Switzerland is about to introduce the next generation of DLT legislation that ensures that it will keep its reputation as most DLT friendly nation in the world. As the DLT markets mature, the regulatory focus is shifting from primary markets to secondary markets. The new proposed Swiss legislation, subject to consultation until 28 June 2019 and likely to enter into force on 1 January 2020, is addressing one of the most important missing parts in the DLT regulatory infrastructure – the regulatory and legal framework of the secondary markets for security tokens.
The key proposed rules
- The Swiss are introducing a new form of uncertificated transferable securities called “DLT uncertificated securities”. DLT securities must be entered in a DLT electronic register at issuance that has to comply with transparency, certain data integrity and IT systems requirements and functionalities. DLT securities have the same rights and features as any other certificated security. This means that they can be transferred, presented, pledged, and invalidated like any other certificated security under Swiss law. It will, however, remain possible to issue security tokens under Swiss law that do not comply with these requirements. Payment and utility tokens can also be DLT securities if they include a claim.
- DLT securities are at the core of a new category of DLT trading venues called “DLT trading systems”, “DLT exchanges”, or “DLT trading facilities” which allow for multilateral exchange of offers related to DLT securities between multiple market participants, and conclusion of contracts on a non-discretionary basis. In addition to a multilateral trading facility they must – either separately or as a whole – admit natural and legal persons as well as licensed entities, keep DLT securities in custody or provide for a settlement mechanism of DLT securities. The requirements for establishing a DLT exchange are similar to those for stock exchanges, but there is no listing takes place and multilateral trading is limited to DLT securities and tokens that are not securities, such as payment and utility tokens. A DLT trading venue also allows for exemptions and alleviations for smaller operators on a case-by-case basis. DLT securities admitted to trading on a DLT exchange are subject to the same insider dealing and market manipulation prohibitions as securities admitted to trading or listed on trading venues. As financial intermediaries, DLT trading systems are subject to all the AML duties.
- Organised Trading Facilities (OTF) allowing for multilateral or bilateral discretionary or non-discretionary trading will be able to be operated by any investment firm engaging in short term trading on own account independent of the own trading volume. The threshold of CHF 5bn annual turnover for trading activities on own account accordingly does not apply for the operation of an OTF.
- Cryptobased assets held in custody with a bank that can be allocated at all times to individual clients will profit from a bankruptcy privilege, like any other assets held in custody. On the flip side, however, this implies that Swiss law considers payment and utility tokens generally to be public deposits when kept in custody.
The Swiss proposal addresses some pressing market needs and solves some debated legal questions. It can be seen as confirmation of the positive attitude of the Swiss government towards DLT and strikes a good balance between self-regulation, supervision, and alleviations for smaller market places. Switzerland is open for business and setting the new global standard for secondary markets in DLT securities.