The new laws on distributed ledger technologies (DLT) have been in force for over a year now and the Swiss crypto scene, as well as the Swiss regulator FINMA, have had plenty of opportunities to put the legislator’s provisions on DLT into practice.
Despite "crypto-winter" ongoing, Switzerland's crypto scene has still been very busy in the past year and many new businesses have been established and a vast variety of crypto projects have been launched. However, it has proven rather challenging to receive general information and guidance on FINMA's practice regarding the new DLT laws. Most information from FINMA is provided bilaterally when filing for a licence application (e.g. FinTech licence or DLT trading facility licence) or when submitting a so-called "non-action letter" to get confirmation from FINMA that a certain project is not subject to a FINMA licence. This makes it even more crucial to work together with experienced and knowledgeable advisors having day-to-day exposure to the crypto-ecosystem, the regulator and the tax authorities.
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 affects certain business activities with virtual currencies particularly. 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 entering into force on 1 January 2023 intensifies the duty to monitor transactions for certain financial intermediaries significantly. 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 crypto currencies 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 provision, i.e. not only privacy coins such as Monera, 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.
Another change in the AMLO-FINMA is related to DLT trading facilities, as the scope of application of AMLO-FINMA will be extended to DLT trading facilities.
Developments Regarding DLT Trading Facilities
The Swiss National Bank (SNB) has set criteria for admitting DLT trading facilities to the Swiss Interbank Clearing (SIC) payment system. Although it is SNB that grants access to SIC, DLT trading facilities need to obtain a FINMA licence first. In a press release from 4 March 2022, SNB said it will consider applications that "make a significant contribution to the fulfilment of the SNB's statutory tasks" and do not pose any major risks while doing so. Further criteria are operations as a securities settlement system and settlement of payments in Swiss Francs via SIC.[i]
While the crypto world is still shaking from the recent disruption caused by the collapse of one of the biggest crypto exchanges, our focus is on how this event, unfolding into one of the biggest crises in the financial market since 2008, may affect existing and future crypto-related projects and businesses in Switzerland.
Currently, FINMA has not issued a single licence for a DLT trading facility. In light of recent events and in connection with anticipated and long overdue clarifications and guidelines on the qualification of crypto assets as securities from regulators worldwide, in particular from the United States Securities and Exchange Commission (SEC), an increase in applications for DLT trading facilities seems likely. In particular, the high level of legal certainty for crypto regulations and taxation in Switzerland, the broadly established crypto ecosystem and crypto-infrastructure within Switzerland, a crypto-experienced public sector as well as a highly reputed and leading financial market place and regulator provide a very solid ground for setting up and operating fully regulated DLT trading facilities in and from Switzerland.
Implications Of New European Union Regulation
On 5 October 2022, the European Council published the agreed text of the European Union regulation on markets in crypto assets (MiCA). The text is now subject to formal approval by the European Parliament and will then be translated into each of the official languages of the EU and published in the Official Journal of the EU. MiCA will enter in to force 20 days after that publication, presumably in 2023. Some provisions of MiCA will apply 12 months after MiCA enters into force, all others will enter into force 18 months after.
Switzerland as a non-EU country will still be affected by MiCA as most crypto-related businesses have ties to EU jurisdictions. Hence, Swiss companies who 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 constituting financial instrument, 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 designed to maintain a stable value, i.e. 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 EU/EEA and a licence as a bank or e-money institute. In addition, a so-called "crypto asset whitepaper" must be published.
Hence, Swiss crypto companies are well-advised to clarify rather sooner 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-wise 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.
Tax Reporting Of Crypto Assets
Switzerland has an already well-established taxation practice regarding crypto-assets. However, on an international level, the automatic exchange of information (AEOI) released by the Organisation for Economic Co-operation and Development (OECD) does not cover crypto-assets. Therefore, the OECD had published in March 2022 the draft Crypto-Asset Reporting Framework (CARF) for consultation with interested parties.
In particular, the Swiss Bankers Association (SBA) has submitted detailed comments on the OECD's proposal on the CARF. In Switzerland, it is expressively welcomed to create a level playing field for all types of service providers and to extend tax transparency to crypto assets. The CARF is meant to close gaps where Common Reporting Standard (CRS) does not apply. However, there has been a certain degree of irritation on the fact that CARF is not adopting the long-established system of the AEOI, but instead introduces a whole new regime of its own, despite serving the same purpose as AEOI. As opposed to securities assets with AEOI, CARF's starting point will be tokenised assets. Further, whereas the AEOI focuses on balances, the CARF is transaction-based and requires not always easy valuations of crypto assets in a FIAT-currency. At least, the rather many cases of necessary double-reporting under AEOI and CARF resulting from the initial draft of the CARF have been reduced in the final version. It remains to be seen how the specific implementation measures/guidelines will look like.
[i] https://www.snb.ch/en/mmr/reference/pre_20220304/source/pre_20220304.en.pdf, last visited on 27.11.2022.
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.
Kathrin Waditschatka, MLaw
Kathrin Waditschatka is an associate in the firm’s Banking & Finance and Regulatory / Fintech & DLT teams. She advises and represents national and international clients in financial transactions as well as in banking and financial market regulatory matters. Her practice focuses on banking, anti-money laundering, financial services and financial market infrastructures. Prior to joining MLL Legal, Kathrin Waditschatka worked as a junior associate for a leading Swiss law firm in Zurich, where she gained experience in corporate and restructuring law. Afterwards she joined a boutique law firm to gain additional practical experience in litigation. Thanks to her commercial training in the Swiss machinery industry and several years of professional experience, she has a sound knowledge of business administration.