requirement arises in every case if this activity is carried out on a professional basis.
Moreover, the qualification of tokens as securities affects the licensing requirements under the FMIA for any secondary trading platform on which such tokens can be sold.
Collective Investment Laws
In relation to any investments in tokens through collective investment schemes or funds, or in relation to the issuance of tokens representing units in collective investment schemes, the rules of the Swiss Collective Investment Schemes Act (CISA) and its executive regulations must be taken into account. For the purposes of CISA, a collective investment scheme is a pool of assets attracted from investors for the purpose of investing under collective management on behalf of investors. CISA regulation applies regardless of the legal form chosen for the collective investment scheme or fund.
As a result, the issue of tokens, as well as any business activity in relation to tokens (regardless of their classification), according to which assets accepted from clients for investment purposes are combined (i.e. there is no separation of investments for each investor), or when client assets are managed by a third party on behalf of these clients, may fall under the requirements of CISA and FinIA and should be analyzed from the point of view of the Swiss regulation of collective investment schemes.
Commercial enterprises, as a rule, are not subject to CISA. However, it is possible to draw a line between a commercial enterprise and a collective investment scheme only in each specific case.
Banking operations and money transfers
In accordance with the Swiss Banking Act (SBA), the requirement for a banking license arises if a company engaged primarily in financial activities accepts deposits from the public (i.e. from more than 20 people) or publicly advertises this activity. According to the Swiss Banking Regulation (SBO), the acceptance of any obligations is usually qualified as a deposit-raising activity, unless one of the exceptions defined in Article 5 (2) and (3) of the SBO applies.
In the context of token sales, the most relevant exceptions are the following:
- to the extent that the liabilities are debt securities issued as standardized products suitable for mass trading, or non-documentary rights with a similar function, and creditors are provided with disclosure (for example, in a prospectus or a private placement memorandum), including the minimum content as described in Article 5(3)(b) of the SBO at the time of the offer, the obligations do not qualify as deposits; and
- to the extent that liabilities arise from customer funds held in settlement accounts with securities firms, asset managers or similar financial intermediaries, provided that the funds are used to settle customer transactions, interest on the funds is not paid and – with the exception of accounts with securities of the firm – the settlement takes place no later than less than within 60 days.
In addition, Swiss law provides an exception for the sandbox in accordance with Article 6(2) of the SBO. In accordance with this exception, accepting deposits from the public (i.e. from more than 20 persons) up to a maximum amount of 1 million Swiss francs is allowed without a banking license, provided that the deposit amounts do not bring interest income and before accepting the deposit, the investor was informed that the receiving individual or legal entity is not subject to supervision by FINMA and that investments are not protected by any deposit protection scheme.
In addition, organizations accepting deposits from the public in the amount of up to 100 million Swiss francs, provided that these deposits are not reinvested and do not bring interest, can request a “lite” banking license. Compared to a full banking license, some exceptions apply with respect to the organization, risk management, compliance, qualifications of the regulatory auditor and capitalization requirements. The Light Banking license is available from January 1, 2019. This may be an interesting option for organizations operating in the crypto space that intend to accept deposits from the public in an amount below the limit of 100 million Swiss francs.
When providing token storage services, the following question arises: under what circumstances is a banking license or a banking license required to carry out activities? This would be appropriate when a storage provider stores tokens with a payment function not on a separate basis (for example, on individual public addresses for each client), but on an omnibus client account (for example, on a common public address for more than one client). customer), since such storage activities on omnibus customer accounts require a banking license or a banking license.
As for the brokerage services provided in relation to tokens, this activity may be subject to a banking license if the service provider accepts fiat currencies or tokens to its own accounts, respectively public keys, in connection with such services. In this case, the service provider will need to rely on the settlement account exemption mentioned above. However, this exception is not available for cryptocurrency traders who carry out activities comparable to those of currency traders (i.e. expose their clients to the same risks of bankruptcy as currency traders).
The fight against money laundering
According to Swiss law, AML regulation consists of the Swiss Anti-Money Laundering Act (AMLA) and the Anti-Money Laundering Ordinance (AMLO). AMLA applies, in particular, to financial intermediaries. In short, in addition to the entities subject to supervision, any person accepting, holding or depositing assets belonging to other persons, or assisting in the investment of such assets on a professional basis, qualifies as a financial intermediary in accordance with Article 2(3) of the AML. In addition, the POA contains an incomplete list of activities that are considered financial intermediation. In the context of ICOs and tokens, the issuance of means of payment that cannot be used exclusively with the issuer, the provision of services related to payment transactions in the form of money and asset transfer services, and currency exchange services are relevant types of financial intermediation activities.
A financial intermediary within the meaning of the POA must be affiliated with an authorized self-regulatory organization (SRO) under AML. In addition, the financial intermediary must comply with the obligations defined in the AMLA, including, but not limited to, the obligations to identify and know its client (KYC) related to the contracting party and its beneficial owner, and must submit reports to the finance department. The Office for Reporting on Money Laundering in Switzerland in cases of suspected money laundering or terrorist financing.
In the FINMA 02/2019 Blockchain Payments Manual dated August 26, 2019, FINMA indicated that financial intermediaries controlled by FINMA must comply with the movement rule for blockchain transactions. This also applies to other financial intermediaries for AML purposes due to their affiliation to the SRO. According to the travel rule, the relevant Swiss financial intermediary must transmit the same information that is required for electronic transfers in fiat money, or, alternatively, it must (1) identify the recipient in accordance with the Swiss rules UNDER, as if the recipient were a customer. of the Swiss financial intermediary, and (2) verify the recipient’s right to dispose of the wallet address used by him by means of appropriate technical measures determined by the relevant Swiss financial intermediary.
Depending on the classification of tokens that will be issued as part of the ICO, the issue may qualify as financial intermediation. FINMA provides clarity in its ICO Guide on this issue, as indicated below.
The issuance of payment tokens is classified as the issuance of means of payment and, therefore, constitutes financial intermediation in accordance with AMLA.
The issuance of service tokens, which represent some form of payment function in a specified application or platform (for example, the ability to use service tokens to pay for services used on such a platform), is usually qualified as the issuance of means of payment and, therefore, constitutes a financial intermediation activity in accordance with AMLA. However, the issue of service tokens does not qualify as financial intermediation if the service token does not have any form of payment function or if the payment function is exceptionally considered as an auxiliary function of service tokens. In order to take advantage of such an exception, it is necessary that the main purpose of service tokens is to grant access rights to a non-financial application, so that the organization providing payment functionality is also an organization managing a non-financial application, and that access to a non-financial application cannot be granted without enabling additional payment functions built into the service token. However, please note that FINMA applies this exception very restrictively, and in practice any service token with any payment function is considered as financial intermediation within the framework of AMLA.
The issue of asset tokens does not qualify as a financial intermediation activity in accordance with AMLA, provided that the asset tokens are classified as securities, and also provided that they are not issued by a bank, a securities firm or some other organizations under prudential supervision. However, in practice, issuers of asset tokens are often required to conduct some KYC and identification processes on a voluntary basis due to compliance with the requirements of banks to which ICO proceeds will be transferred.
The issuance of rights to purchase tokens in the future as part of a pre-ICO is not a financial intermediation activity, provided that the issuer is not a bank, securities firm or some other entities under prudential supervision. However, the subsequent issue of tokens, which qualifies as the issue of a means of payment in accordance with AMLA (i.e. payment tokens and, subject to the mentioned exceptions, service tokens) for investors before the ICO, qualifies as financial intermediation. As a consequence, the obligations arising from the AMLA come into force at the time of issue.
With regard to ICOs subject to AMLA, FINMA indicates that obligations arising from AMLA (for example, KYC) can be outsourced to financial intermediaries in Switzerland who are affiliated with SRO or are under FINMA supervision, provided that any funds from the ICO are accepted through a financial intermediary: that is, any tokens or fiat currencies paid by investors must be transferred to the public keys or accounts of the outsourcing partner before they are transferred to the appropriate issuer.
Exchange and intermediary services
The exchange of fiat currencies for tokens or vice versa, or the exchange of two different tokens, is a financial intermediary subject to AMLA.
If the service provider offers exchange services directly (i.e. acts as an exchange counterparty for its customers), this activity qualifies as money exchange in accordance with AMLO. For these services, a minimum threshold of 1,000 Swiss francs is applied if exchange transactions are related to cryptocurrencies, and transactions below this threshold are exempt from KYC or identification obligations in accordance with AMLA.
If the service provider offers exchange services with the involvement of a third party (for example, a token exchange platform) or if the service provider acts as an intermediary in services related to the transfer or exchange of tokens or fiat currencies and participates in the payment process, the services qualify as money and asset transfer services in accordance with Article 4(2) of AMLO, and the service provider qualifies as a financial intermediary in accordance with AMLA.
In addition, FINMA indicated with regard to the provision of payment service providers by institutions under its control that the transfer of crypto assets to external wallets (i.e., wallets managed by third parties) is allowed only if the recipient’s wallet address belongs to one of its own customers, which must be verified. FINMA justifies this approach by the fact that currently there is no way in blockchains to provide identifying information about the sender and recipient of the transaction, similar to traditional bank transfers (for example, via SWIFT).
A custodian service provider is considered a financial intermediary if it has the right to dispose of the private keys of the stored tokens (custodial wallets). In addition, this activity may lead to the need to obtain a banking license (see Section IV).
Regulation of exchanges
Tokens that qualify as securities
In August 2021, the DLT Law will introduce a new category of licenses for trading platforms, where DLT rights qualify as securities. Thus, the legislature departs from its principle of technologically neutral regulation in order to eliminate barriers that prevented the creation of trading platforms for trading tokens qualified as securities in Switzerland (at least until such DLT securities were structured as non-documentary). securities). In accordance with the previous licensing options, trading platforms could not integrate post-trading activities into the trading platform. In addition, separate central counterparties and central securities depositories were required for clearing and settlement of transactions. As for transactions in distributed registries, post-trading operations of this kind are usually performed simultaneously with the transaction by registering the corresponding transaction in the distributed registry without involving additional intermediaries performing clearing or settlements. In addition, trading platforms were not allowed to provide direct access to retail customers.
The DLT Law amends the FMIA by introducing DLT trading systems as platforms that provide multilateral trade in DLT rights or other rights regulated by foreign law, which are represented in a distributed registry qualified as securities based on non-discretionary rules (collectively DLT Securities) and which meet at least one of the following requirements: the trading system allows trading by unregulated legal entities or individuals as participants, the operator of the trading system centrally deposits DLT Securities based on a distributed registry based on uniform rules, or the operator of the trading system performs post-trading operations with DLT Securities (for example, clearing and settlements) based on uniform rules and procedures.
Moreover, the DLT Law allows a firm regulated as a securities firm or as a bank to operate an organized trading mechanism for trading DLT rights.
With regard to regulating the exchange of payment tokens and service tokens that do not qualify as securities, there are no licensing requirements under Swiss law for doing business of this kind, other than ensuring compliance with Swiss AML requirements (see Section V). However, since the operations of such exchanges usually involve the acceptance of fiat currencies or such tokens to the accounts or public keys of the exchange operator, the requirement of a banking license can be initiated as an acceptance, which is the acceptance of deposits from the public (see Section IV).).
Similarly to the provision of brokerage services, the exchange can take advantage of the exemption for settlement accounts if customer funds accepted into its own accounts or public keys are used exclusively for transactions on the exchange, are interest-free and are transferred to within 60 days. In addition, this exemption will only apply if the clients are not exposed to an increased risk of bankruptcy, similar to the clients of a currency trader (see Section IV).
In addition, the exchange may benefit from an exception from the sandbox in accordance with Article 6(2) of the SBO if fiat currencies and tokens worth less than 1 million Swiss francs are accepted from exchange participants and if participants are informed of the absence of any prudential supervision of the exchange operator and any protection from the deposit protection scheme.
In any case, the token exchange operation is a service for the transfer of money and assets in accordance with Article 4(2) of AMLO. Thus, the exchange operator qualifies as a financial intermediary, which, in particular, is subject to obligations to join the SRO or the requirement to have a FINMA financial intermediary license.
Regulation of virtual currency mining
In an unlimited decentralized network (such as the Ethereum or Bitcoin blockchain), the extraction of native tokens of the corresponding distributed registry, usually a payment token, plays an important role in recording transactions in the distributed registry, since there is no central authority monitoring transactions. In order to secure financial transactions and guarantee the absence of fraud, miners (or crypto-miners) must verify transactions and add them to the distributed registry.
The work of miners is open to the entire ecosystem of the distributed registry: everyone can potentially participate in this network and mine tokens. For each block of transactions, miners use mathematical protocols to verify transactions and verify them before distributing the result throughout the network. This process creates a virtual currency as miners receive a new virtual currency for their mining activities.
Currently, there is no special legislation regulating the status of miners in Switzerland. Token mining (self-issuance of tokens) does not require a license in accordance with Swiss law, provided that the miner does not carry out any activities subject to the regulated activities described in sections II-VI.
The independent issuance of tokens qualifying as securities, as a rule, does not require a license as a securities firm in accordance with FinIA. This conclusion is also true in the unlikely event that 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 generally positive about blockchain technology, but closely monitors all market participants to ensure that the Swiss blockchain network remains free from fraud, especially in the context of ICO. He regularly highlights the risks associated with investors and undertakes to take measures against ICO business models that violate or circumvent regulatory laws.
An example is the beginning in July 2018 of FINMA enforcement proceedings against Envion AG, a Swiss mining company, for violating Swiss financial regulations in the context of its ICO. This led to the FINMA ruling that the company was engaged in deposit raising activities without a proper bank license, and ordered the liquidation of the company as a result of bankruptcy.
Since the regulatory status of token mining activities may raise some questions, it is always recommended that a letter from FINMA about the inadmissibility of actions, for example, in relation to a specific miner’s activity, in order to obtain legal certainty that the proposed activity meets the requirements. all regulatory laws (see Section II.iv).
Regulations on Issuers
As for the organizational and legal form for token issuers, two types of forms are usually used: a fund and a joint-stock company.
The Fund offers full independence and control of the board of the fund, since there are no shareholders in it. However, its assets must be used in accordance with the purpose of the fund, as specified in the founding act. Consequently, the distribution of profits is limited to this purpose, and it is impossible to distribute profits among the founders. In addition, each fund is additionally subject to state supervision. Please note that some tax benefits are available for foundations or joint stock companies pursuing both public and non-profit goals. However, the conditions for obtaining such exceptions are very strict and are usually not met by ICO organizations.
In the context of an ICO, to the extent that there is, at least partially, a commercial purpose, and the issuer does not pursue a non-commercial purpose, the legal form of the Swiss fund is not suitable in most cases. . Its rigid structure does not provide the flexibility that is usually necessary, in particular, since the founders do not have ownership rights or any other control over the assets or funds of the fund and do not have legal means to influence the conduct of the fund’s activities. Instead, a joint stock company is a more appropriate type of corporate form for ICO issuers.
An ICO issuer registered as a joint stock company must have – if it is not registered with a contribution in kind – a paid-up capital of 50,000 Swiss francs (with a minimum authorized capital of 100,000 Swiss francs) deposited in a Swiss bank. . However, after registration, there are no restrictions regarding the place of account management. The issuer may also have an account with a foreign bank.
The Issuer must comply with regulatory requirements to the extent applicable to the issuer, as specified in sections II-VI.
Depending on the classification of the issued tokens, the token issuer may be subject to AMLA if it performs financial intermediation (see Section V.ii). In the context of ICOs and tokens, the issuance of means of payment that cannot be used exclusively with the issuer, the provision of services related to payment transactions in the form of money and asset transfer services or money exchange services are, for example, financial. Mediation activities (see Section V).
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:
- license requirement under SBA or FinIA: if the sponsored company has a foreign regulatory status as a bank or securities firm because it has the appropriate regulatory status under foreign law, it carries out activities that qualify as banking or securities transactions under Swiss law or it uses the terms “bank” or “securities firm” in the name of its company, any marketing activity in Switzerland or from Switzerland for this foreign bank or broker-dealer – provided that such activity is carried out by individuals employed in Switzerland on a professional and permanent basis. reason – may bring a foreign bank or broker-dealer activity within the scope of the license requirement of a FINMA branch or representative office; or
- 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 Tax Administration (FTA) published a working paper on the tax regime of cryptocurrencies and ICOs for the purposes of property tax, personal income and corporate income tax, as well as for the purposes of withholding tax and stamp duty. The practices described in this working paper are set out below. However, it should be noted that this is just a brief overview and that not all tax issues related to cryptocurrencies or ICOs have yet been considered and final answers have been given to them. Therefore, it is possible that the practice of tax authorities described below will evolve and change. Therefore, it is strongly recommended to obtain preliminary tax decisions from the responsible tax authorities before the ICO.
In addition, the following explanations are limited to tax implications for issuers registered in Switzerland who have issued coins or tokens with monetary rights against any counterparty in the form of asset tokens and utility tokens.
Finally, the tax regime 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 represent the investor’s rights in relation to the issuer, which consist of fixed compensation or a certain, predetermined investor’s participation in the reference value (for example, earnings before interest and taxes (EBIT)) of the issuer’s business. Thus, the tax classification of asset tokens largely depends on the civil structure of legal relations.
So far, asset tokens have been divided into the following three subcategories for tax purposes:
- Debt Tokens: These tokens represent a legal or actual obligation of the issuer to repay all or a substantial part of the investment and, if applicable, to pay interest.
- Stock tokens: These tokens do not require the issuer to return the investment. The investor’s right refers to a cash payment, which is measured by a certain ratio to profit or the result of liquidation, or both.
- Participation Tokens: these tokens do not include any obligations of the issuer to return the investment. The investor’s right refers to a proportionate share of a certain reference value of the issuer (for example, EBIT, license income or sales).
The following describes the tax treatment of these three types of asset tokens for the issuer, provided that the issuer is a corporation with tax residence in Switzerland.
Debt tokens qualify as bonds for tax purposes and are therefore processed as follows:
- Corporate income tax: funds received from collective fundraising are not taxable income and are reflected in the issuer’s balance sheet as liabilities. Any interest payments to investors are generally business expenses and therefore not taxable.
- Withholding tax: Both recurring and one-time interest payments on debt tokens are taxed at source at a rate of 35%. Whether a refund of withheld tax is possible, and if so, to what extent, depends on the individual investor.
- Stamp duties: the issue of debt tokens is exempt from the tax on the transfer of securities. On the contrary, transactions on the secondary market of debt tokens are usually taxed on the transfer of securities at a rate of up to 0.15% of the purchase price of debt tokens; however, this is only possible if the securities dealer in Switzerland or Liechtenstein, as defined in the Stamp Duty Law, is a party or acts as an intermediary in the transaction, and no exceptions apply.
Stock tokens are considered derivative financial instruments for tax purposes and are therefore treated as follows:
Corporate income tax: Funds raised through the issuance of share tokens are qualified as taxable income and are recorded as income in the issuer’s income statement. If the issuer has assumed a contractual obligation to implement a specific project, the reserve can be reflected as an expense, which accordingly reduces taxable income. Reserves that are no longer required after the completion of the project development should be included in the income statement. Payments to investors based on their right to a certain share of profits or the result of liquidation (or both) are usually qualified as tax-free expenses. However, this assumes that investors are aware at the time of payment that the issuer shareholders do not own more than 50% of the issued tokens, and payments to token holders do not exceed 50% of EBIT. If these conditions are not met, there is a taxable hidden profit distribution.
Withholding tax: Share tokens or their payments are not subject to withholding tax; however, if the issuer’s shareholders own more than 50 percent of the issued tokens, and payments to token holders amount to more than 50 percent of EBIT, the FTA assumes, as mentioned above, a hidden profit distribution that is subject to withholding tax. In case of any tax evasion, the FTA also reserves the right to levy withholding tax.
Stamp duties: The issue of stock tokens is not subject to stamp duty, since stock tokens do not qualify as participation rights within the meaning of the Stamp Duties Act. In the case of share tokens purchased by the issuer’s shareholders, the question arises whether the payment represents a taxable contribution or not. It depends on whether the purchase price paid for the stock tokens represents an appropriate reward. If there is such consideration, there is no taxable contribution; however, without such consideration, there is a taxable contribution, subject to stamp duty at the rate of 1%. Derivative financial instruments usually do not qualify as taxable securities within the meaning of the Stamp Duty Act, therefore transactions on the secondary market are not taxed on the transfer of securities.
Participation tokens are also considered derivative financial instruments for tax purposes, so they are treated in the same way as stock tokens for tax purposes. The link is made in accordance with the above explanations on the taxation of stock tokens.
Taxation of service tokens
For the purposes of tax analysis, it is assumed below that the issuer undertakes to use the funds received from the sale of service tokens exclusively for the development of the digital service and providing investors with access to or use of the service. The Issuer has no additional obligations to investors. Utility tokens should basically be classified as a contractual relationship between the issuer and the investor. The mandate is that the issuer must act in accordance with a contractual agreement between it and investors. Accordingly, for tax purposes, service tokens are processed as follows:
- Corporate income tax: Funds raised through the issuance of utility tokens are qualified as taxable income and are recorded as income in the issuer’s income statement. If the issuer has assumed a contractual obligation to implement a specific project, the reserve can be reflected as an expense, which accordingly reduces taxable income. Reserves that are no longer required after the completion of the project development should be included in the income statement.
- Withholding tax: Claims arising from contractual relationships are not subject to withholding tax. Accordingly, the right to use digital services is not income taxable at source.
- Stamp duties: The issue of service tokens is not subject to stamp duty, since service tokens do not qualify as participation rights within the meaning of the Stamp Duty Act. In the case of the acquisition of utility tokens by the issuer’s shareholders, the question arises whether the payment represents a taxable contribution or not. It depends on whether the purchase price paid for service tokens represents an appropriate reward. If there is such consideration, there is no taxable contribution; however, without such consideration, there is a taxable contribution, subject to stamp duty at the rate of 1%. Utility tokens do not qualify as taxable securities in accordance with the Stamp Duty Law, therefore neither the issue nor transactions on the secondary market,
The DLT Law has eliminated some of the most significant obstacles to the development of a functioning primary and secondary digital asset market in Swiss law and has created a solid legal basis for the issuance and trading of rights represented in tokens. The impact of the new features introduced by the DLT Law in practice should be observed in the future. However, for cross-border issues, the impact of the new legislation may be limited in the future by new legislation currently in force in other relevant markets, such as the EU Regulation proposal for crypto Asset markets (known as MiCA) published by the European Commission on September 24, 2020, which may introduce additional requirements for the distribution of tokens issued in Switzerland, within the European Union.
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