Overview of Switzerland’s New DLT Framework

In September 2020, the Swiss Parliament approved new regulations for Blockchain and Distributed Ledger Technology (DLT Framework), reinforcing Switzerland’s position as a leading jurisdiction for FinTech, Blockchain, and DLT technologies. The new legal framework was implemented in two phases: the issuance of the newly introduced DLT-securities began in February 2021, with the remaining provisions coming into effect in August 2021.

Key Areas of the New DLT Framework

The new DLT Framework introduces advanced regulatory solutions and specific amendments in several critical areas:

• Civil Law
• Insolvency Law
• Financial Market Law
• Anti-Money Laundering Regulation
• International Private Law

These changes aim to enhance legal certainty, address obstacles related to blockchain applications, and mitigate the risk of abuse.

Core DLT Activities Benefiting from the New Framework

1. Security Token Exchanges
   Introduction of a new license category for trading venues focusing on digital assets, known as DLT Trading Facilities.
2. Custody Service Providers
   Implementation of a clearer and lighter regulatory regime for digital asset custody providers.
3. Security Token Issuers
   Introduction of a civil law concept for digital securities (“asset tokens”), facilitating the creation and transaction of digital uncertificated securities within a DLT ecosystem without legal uncertainties.

New Digital Securities: Uncertificated Register Securities

Under the existing legal framework, the treatment of “security tokens” under civil law was uncertain. To address this, the new law introduces “Uncertificated Register Securities” (Registerwertrechte) as of February 1, 2021. New rules for corporations issuing shares in a tokenized form are also being introduced. The goal is to enable stable and legally robust tokenization of rights through electronic registration, ensuring the same protection and functionality as traditional securities.

Requirements for Creating Uncertificated Register Securities

• The register must technically allow only creditors to dispose of their rights, excluding debtors.
• Information regarding the content, functionality, and agreement of the register must be stored on the register itself or linked to associated data.
• Creditors must be able to access all relevant information regarding their rights linked to the register without third-party intervention.
• Appropriate technical and organizational measures must be implemented to prevent unauthorized changes to the register.

The creation of these securities is achieved through a registration agreement, wherein the right is entered into a “Register of Uncertificated Securities” and may be asserted and transferred exclusively via the register. It remains possible to register these securities with a custodian (Verwahrungsstelle), giving them the same value as traditional book-entry securities.

Digital Security Trading Facilities

A significant element of the new regulations is the introduction of a new license category for “DLT Trading Facilities” (DLT-Handelssysteme) under the Financial Market Infrastructure Act (FMIA). This license is designed for professionally operated venues for multilateral and non-discretionary trading of Digital (DLT) Securities, offering trading, clearing, settlement, and custody services for DLT-based assets to both regulated financial market players and private customers. This “token security exchange license” became available from August 1, 2021.

DLT Securities

DLT Securities are suitable for mass trading and can include Uncertificated Register Securities or other uncertificated securities held in distributed electronic registers. These securities grant creditors exclusive control over their rights. The system permits entry to entities holding a FINMA license, foreign entities under equivalent supervision, and even unregulated entities and individuals acting on their own behalf.

Entities with a DLT Trading Facility license can also operate Organised Trading Facilities (OTF), a capability previously restricted to banks, securities firms, and other authorized or recognized trading venues. The licensing requirements for DLT Trading Facilities are modeled on those for traditional trading venues but adjusted for the specificities of distributed ledger technology. The license can be applied for in two versions: a smaller, more streamlined version for lower transaction volumes and a comprehensive version for higher transaction volumes.

New Regulatory Framework for Custody Providers

The DLT Framework also clarifies the regulatory treatment of custody service providers for digital assets. The new regulations ease segregation requirements, so providing (pooled) custody services typically no longer requires a Banking License but only a FinTech License (“Banking License Light”). In this setup, digital assets held in custody are treated as deposit accounts (off-balance sheet). Depending on the technical segregation setup, a membership with a Self-Regulatory Organization (SRO) may suffice.

The Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) has been amended to clarify the treatment of digital assets in the event of a custodian’s bankruptcy. The new regulations allow for the segregation of digital assets for the benefit of creditors or investors, provided specific requirements are met.