After a slight decline in 2021, the Swiss FinTech industry rebounded in 2022. Switzerland was home to around 437 FinTech companies in 2022 which was an increase of 53 compared to 2021, and total funding for such FinTech companies increased by 36 per cent to CHF 605 million up from CHF 446 million, according to the FinTech Study 2023 of the Lucerne University of Applied Sciences and Arts . The growth was led by an increase in FinTech companies operating in the segments of investment manage-ment and banking infrastructure, followed by payment services and loans and deposits .
Digitalisation, automation, blockchain technology, big data and artificial intelligence have been the key drivers of the FinTech sector. We have seen many projects in algorithmic trading and digital wealth management, and – despite the ongoing crypto winter – an increase in Web 3.0 projects, including decentralised autonomous organisations, and a push towards tokenising financial instruments because of the legislation on distributed ledger technology (DLT Act) as of 1 February 2021 and 1 August 2021.
Digital payment solutions and mobile banking are growing steadily and rapidly in Switzerland. Contactless payments, mobile wallets and peer-to-peer payment applications have gained popularity. Established banks and FinTech startups offer mobile banking applications with features such as instant payments, money transfers and account management. The Swiss Interbank Clearing (SIC) payment system will introduce instant-payment at the end of 2023, and the Swiss National Bank (SNB) decided that the bigger banks must accept incoming instant payments as from August 2024 and the other banks shall follow until 2026. The SNB is actively exploring the potential of central bank digital currencies (CBDCs), in particular with projects Helvetia, Jura, Helvetia Phase II, Rio and Mariana.
In contrast to the European Union (EU) with its payment services directive II and e-money directive with respective license regimes, Switzerland has no payment-specific regulatory framework. Payment activities are usually either lightly regulated by being only subject to Swiss AML regulations or rather strictly regulated by being subject to Swiss AML and banking regulations. The rather new FinTech license created a kind of middle ground to this pretty big regulatory balancing act. Finally, the Swiss payment industry and Swiss banks are continuing their hard work towards industry standards for giving data access to account information service providers via open APIs in order to avoid screen-scraping solutions which are usually problematic under e-banking agreements between banks and end-users.
FINMA’s Qualification Of Staking Under Banking Law
The Swiss Financial Market Supervisory Authority (FINMA) clarified that entities offering staking services to clients require as a general rule a banking license under the Banking Act. Staking service providers offer their clients the possibility to stake certain crypto-assets and to earn rewards for staking the crypto-assets for a certain period according to the rules of the relevant underlying proof-of-stake protocol. Staking services are usually provided for crypto-assets that are held in custody with the staking provider or a third-party custodian whereby the respective crypto-assets will be locked but not transferred.
FINMA’s position with regards to the custody of crypto-assets is that no banking or FinTech licence is required if (i) the crypto-assets are stored separately and directly on the public distributed-ledger network for each client (an internal ledger allocating tokens to clients is not sufficient) and (ii) the crypto-assets are kept ready for the client by the custodian at all times.
A FinTech license is required where crypto-assets are held in custody on an omnibus address with apparent client shares but still kept ready for the clients by the custodian at all times.
A banking license is required where there is no obligation to keep the crypto-assets ready for the client at all times or where crypto-assets are held on an omnibus address without apparent client shares.
FINMA clarified that as a general rule, it is of the view that staked crypto-assets are not kept available for the client at all times, in particular due to the slashing risk, as well as in some cases lock-up periods or long waiting times for unstaking, particularly in times of high demand. Therefore, entities that offer staking services require a banking license unless another exemption, like collecting deposits only from institutional clients with professional treasury or a bank default guarantee, applies.
Implications By New European Union Regulation
In June 2023, the European Union regulation on markets in crypto assets (MiCA) entered into force, with some of its provisions taking effect in July 2024 and others by January 2025. MiCA introduces uniform rules for the issuance, offer to the public and admission to trading of crypto-assets in the EU and for the provision of crypto-asset services within the EU.
Switzerland as a non-EU country will still be affected by MiCA as most crypto-related businesses in Switzerland have ties to EU jurisdictions. Hence, Swiss companies that offer their products or services to EU countries will need to assess carefully whether their business activities are subject to MiCA or – with regards to crypto-assets that constitute financial instruments, such as securities – the EU Directive on markets in financial instruments (MiFID II). Since MiCA aims at covering the range of crypto-assets in the broadest way possible, it is likely that MiCA will have an impact despite being out of scope of Swiss financial market regulation. This is especially the case for pure utility tokens.
For some tokens, enhanced rules apply under MiCA. For example, the issuance of a crypto-asset that is designed to maintain a stable value (ie stablecoin) by reference to a single currency is considered an ‘e-money token‘ under MiCA. As a basic rule, the issuance of an e-money token requires a physical presence within the EU/EEA and a license as a bank or e-money institute. In addition, a so-called ‘crypto-asset whitepaper’ must be published. Although such a location requirement does not apply to issuers of crypto-assets other than e-money tokens or asset-referenced tokens, including utility tokens, but generally excluding NFTs (if no circumvention), MiCA still has an extra-territorial effect.
Specifically, Swiss companies that want to offer to the public or admit to trading crypto-assets other than e-money tokens or asset-referenced tokens in the EU must publish a crypto-asset whitepaper in accordance with the MiCA minimum information, notify the crypto-asset whitepaper to the competent authority of an EU member state, and draft any marketing communication in accordance with MiCA. Swiss crypto-asset service providers that wish to provide their services in the EU must be registered and authorised in the EU.
The reverse solicitation exemption is applicable to Swiss and other third-country crypto-asset service providers that provide their services at the own exclusive initiative of a client in the EU. The definition and scope of the reverse solicitation is however restrictive. Where the third-country crypto-asset service provider or anyone acting on its behalf has solicited clients or potential clients in the EU, regardless of the means of communication, reverse solicitation is not available.
Swiss crypto companies are therefore well advised to clarify sooner rather than later whether MiCA is affecting their business model. In particular, it has to be assessed which crypto-asset services can be provided cross-border from Switzerland into the EU, and for which tokens issued from Switzerland a crypto-asset whitepaper can be notified into the EU and then passported within the EU, or if for example a double structure for Switzerland and the EU makes sense based on the EU-local presence-requirement in certain cases.
Changes To Anti-Money Laundering Regulations
On 2 November 2022, FINMA published its revised anti-money laundering ordinance (AMLO-FINMA). Amongst other changes, a new provision particularly affects certain business activities with virtual currencies. As of now, financial intermediaries must identify the contracting party when crypto-related transactions exceed the threshold of 1,000 Swiss Francs, either as a single transaction or as seemingly connected transactions. This is unless such transactions represent money or value transfers and are conducted within the course of an ongoing contractual relationship with the financial intermediary. The provision aims at detecting so-called “smurfing” transactions.
A new provision, which entered into force on 1 January 2023, significantly intensifies the duty to monitor transactions for certain financial intermediaries: When accepting payments in cash or other anonymous means of payments for the purchase or sale of virtual currencies, financial intermediaries must implement suitable technical precautions to prevent any transactions from exceeding the threshold of 1,000 Swiss Francs within a period of 30 days. This new provision targets mainly crypto-ATM providers as well as virtual asset service providers (VASPs) providing (money) exchange services.
As cryptocurrencies do not qualify as cash according to the anti-money laundering ordinance (AMLO), FINMA added “or other anonymous means of payments” and explained in their explanatory report that all cryptocurrencies shall be in scope of that, ie not only privacy coins such as Monero, Dash or Zcash. It goes without saying that implementing such technical precautions comes with high costs and efforts. To implement preventing measures may not even be technically possible. It is therefore expected that not all financial intermediaries affected by this new provision will be able to continue their business in the same way.
1 Lucerne University of Applied Sciences and Arts, FinTech Study 2023, p. 5 (found on 14 July 2023 under: https://www.hslu.ch/en/lucerne-university-of-applied-sciences-and-arts/about-us/media/medienmitteilungen/2023/03/08/fintech-studie-2023/).
2 Lucerne University of Applied Sciences and Arts, FinTech Study 2023, p. 5 (found on 14 July 2023 under: https://www.hslu.ch/en/lucerne-university-of-applied-sciences-and-arts/about-us/media/medienmitteilungen/2023/03/08/fintech-studie-2023/).
Dr. Reto Luthiger
Reto Luthiger is a Partner with MLL Legal and Co-Head of the Regulatory, FinTech & DLT Team. He is a financial market regulatory as well as a DLT/blockchain specialist. He advises and represents domestic and international clients in financial markets regulatory and civil law matters as well as proceedings before FINMA, self-regulatory organisations (SROs), supervisory organisations (SOs) other authorities and courts. He has wide-ranging experience in banking, securities brokerage, anti-money laundering, financial services, financial markets infrastructures and collective investment schemes as well as FinTech, InsurTech and DLT/blockchain.
Andrea Trost is a senior associate at MLL Legal and is part of the Regulatory, FinTech & DLT Team. She has in-depth knowledge of financial market regulation, with a focus on disruptive and new technologies. She advises Web3 and FinTech companies in all phases of development, including formation, business model/product structuring and fundraising.