On August 1st, 2021, the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (DLT Act) and the associated blanket ordinance came into full force, bringing various aspects related to the distributed ledger technology (DLT) and blockchain technology into the Swiss law. Switzerland was one of the first countries to enact legal regulations for the DLT and blockchain technology, making it thereby an international pioneer.
As the DLT Act introduced a number of new concepts, we put together an FAQ answering the most prominent questions in short to provide an overview. To learn about the details, check the DLT Act and the corresponding Erläuternder Bericht (German)/Commentaires (French)/Rapporto esplicativo (Italian) prepared by the Federal Department of Finance.
1. History — how did the DLT Act evolve?
The DLT Bill was prepared to address issues raised in the Federal Council Report Legal framework for distributed ledger technology and blockchain in Switzerland — An overview with a focus on the financial sector published in 2018. The Swiss Parliament passed the DLT Bill on September 25th, 2020.
Looking at the broader context, Governments around the world are currently undertaking efforts to introduce regulations related to the DLT and blockchain technology and especially their applications for the financial industry. For instance, the European Commission is working on introducing the Regulation of Markets in Crypto-Assets (MiCA) (read more about MiCa in our previous article An introduction to the Regulation of Markets in Crypto-Assets).
2. Aim — what would the DLT Act like to achieve?
The aim behind the DLT Act was (and still is) to create a sound legal framework that enables the realisation of opportunities offered by the DLT and blockchain technology by enhancing legal certainty and addressing (previous) shortfalls of the law. It was further designed to improve the conditions for DLT and blockchain companies operating in Switzerland and to remove hurdles related to the application of these technologies.
3. Implementation — which federal laws were adapted?
In line with the Swiss legislation’s technology-neutral approach, existing federal laws were adapted selectively. The adjustments entered into force in two phases: (i) on February 1st, 2021, the amendments to the Code of Obligations (CO), the Federal Intermediated Securities Act (FISA) and the Federal Act on International Private Law (PILA); and (ii) on August 1, 2021, the amendments to the Financial Services Act (FinSA), the National Bank Act (NBA), the Banking Act (BA), the Financial Institutions Act (FinIA), the Anti-Money Laundering Act (AMLA), the Financial Market Infrastructure Act (FMIA), and the Debt Enforcement and Bankruptcy Act (DEBA), together with their accompanying blanket ordinance.
As major changes, two new concepts were introduced that offer opportunities for innovation and new business models, namely ledger-based securities (question 4) and DLT trading facilities (question 5). Further, increased legal certainty in the event of bankruptcy was created (question 6).
Also read in our previous article Overview of Switzerland’s regulatory mechanism to combat money laundering related to cryptocurrencies specifically about the changes to AMLA.
4. Ledger-based securities — what are these?
With the DLT Act ledger-based securities were introduced: A ledger-based security is a right that is registered in a securities ledger, in accordance with an agreement between the parties, and can only be exercised and transferred to others via this securities ledger. Unlike traditional securities, ledger-based securities do not require written and signed cessions for legally binding transfers and no central securities depository is necessary to facilitate transfers. Ledger-based securities can be traded via DLT trading facilities (question 5).
With this introduction of ledger-based securities, the tokenization of rights — entailing similar functionalities and the same level of protection than traditional securities — was anchored in the law. This change is meant to facilitate companies to issue instruments representing equity or debt and to make transfers and secondary trading easier.
5. DLT trading facilities — what are their functions?
The DLT Act introduced DLT trading facilities as a new type of regulated trading facility within the framework of financial market supervision with a new corresponding licence. DLT trading facilities are regulated similarly to existing trading facilities, such as stock exchanges. For instance, DLT trading facilities can also engage in multilateral trading, have to be operated by a Swiss entity and need to set up an appeals body as well as an independent body for supervising trading activities.
However, they differ in three main points from traditional trading facilities. First of all, their focus is on dealing with DLT-based products, including ledger-based securities (question 4) and their foreign equivalents as well as other digital assets, such as cryptocurrencies. Secondly, their licence allows them to admit a wider group of participants than traditional trading facilities, which can usually only admit financial institutions. In particular, they are entitled to also accept corporate entities and individuals, which allows these actors to directly participate without the obligation to trade via a bank or broker, as it is the case for traditional trading facilities. Lastly, DLT trading facility licences permit to not only offer trading, but also some post-trading services, including settlement of trades as well as custody services — which would have required additional licenses under the former law.
FINMA has published detailed guidelines on how companies can apply for such a DLT trading facility licence.
6. Bankruptcy — what has changed?
The DLT Act also enhanced legal certainty in case of bankruptcy by explicitly regulating the segregation of crypto based assets. Concretely, a new provision gives custodians the right to restitution of crypto based assets, under certain circumstances: In case of bankruptcy of a custodian, crypto based assets can be segregated from other assets under the condition that these crypto based assets are hold in readiness to the third party at all times and can be allocated. This allows custodians to hold such crypto based assets off-balance sheet. Consequently, this provision is expected to support the advancement of crypto custody services and the emergence of new crypto custody solutions.
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