On 10 September 2020, the second chamber of the parliament adopted an amending act to further improve Switzerland’s framework conditions for distributed ledger technology (DLT)/blockchain companies. Thereby, Switzerland strengthens its position as a leading location for the fintech and blockchain sector.
The legislator’s approach is to provide legal and regulatory certainty by introducing provisions addressing opportunities and risks presented by DLT in existing federal acts. Thus, the adopted act will amend inter alia existing legislation on:
- shares and other securities;
- trading facility and post-trading infrastructure regulation;
- banking regulation;
- insider trading and market manipulation; and
- release of assets and access to data in bankruptcy procedures.
Money laundering risks are not covered in substance by the adopted act but have already been addressed by amending the respective ordinances.
While the adopted act sets out the principles of the legislation on DLT, details will need to be fleshed out in accompanying ordinances. The adopted act is subject to an optional referendum and will enter into force together with the accompanying ordinances on a date to be determined by the Federal Council.
This article briefly summarises the most important points for the two key opportunities introduced by the adopted act, namely the amendments to the existing securities law and to the trading facility/post-trading infrastructure regulation.
Securities law: introduction of the register certificated securities
DLT allows its users to agree that rights, such as claims or memberships, are reflected and transferred from one user to another on the distributed ledger. How rights can be reflected (i.e. securitised) and made transferable is the essence of securities law, thus DLT provides a new means to address an old need.
The adopted act will introduce a new type of uncertificated security, named “register uncertificated security” (Registerwertrecht), which can serve as an alternative to the existing intermediated securities (Bucheffekten). Both types are immaterialised securities, but the latter require, unlike the new register uncertificated securities, a regulated institution such as a bank, securities firm or a central securities depository for creation and transfer.
To create register uncertificated securities, the parties involved must enter into a registration agreement or agree on a registration clause, and the register has to fulfil certain requirements.
The registration agreement or registration clause must set out that the rights reflected by the securities are entered into a register for uncertificated securities (Wertrechteregister) and may only be claimed and transferred via this register.
The register for uncertificated securities must ensure (i) that creditors, but not the debtor, have the power of disposal over the rights reflected on the register, (ii) its integrity by technical and organisational means, for example by being administrated by several users independent from one another, (iii) recording of the content of the reflected rights, the functionalities of the register and the registration agreement, (iv) that creditors can see information and register entries relating to the themselves without involving another party.
After being duly created, the register uncertificated securities will have the same traits as traditional securities. In particular, the registered rights can be created and transferred on the register only, a party entered as creditor in the register is assumed to be entitled to the right, and the parties may rely on the ownership of right as reflected in the register.
The legislator also included a link between the traditional securities market and the new register uncertificated securities. The new type of securities can be used as a basis to create traditional intermediated securities. Thereby the rights reflected in the register uncertificated securities can be fed into the system of the traditional securities market. To this end, the register uncertificated securities must be transferred to a traditional, regulated custodian, credited to a securities account and immobilised on the register for uncertificated securities. This possibility could, for example, be useful for listing the rights reflected on the register for uncertificated securities on a traditional stock exchange or to make the rights bankable and credit these to a traditional securities account.
If the entity’s articles of association foresee this possibility, shares may also be created as register uncertificated securities, like other types of securities. The issuing entity will be responsible for selecting the technology of the register on which its shares are created, its quality and its security. It must also ensure that conditions for certain types of shares are adhered to, e.g. for shares with limited transferability, the option to transfer should be limited by the register used.
Financial market infrastructure regulation: introduction of the DLT trading facilities
The adopted act will introduce a new financial market infrastructure authorisation type named “DLT trading facility” (DLT-Handelssystem). A DLT trading facility is a commercially operated institution for multilateral trading of DLT securities. Its purpose is the simultaneous exchange of bids between several participants and the conclusion of contracts based on nondiscretionary rules. To clearly differentiate the DLT trading facility from the multilateral trading facility, one of the following requirements must be met in addition: (i) admission of legal entities other than supervised financial institutions or private clients as participants; (ii) provision of central custody of DLT securities based on uniform rules and procedures; or (iii) provision of clearing and settlement for transactions in DLT securities based on uniform rules and procedures.
In addition to multilateral trading of DLT securities, the DLT trading facility may also offer trading of instruments not qualifying as securities, such as cryptocurrencies.
Compared to a stock exchange or a multilateral trading facility, a DLT trading facility has two major regulatory advantages:
First, a DLT trading facility will be allowed to admit not only regulated financial intermediaries as participants but also other legal entities and private clients. The latter two, however, can only be admitted as participants if they trade in their own name and on their own account. This is to facilitate the combatting of money laundering and terrorist financing. To enable FINMA to fulfill its duties, all participants, whether subject to FINMA supervision or not, will have to provide it with information or documentation upon request.
Second, a DLT trading facility will be allowed to provide central custody, clearing and settlement services for DLT securities, e.g. on a blockchain. This is a major innovation since multilateral trading facilities and stock exchanges are dependent on a central securities depository to fulfil these functions. A DLT trading facility will, however, not be allowed to centrally clear DLT securities, to avoid risk concentration. This activity remains reserved for central counterparties.
The requirements to obtain authorisation as a DLT trading facility will be similar to the ones for obtaining authorisation as a stock exchange or a multilateral trading facility. This includes that the DLT trading facility must be operated by a Swiss entity, save for the possibility to outsource certain services. In other words, an entirely decentralised platform will not be eligible to obtain a DLT trading facility authorisation in Switzerland. Another noteworthy requirement is the establishment of a self-regulation and supervisory organisation that must be independent from the business functions. This organisation has to ensure, inter alia, fair and open access to the DLT trading facility as well as orderly and transparent trading.
How PwC can support you
PwC can support you in either shifting from traditional processes to the new possibilities provided by DLT and the adopted act, or in expanding your business activities, or in realising your start-up’s business plans. Thanks to our interdisciplinary approach, we are not only able to provide legal expertise but can also staff a project team with DLT experts.
PwC can, for example, support you in:
- applying for a DLT trading venue license, including drafting the required self-regulation, setting up the required self-regulation bodies, and defining the target operating model;
- drafting the registration agreement or registration clause to create register uncertificated securities;
- due diligence on the register for uncertificated securities to ensure that it meets the legal requirements;
- issuing shares in the form of register uncertificated securities;
- transforming register uncertificated securities into intermediated securities.
PwC has advised numerous clients in traditional securities law and financial market infrastructure regulation, in particular trading venues, and has an outstanding track record of successfully advising clients from the blockchain sector.