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 introduces a cryptocurrency listing process and requires a license from the Swiss Financial Market Supervisory Authority (FINMA) to operate. While an exemption from the licensing of cryptocurrency is available for government deposits of up to CHF 1 million, exchanges must write and inform their customers that their funds are not subject to protection if the firm is supervised by FINMA.
Cryptocurrency rules in Switzerland also apply to ICOs: in 2018, FINMA published a set of guidelines that applied 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 requiring the Federal Council to adapt existing rules to include cryptocurrencies. In September 2020, the Swiss parliament passed the Blockchain Act, which additionally determines the legality of cryptocurrency exchanges and cryptocurrency exchanges in Swiss law. Legislation requires compliance with local ICO, AML, and CTF requirements as soon as the token can be technically transferred to the blockchain infrastructure.
Switzerland cryptocurrency regulation
FUTURE CRYPTOCURRENCY RULES
The Swiss government has announced that it will continue to work on a regulatory framework favourable to cryptocurrencies. In 2016, the city of Zug, a well-known global cryptocurrency center, introduced bitcoin as a way to pay city dues, and in January 2018, Swiss Economy Minister Johann Schneider-Ammann stated that he sought to make Switzerland a “crypto nation”. Similarly, the Swiss Secretary of International Finance, Jörg Gasser, stressed the need to promote cryptocurrencies while respecting existing financial standards.
Based on these goals, in late 2020, the Swiss Ministry of Finance began consultations on new common cryptocurrency rules that would allow it to take advantage of blockchain technology without stifling innovation.
FAMILIARITY WITH THE REGULATORY FRAMEWORK
Switzerland is home to a crypto valley in Zug, near Zurich, and has an active community of enterprises working in the cryptographic space. Although it is difficult to attribute Switzerland a place in the rapidly developing global cryptocurrency community, Switzerland has taken a pioneering role in this area. It is an important jurisdiction for the initial placement of coins (ICOs) and offering securities tokens (STO) and offers a well-developed infrastructure and a reliable legal framework for companies that are active in the crypto space.
Switzerland has a favourable and attractive legal framework for cryptographic assets, although it does not have a separate legal framework for them. With regard to cryptocurrencies, the regulatory framework for the issuance and trading of these assets has been in place for several years.
Switzerland has now improved its regulatory framework for rights-bearing tokens, such as asset tokens and service tokens, which represent claims against the issuer or third party, Through the Federal Act on the Adaptation of the Federal Act to Changes in Distributed Registration Technology (DLT Act)which has been amended in various ways in Swiss legislation to take account of the potential of distributed accounting technology (DLT). In particular, the DLT Act introduced DLT rights as a digital alternative to certified securities as a new asset class. DLT rights should be transferred exclusively through blockchain. In addition, Swiss law has introduced a new category of licenses for trading platforms where DLT rights can be traded. In addition, additional rights have been introduced to separate cryptographic assets owned by a third party (such as a wallet provider) in the event of 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: in other words, it will apply the principle of “same business, same rules” to any new technology. FINMA currently adheres to this principle when applying Swiss financial market laws based on blockchain cryptographic assets and applications, and this will also apply in the future with the DLT law.
Normative classification of tokens
On 16 February 2018, FINMA published the Swiss Guidelines for the Application of Financial Market Law in its ICO Guidelines (ICO Guidelines). 3 In the ICO Guide, FINMA explains how cryptocurrencies and other coins or tokens (together with cryptocurrencies, tokens) or other assets registered in a distributed registry are classified in accordance with Swiss law.
According to the ICO manual, FINMA defines the following tag categories:
- Payment of tokens or cryptocurrencies only as a means of payment, without any claim to the issuer;
- A service token that grants access or access to a digital application or service if the application or service is already running at the time the token is sold;
- An asset marker that constitutes an asset, such as a debt or equity claim to the issuer or a third party, or a right to principal.
FINMA also explains that tokens can also have a hybrid form that includes elements of more than one category. These mixed tokens must collectively comply with the regulatory requirements applicable to each relevant class of token. FINMA recognizes that token classification may change over time. Releasing tokens is important to assess the regulatory impact of ICOs. However, the initial classification may change after the ICO. For any trading activity with tokens in the secondary market, it is necessary to consider its classification in the relevant trading activity.
In addition, to the ICO Guidelines of 11 September 2019, the Monetary Authority published its opinion on the regulatory classification of stabilization tokens (i.e. major asset support tokens). Under Swiss law, tokens are not considered separate token types, and they are usually classified as a mixture of asset tokens or payment tokens and asset tokens, depending on the right assigned to stable tokens.
Under Swiss law, payment tokens are not considered legal tender or other means of payment. However, the Swiss Federal Council explained that payment tokens could be used as private means of payment if the parties to the transaction agreed to use them as the applicable means of payment for such transactions. In addition, the issuance of payment tokens is subject to Swiss anti-money laundering rules (section V).
Query to FINMA
Notwithstanding the recommendations made by the Monetary Authority, given that this area is new, the structure of the symbolic proposal is constantly changing with regard to the application of the International Customs Organization (WCO) guidelines in practical projects, usually by issuing confirmation requests to the Monetary Authority with exemptions from regulatory bodies, thus ensuring comfort.
The FINMA recommended such a request for “inaction” to confirm the interpretation of the regulations.
Securities and Investment Act
Swiss securities law applies to the issuance of an asset token or any hybrid form of token, including the function of an asset token (for example, a stable token or token for services using an underdeveloped platform).
However, payment tokens and service tokens that do not claim against the issuer or third parties are not subject to Swiss securities law, as they do not represent any rights. Such payment tokens and service tokens should now be classified as intangible digital assets.
Issuance of tokens representing rights against the issuer or third party
The DLT Act introduced DLT rights (DLT rights) as a new class of assets. Swiss Code of Obligations (CO) for tokens of assets or services presenting any claims against the issuer or third parties. DLT’s rights are designed as the digital equivalent of documentary or non-documentary securities by tying the right to a token instead of a certified security instrument or registration in a non-documentary securities registry. DLT rights cannot be exercised or transferred outside the respective distributed registry. As to the scope of DLT rights, any rights that may be issued as documentary or non-documentary securities may be issued as DLT rights. Consequently, they can be used to present fungible contractual claims (e.g., debt obligations. However, cryptocurrencies or ownership or effective control of assets cannot be formalized as DLT rights.
According to the Distributed Registry Act, 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 the registration of relevant rights in the distributed registry and the obligation that such rights may be transferred and exercised only in the relevant distributed registry. It is also recommended that the parties expressly declare their intention, within the framework of the DLT Rights, to establish the DLT Law and that Swiss law be applicable. Without such a choice of law, the Swiss Private International Law Act, as amended by the DLT Act, provides that the laws of the place of registration or residence of the issuer apply, subject to special rules relating to property rights.
In addition, the DLT Act specifies certain characteristics that must be observed by the distributed registry to which the DLT is entitled. Such distributed registry should grant the right of disposal of DLT rights only to owners of DLT rights (not to the debtor), protect its integrity through appropriate technical and organizational measures against unauthorized access and changes; Register or make available through a distributed registry, its terms and conditions of transactions and the relevant rights of the distributed registry, and ensure that the records of the distributed registry are accessible to the public. However, the DLT Act does not specify any technical requirements, such as the minimum number of participants in the register or the consensus mechanism used.
Finally, DLT rights can be used as a basis for creating undocumented securities under the Swiss Federal Securities Intermediation Act (FISA) by transferring their rights to the custodian in the meaning of FISA, and by this custodian crediting the rights of the DLT to one or more securities accounts. The custodian must block DLT rights that can be transferred under FISA only if they are held as undocumented securities.
Token transfer requirements
Under Swiss law, payment tokens and service tokens that do not present any claims against the issuer or third parties may be legally created and transferred in accordance with the terms of the respective distributed registry. Thus, the transfer can actually be effected through a transaction between two purses.
On the other hand, asset tokens or service tokens representing any claims against the issuer or third parties that are issued as DLT rights may only be transferred under the rules of the respective distributed registry. It no longer matters how the relevant rights presented in the DLT legislation will be transferred without digital representation in the DLT legislation, as in the case of asset tokens or service tokens representing any claims against the issuer or third parties, which are not issued as DLT rights. The DLT Act provides for a rule on the finality of such transfers even if the transmitting party becomes insolvent. DLT rights holders will also be entitled to fair protection, as will paper security certificate holders, if they have acquired DLT rights from an unauthorized seller.
Classification of tokens as securities
Under Section 2(b) of the Financial Market Infrastructure Act (FMSA), securities are certified or undocumented securities, derivative securities, intermediary securities or rights to DLT, which are standardized and are suitable for mass trade. In accordance with article 2(1) of the Financial Market Infrastructure Act, “are standardized and suitable for mass education” In this context, this means: that the instruments are offered for public sale in the same structure and denomination, or that they are placed with 20 or more customers on the same terms and conditions.
FINMA explained in the ICO manual that it will apply these rules to markers as follows:
- Payment tokens are not considered securities because they are intended to be used as a means of payment under FINMA. Payment tokens cannot be defined as securities because they do not represent any rights that may be exercised against the issuer or third parties.
- Utility tokens can qualify as securities if the platform on which they can be used is not ready to operate during the sale of the token or if the tokens represent rights that can be applied to the issuer or third party. These service tokens are believed to have an investment purpose. FINMA also explained that a case-by-case analysis is required to determine whether a service token can be used for its own purposes. In particular, it states that testing concepts or beta versions of platforms or applications on which utilities 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 by 20 or more persons for sale.
FINMA stated that any legally secured rights of investors to receive or purchase tokens in the future as a result of a pre-sale, such as a simple agreement on future tokens, are qualified as securities, If the rights have been proposed publicly or under identical conditions by more than 20 persons. On the other hand, pre-sale rights are not securities if the terms used in the pre-sale transaction are not standardized or if different terms are used for each investor: for example, by changing the number of rights, price or any blocking position.
Irrespective of the classification of tokens as securities, in respect of any tokens representing a digital representation of rights that may be exercised against the issuer, The question arises whether tokens are subject to the prospectus requirement under the Swiss Financial Services Act (FinSA). According to FinSA, the prospectus requirement applies generally to all public offerings of securities, including tokens that qualify as securities (see Section II.iv).
In addition, with regard to financial instruments offered to retail investors, FinCA introduced the obligation to prepare the investor’s master document as an additional disclosure document, similar to what is currently applied in the European Union under packaged retail and insurance investment products. Regulation. This new obligation also applies to certain types of tokens that qualify as financial instruments (e.g., asset tokens with structured product or derivative economies).
Regulatory Implications of Classifying Tokens as Securities
If they are classified as securities, they are subject to the FinSA regulatory framework and the Financial Institutions Act (FinIA). According to this regulatory framework, a license for a securities firm is required for any brokering activity on behalf of clients (other than institutional clients) in respect of such tokens and any market creation activity in respect of such tokens. In addition, underwriting of such tokens and issuance of tokens that qualify as derivatives are subject to licensing as firm or bank securities, if performed on a professional basis. 8 The licensing requirement arises in each case if the activity is carried out on a professional basis.
In addition, the qualification of tokens as securities affects FMIA licensing requirements for any secondary trading platform on which such tokens can be sold.
Collective Investment Laws
In connection with any investment in tokens through collective investment schemes or funds, or in connection with the issuance of tokens representing units in collective investment schemes, the rules of Swiss collective investment schemes Act (CISA) and its executive provisions must be taken into account. For CISA purposes, 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 taken from customers for investment purposes are combined (i.e. there is no division of investment for each investor)or when the assets of clients are managed by a third party on behalf of these clients, may be subject to the requirements of CISA and FinIA and should be analysed from the point of view of Swiss regulation of collective investment schemes.
Business enterprises are generally not subject to CASA. However, the distinction between a business and a collective investment scheme can only be made on a case-by-case basis.
Banking operations and money transfers
Under the Swiss Banking Act (ABS), a bank licence is required if a mainly financial company accepts deposits from the public (i.e. more than 20 persons) or publicly advertise these activities. Under the Swiss Bank Regulation (CFA), any undertaking is normally regarded as a deposit raising activity, unless one of the exceptions set out in article 5(2) and (3) of the CFO applies.
In the context of token sales, the most important exceptions are:
- insofar as 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 the prospectus or private placement memorandum), including the minimum content described in article 5(3)(b) of the BDM at the time of offer, obligations are not qualified as deposits; and
- To the extent that liabilities arise from the funds of clients held in settlement accounts of securities firms, asset managers or similar financial intermediaries, provided that these funds are used to settle transactions with clients, Interest on money is not paid and – except for the firm’s securities accounts – is settled within 60 days at the latest.
In addition, Swiss law provides an exemption for sandbox under article 6(2) of the BORO. In accordance with this exception, without a bank licence, it is permitted to accept deposits from the public (i.e. from more than 20 persons) of up to CHF 1 million; provided that the deposits do not generate income from interest and until the deposit is accepted, The investor was informed that the receiving natural or legal person is not subject to supervision by FINMA and that the investment is not protected by any deposit protection scheme.
In addition, organizations that accept deposits from the public of up to CHF 100 million, provided that these deposits are not reinvested or yield interest, may request a “light” banking licence. Compared to a full banking licence, some exceptions apply to the organization, risk management, compliance, regulatory auditor qualifications and capitalization requirements. Light Banking license is available from January 1, 2019. This may be an interesting option for organizations working in the crypto space that intend to accept deposits from the public for an amount below the limit of 100 million Swiss francs.
In providing token storage services, the question arises: under what circumstances does a bank licence or banking licence be required to operate? This would be appropriate if the provider was storing payment tokens not on a separate basis (for example, on each client’s individual public address), but on a complex client account (for example, on a common public address for several customers). client), as such storage activities on common client accounts require a bank license or bank license.
In the case of token brokerage services, the activity may be subject to a bank licence if the service provider accepts fiat currencies or tokens in its own accounts, respectively public keys, for such services. In this case, the service provider would have to rely on the waiver 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 customers to the same bankruptcy risks as currency traders).
THE FIGHT AGAINST MONEY LAUNDERING
Under Swiss law, anti-money-laundering regulation consists of the Swiss Anti-Money Laundering Act (AMLA) and the Anti-Money Laundering Act (AMLA). The Anti-Money Laundering Act applies, inter alia, to financial intermediaries. In short, in addition to the entities subject to supervision, any person taking, owning or depositing assets belonging to other persons or facilitating the investment of such assets on a professional basis, Is classified as a financial intermediary under Article 2(3) of the Anti-Money Laundering Act. In addition, the Programme of Action contains a non-exhaustive list of activities that are considered financial intermediation. In the context of ICOs and tokens, the issuance of means of payment, which cannot be used exclusively with the issuer, the provision of services related to payment transactions in the form of money and transfer of assets, Currency exchange services are important financial intermediation activities.
The financial intermediary within the meaning of the EPA must be linked to an authorized self-regulatory organization (SRO) in accordance with the AML. In addition, the financial intermediary must comply with the obligations set out in the Anti-Money Laundering Act, including, inter alia, the obligation to identify and identify its customer (FCA) linked to a Contracting Party and its beneficial owner; and must report to the Finance Division. The Swiss Money-Laundering Reporting Office in cases of suspicion of money-laundering or financing of terrorism.
In FINMA 02/2019 Blockchain Payments Guide dated August 26, 2019, FINMA indicated that financial intermediaries controlled by FINMA must comply with traffic rules for blockchain transactions. This also applies to other financial intermediaries for AML purposes because of their affiliation to the SRO. Under the travel rule, the relevant Swiss financial intermediary must transmit the same information as required for electronic transfers of fiat money or, 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 (2) verifies the right of the recipient to dispose of the wallet used by him by means of appropriate technical measures determined by the relevant Swiss financial intermediary.
Depending on the classification of the tokens to be issued by the ICO, 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 the issuance of payment instruments and therefore constitutes financial intermediation under the AMLA.
Issue service tokens, which are 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 platform)Under the AMLA, financial mediation is a mediation activity. However, the issuance of service tokens is not regarded as financial intermediation if the service token does not have any form of payment function or if the payment function is exceptionally treated as an ancillary function of service tokens. To take advantage of this exception, it is necessary that the primary purpose of service tokens is to grant access rights to a non-financial application, so that the entity providing payment functions is also an organization, managing a non-financial application, and that access to a non-financial application cannot be granted without including additional payment functions built into the token of service. However, please note 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 issue of asset tokens is not qualified as financial intermediation under AMLA, provided that asset tokens are classified as securities, and provided that they are not issued by a bank, securities firm or other entities, under prudential supervision. However, in practice, issuers of asset tokens are often required to conduct some CACs and identify processes on a voluntary basis due to compliance with the requirements of banks to which ICOs revenues will be transferred.
The granting of rights to purchase tokens in the future as part of a preliminary transaction is not financial intermediation, provided that the issuer is not a bank, a securities firm or some other subject under prudential supervision. However, the subsequent issue of tokens, which qualifies as a matter of means of payment under AMLA (i.e. payment tokens and, subject to these exceptions, service tokens) for pre-ICO investors, qualifies as financial intermediation. As a result, the obligations arising from the Anti-Money Laundering Act come into force at the time of its adoption.
With regard to ICO subject to AMLA, FINMA indicates that obligations arising from AMLA (such as KYC) may be outsourced to financial intermediaries in Switzerland that are affiliated with SRO or supervised by FINMA, 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 the accounts of the outsourcing partner before they are transferred to the appropriate issuer.
Exchange and intermediary services
Exchange of fiat currencies for tokens or vice versa, or exchange of two different tokens, is a financial intermediary under the condition of AMLA.
If the service provider offers exchange services directly (i.e. acts as an exchange partner for its customers), this activity is qualified as currency exchange under AMLO. For these services, a minimum threshold of CHF 1,000 applies if foreign exchange transactions are linked to cryptocurrencies, and transactions below this threshold are exempt from KCS or AMLA identification obligations.
If the service provider offers an exchange service involving a third party (e.g., a token exchange platform) or if the service provider acts as an intermediary in the provision of services related to the transfer or exchange of tokens or fiat currencies and participates in the payment process, These services are classified as money and asset transfer services in accordance with article 4(2); Under the AMLA, the service provider is deemed to be a financial intermediary.
In addition, FINMA, in connection with the provision of payment services by entities under its control, indicated that the transfer of cryptographic assets to external purses (e.g., purses managed by third parties) was only permitted if the recipient’s wallet address belongs to one of his clients, which should be checked. FINMA justifies this approach in that there is currently no way in blockchains to provide identifying information about the sender and recipient of the transaction, similar to traditional bank transfers (such as 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 Act introduced a new category of licenses for trading platforms, where DLT rights qualify as securities. Thus, the legislature is departing from its principle of technology-neutral regulation to remove barriers that have prevented the creation of trading platforms for trade tokens classified as securities in Switzerland (at least until such DLT securities are structured as non-documentary). securities). Under previous licensing options, trading platforms could not integrate post-trade activities into the trading platform. In addition, clearing and settlement of transactions require separate central counterparties and central securities depositories. With regard to transactions in distributed registries, Such transactions are usually carried out simultaneously with the transaction by registering the transaction in a distributed registry, without the involvement of additional intermediaries engaged in clearing or settlement. In addition, trading platforms are not allowed to provide direct access to retail customers.
The DLT Act amends the FCIA by introducing DLT trading systems as platforms for the multilateral trading of DLT rights or other rights governed by foreign law, which are represented in the distributed registry, qualified as non-discretionary-based securities (collectively DLT Securities) that satisfy at least one of the following requirements: the trading system allows trade of unregulated legal or natural persons as participants, 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.
In addition, the DLT Act allows a firm regulated as a securities firm or as a bank to manage an organized trading mechanism for trading DLT rights.
With regard to the regulation of exchange of payment tokens and service tokens that do not fall under the category of securities, under Swiss law there are no licensing requirements for doing business of this kind, except to ensure compliance with the requirements of the Swiss AML (section V). However, since the transactions of such exchanges usually involve the acceptance of fiat currencies or such tokens into the accounts or public keys of the exchange operator, the requirement for a bank licence may be triggered as an acceptance which is the acceptance of deposits from the public (section IV). ).
As with brokerage services, an exchange may benefit from a clearing account exemption if clients’ funds accepted into its own accounts or public keys are used exclusively for exchange transactions; interest-free and transferred within 60 days. In addition, this exemption would apply only if clients are not exposed to an increased risk of bankruptcy similar to those of a currency trader (Section IV).
In addition, the exchange may benefit from an exemption from the sandbox under Article 6(2) of the SBO if fiat currencies and tokens worth less than CHF 1 million are accepted from the exchange participants and if the participants are informed that there is no oneor prudential supervision of the exchange operator and any protection against deposit protection.
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 is a financial intermediary who, inter alia, is obliged to join the SRO or to obtain a licence from the FINMA financial intermediary.
Virtual currency mining regulation
In an unlimited decentralized network (such as Ethereum or Bitcoin blockchain), extracting native tokens of the respective distributed registry, typically a payment token, plays an important role in recording transactions in a distributed registry, due to the absence of a central authority, controlling transactions. To secure financial transactions and ensure that there is no 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, the miners use mathematical protocols to verify transactions and verify them before distributing the result over 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 tends to be positive about blockchain technology, but closely monitors all market participants to ensure that the Swiss blockchain network remains fraud-free, especially in the context of the ICO. He regularly highlights risks associated with investors and undertakes to take action against ICO business models that violate or circumvent regulatory laws.
As an example, in July 2018, FINMA commenced legal proceedings against Swiss mining company Envion AG for violation of Swiss financial regulations in the context of its ICO. This led FINMA to conclude that the company was collecting deposits without a bank license and ordered the company to be liquidated 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 on non-admissibility, for example, in relation to a specific mining activity, to ensure legal certainty that the proposed activity meets the requirements. all regulations (Section II.IV).
With regard to the legal and organizational form for token issuers, two types of forms are commonly used: a fund and a joint stock company.
The Fund ensures full independence and control of the Board of Directors of the Fund, as there are no shareholders. However, its assets must be used in accordance with the purposes of the fund as specified in the constituent instrument. Hence, profit distribution is limited to this purpose and it is not possible to distribute profits among the founders. In addition, each fund is additionally subject to State control. Please note that some tax exemptions are granted to foundations or joint stock companies pursuing both government and non-commercial purposes. However, the conditions for such exemptions are very strict and are not usually met by ICO organizations.
In the context of ICO, to the extent that there is, at least in part, a commercial purpose and the issuer does not pursue a non-commercial purpose, the legal form of the Swiss foundation is in most cases not appropriate. . Its rigid structure did not provide the flexibility that was usually necessary, particularly since the founders had no property rights oror other control over the assets or funds of the fund and have no legal means to influence the implementation 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 paid-up capital of CHF 50,000 (with a minimum authorised capital of CHF 100,000)deposited with a Swiss bank. . However, after registration, there are no restrictions on the place of management of the account. The issuer may also have an account with a foreign bank.
The issuer must comply with the regulatory requirements to the extent that they are applicable to the issuer as specified in sections II to VI.
Depending on the classification of issued tokens, the token issuer can be subordinated 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, for example, are financial. Mediation (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 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:
- Debt Tokens: These tokens represent a legal or actual obligation of the issuer to pay all or a significant part of the investment and, if applicable, pay interest.
- Stock tokens: These tokens do not require the issuer to return the investment. The investor’s right relates to 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 means a proportionate share of a certain reference value of the issuer (e.g., EBIT, license income or sales).
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:
- Corporate Income Tax: Funds received from a collective fund-raising are not taxable 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 regular and one-time interest payments on debt tokens are taxed at source at a rate of 35%. The possibility of recovering the withheld tax and, if so, to what extent depends on the particular investor.
- Stamp duty: the issue of debt tokens is exempt from transfer tax. Conversely, transactions in the secondary debt token market are usually subject to transfer tax 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, contained in the Stamp Duty Act, is a party or acts as an intermediary in the transaction, and no exceptions apply.
Share tokens are considered derivative financial instruments for tax purposes and are therefore treated as follows:
Corporate Income Tax: Funds raised through the issue of equity tokens are classified as taxable income and reported as income in the income statement of the issuer. If the issuer has entered into a contractual obligation to implement a particular project, the reserve may be recognized as an expense, thereby reducing the taxable income accordingly. Reserves no longer required after completion of the project should be included in the income statement. Payments to investors based on their right to a certain share of profits or on the outcome of a liquidation (or both) are usually treated as tax-free expenses. However, this implies that investors know at the time of payment that the issuer holders do not own more than 50% of issued tokens, and that payments to token holders do not exceed 50% of EBIT. If these conditions are not met, then a tax-deductible distribution of profits takes place.
Withholding Tax: Shares tokens or their payments are not subject to withholding tax; however, if the issuer’s shareholders own more than 50 percent of issued tokens and payments to token holders amount to more than 50 percent of EBIT, FTA assumes, as mentioned above, The hidden distribution of profit, which is subject to withholding tax. In the case of any tax evasion, the FTA also reserves the right to levy withholding tax.
Stamp duty: The issue of tokens is not subject to stamp duty, as tokens are not subject to participation rights within the meaning of the Stamp Duty Act. In the case of equity tokens purchased by the shareholders of the issuer, the question arises as to whether the payment is taxable or not. This depends on whether the purchase price paid for the promotion is the appropriate reward. If there is such a record, the taxable contribution is not levied, but without it a taxable fee of 1 per cent is levied. Derivative financial instruments are generally not taxable under the Stamp Duty Act, so secondary market transactions are not subject to transfer tax.
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
For the purposes of the tax analysis, it is assumed that the issuer undertakes to use the proceeds from the sale of service tokens exclusively to develop the digital service and to provide 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 should act in accordance with a contractual agreement between it and the investors. Accordingly, for tax purposes, service tokens are processed as follows:
- Corporate Income Tax: Funds raised through the issuance of utility tokens are classified as taxable income and recorded as income in the Issuer’s Income Report. If the issuer has entered into a contractual obligation to implement a particular project, the reserve may be recognized as an expense, thereby reducing the taxable income accordingly. Reserves no longer required after completion of the project should be included in the income statement.
- Withholding tax: Claims relating to contractual relationships are not subject to withholding tax. Accordingly, the right to use digital services is not taxed on source of income.
- Stamp duties: The issuance of tokens is not subject to stamp duty as they are not subject to participation rights within the meaning of the Stamp Duty Act. In the case of purchases of utility tokens by the shareholders of the issuer, the question arises as to whether the payment is taxable or not. This depends on whether the purchase price paid for the token service is the appropriate reward. If there is such a record, the taxable contribution is not levied, but without it a taxable fee of 1 per cent is levied. Utility tokens do not qualify as taxable securities under the Stamp Duty Act, so neither issue nor transaction on the secondary market,
The DLT Act removed some of the most significant obstacles to the development of a functioning primary and secondary digital asset market in Swiss law and established a solid legal framework for the issuance and trading of rights represented in tokens. In the future it is necessary to take into account new aspects which have been included in the DLT Law in practice. For cross-border issues, however, the impact of new legislation may be limited in the future by new legislation currently in effect in other relevant markets, such as the proposal of the EU Regulation for Cryptographic Asset Markets (known as MiCA) published by the European Commission on 24 September 2020, which may impose additional requirements for the distribution of tokens issued in Switzerland within the European Union.
Lawyers of our company are always glad to answer all your questions on obtaining a cryptocurrency license in Switzerland and also accompany your company throughout the whole licensing process.
Establish a Crypto Company in Switzerland
Switzerland is considered one of the most attractive jurisdictions for starting a cryptocurrency business due to the government’s positive approach towards the groundbreaking industry allowing crypto companies to innovate in a stable but dynamic environment.
If you wish to open a company in the world-famous Crypto Valley or another prestigious Swiss region, one of the key aspects to note are requirements for a crypto licence which you must obtain prior to starting your crypto business in Switzerland if your crypto activities fall within any of the regulated categories. The licences are granted by the Swiss Financial Market Supervisory Authority (FINMA), whose primary goal is to ensure compliance with the AML/CFT regulations.
The nature of crypto activities determines administrative requirements for each company as well as the involvement of the regulatory bodies which is why it’s imperative to clearly define the scope of crypto operations prior to initiating your company’s formation process.
When you become a proud founder of a Swiss crypto company, remember to seek support from such influential organisations as the Crypto Valley Association, the aim of which is to build the world’s leading blockchain and crypto ecosystem through the facilitation of collaboration between the market participants and authorities.
Types of Business Entities
In Switzerland, all companies are incorporated pursuant to the provisions of the Swiss Commercial Code. The following types of capital companies can be eligible for obtaining a crypto licence: a Limited Liability Company (GmbH), a Corporation with Unlimited Partners (KmAG) or a Company Limited by Shares (AG). You can choose one that suits your business model and size best. Depending on your selected legal business structure and quality of documents the formation process may take up to four months.
Any of these companies can be established either by a legal entity or by an individual shareholder legally residing in Switzerland who doesn’t have to be a Swiss citizen but must possess permit B enabling them to engage in economic activities or be employed in the country.
Initial share capital requirements are determined by the type of the legal business structure and the type of the crypto licence (or multiple licences if you’re applying for more than one). For instance, Fintech licence applicants must transfer a full amount of 300,000 CHF (approx. 289,000 EUR) into the initial share capital account.
Whichever type of capital company you choose, take note of the following general aspects:
- Although the availability of company names should be checked before the registration, reservation isn’t permitted; the name must be unique and true as well as include the abbreviation of the legal structure of the company (AG, SA, KmAG or GmbH)
- A public deed of incorporation must be signed by a notary
- Depending on the level of business complexity and cantonal charges, company registration costs can reach several thousand francs, including notary fees
- Shareholders and board members must be fit and proper (suitable to perform senior management function which includes making measured and effective decisions)
- Employing local staff is mandatory
- Appointing a Swiss corporate lawyer is mandatory
- Designing and implementing internal AML/CFT and other risk management policies related to the specifics of the intended economic activities and corresponding with the size of the business is paramount
- It’s permitted 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)
- 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
- Articles of Association
- A company bylaws
- The Stampa declaration proving that no other contributions in-kind and recoveries of assets exist apart from those listed in the Articles of Association
- The Lex Friedrich declaration which is a permit granted to a foreign citizen to buy real estate in Switzerland
Limited Liability Company (GmbH)
The minimum share capital is CHF 20,000 (approx. 19,668 euros) to be transferred to a recently opened Swiss bank account or deposited with assets such as cryptocurrencies.
The main features of a limited liability company (GmbH):
- Suitable for small and medium-sized enterprises
- At least one founder (natural or legal person)
- Unlimited number of quota holders
- Exclusive liability for debts, although the charter may impose an obligation to pay additional capital
- Taxed on its income at the corporate level
- Quota holders are taxed on distributed dividends
- Management delegated to all partners
- Annual audit report is mandatory (except for small companies)
The Articles of Association of a Limited Liability Company (GmbH) shall include the following:
- Unique and compatible 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 external debt)
- Specific method used to notify interested parties
Corporation with unlimited partners (KmAG)
This type of enterprise is the least common among crypto entrepreneurs. However, it is usually used when an unlimited business (such as an individual entrepreneur or general partnership) needs to mobilize more capital.
The main features of the Unlimited Partners Corporation (KmAG):
- No minimum capital requirement
- Capital divided by shares
- At least two partners where at least one natural person should have unlimited liability, making him a general partner
- Legal persons may be partners only in a limited liability partnership which makes them limited liability partners (liability limited to a certain amount registered in the Commercial Register)
- If the limitation of liability is not registered in the Business Register, the partner becomes liable without any limitation, unless he can prove that third parties were aware of the limited liability
- Limited liability partners have limited rights and responsibilities (i.e. they cannot be responsible for the overall management of the company)
The Charter of Unlimited Partners Corporation (KmAG) should contain the following information:
- Unique and compatible 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 external debt)
- Details of shares (type, quantity and face value)
- Rules for the organization of general meetings and voting rights of shareholders
- Information on persons appointed to manage the company (board of directors) and audit (statutory auditors)
- Specific method of shareholder notification or declaration
Limited Company on Shares (AG)
The 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) must be transferred to a Swiss bank account or made contributions such as crypto or other assets.
The main features of the company Limited by Shares (AG):
- At least one founder (natural or legal person)
- Taxed on its income at the corporate level
- Unlimited number of shareholders
- The liability of the shareholder is limited to the amount of the subscription shares
- Shareholders are taxed on distributed dividends
- The Board of Directors is the governing body authorized to represent the company in an external
- The Board of Directors may decide to delegate day-to-day management responsibilities to third parties by implementing organizational by-laws
- Annual audit report is mandatory (except for small companies)
The Articles of Association of the Limited Liability Company (JSC) shall contain the following information:
- Unique and compatible company name
- Clearly defined business objective and core activities to be implemented
- Registered office address in Switzerland
- Specific amount of equity and contributions (in cash, in kind or as external debt), including the number and value of the shares owned by each shareholder
- Specific method used to notify shareholders
WHAT YOU NEED TO DO
In general, the following steps should be taken to establish a Swiss company:
- Register your company name through the EasyGov platform, which will automatically enter the company into the Swiss Business and Corporate Register and assign a unique enterprise identification number (UID)
- Make sure the name is not registered by anyone else by checking the Central Index of business name
- Open an account with the Swiss bank and transfer the required minimum share capital
- If the capital exceeds CHF 1,000,000 (approx. EUR 983,000), stamp duty will be levied on the minimum share capital of 1% and can be paid within 30 days from the date of registration of the company
- The Swiss Bankers Association has published guidelines on opening a corporate bank account for blockchain companies that can be accessed here
- Find a notary who will check the charter and other corporate documents, as well as prepare a statement of registration of the company as soon as you present evidence of the transfer of the original equity
- Companies whose turnover exceeds CHF 100,000 (approximately EUR 98,000) must register with the Commercial Register of the canton in which the company is located
- Costs 600 Swiss francs (approx. 590 euros)
- Notarized documents can be sent by mail or submitted online through a dedicated website
- Apply for a cryptography license at FINMA
- Registration with the Federal Tax Office and cantonal tax authorities
- 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 when the new company is deemed to be fully registered.
Once the cryptographic license is granted, you can begin to carry out crypto activities in Switzerland. If you have any future changes in your company such as new top management, various technical adjustments or updates of key documents, you should inform FINMA, which will give you permission to resume your business.
Based on your business model and the nature of your cryptography-related activities, you can apply for one of the following licenses:
- The fintech or financial intermediary license is the most popular, allowing companies to accept government deposits of up to $100 million. CHF (approx. 96 mill. EUR) or store and trade cryptographic assets that cannot be invested and no interest can be paid on them
- Banking license allows unlimited number of deposits from individuals or legal entities
- Investment fund license allows fund managers to supervise collective fund assets on behalf of clients
- License for DLT trading facility allows multilateral trading of DLT securities
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 carrying out cryptographic activities in Switzerland are generally subject to the following federal, cantonal or communal taxes:
- Corporate income tax (CIT) – 12%-21%
- Capital Gains Tax (WCL) – 0.001%-0.5%
- Value Added Tax (VAT) – 7.7
- withholding tax (GSP) – 35 per cent;
- 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 provide you with customized, added value support in creating a cryptocurrency company in Switzerland, including submitting a cryptographic license application. From the beginning of the process you will receive the support of specialists in the field of formation of companies, rapid development of legislation on money laundering, financial accounting and taxation.
At the moment, the main services of our company are legal and compliance solutions for FinTech projects. Our offices are located in Tallinn, Vilnius, and Warsaw. The legal team can assist with legal analysis, project structuring, and legal regulation.