The brave new world of Bitcoin

Market trends

Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?

Bitcoin and other virtual currencies have been the first application of blockchain technology, allowing transactions directly peer to peer, eliminating intermediaries and significantly reducing costs. Since the introduction of Bitcoin in 2009, a new age of tokenised ecosystems has begun and the shift from centralised to decentralised blockchain-based assets is ongoing. Our world is full of different asset classes ranging from money (in a narrow sense) to gold, real estate, securities, rights and others, many of which are difficult to trade or subdivide physically. Distributed ledger technology, and more specifically blockchain technology, is increasingly providing solutions to this problem.

The Swiss Ethereum Foundation based in Zug launched the first token generating event (TGE), also called an initial coin offering (ICO), in 2014. Switzerland, with its old tradition of political and economic stability and high-skilled labour force, provides a flexible corporate and foundation legal framework for blockchain projects, competitive tax law and regulators that are experienced in blockchain technology. Therefore, the ‘Crypto Valley’ between Zug and Zurich has attracted several of the most prominent blockchain projects in the world and is home to a growing community of entrepreneurs, service providers and crypto-enthusiasts.


Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?

Switzerland has no specific law covering cryptocurrencies and other distributed ledger tokens but rather applies existing financial market legislation to crypto projects. In its guidelines of February 2018, the Swiss Financial Market Supervisory Authority (FINMA) distinguishes between the following three token categories:

  • ‘Asset tokens’ represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category. The classification of asset tokens must consider the issuing conditions and the specific legal positions relating to the token. Asset tokens are usually qualified as securities and may require a civil law prospectus for a public primary market issuance.
  • ‘Utility tokens’ provide access to a digital application or service provided on or via a blockchain-based infrastructure. Depending on their form, they are comparable to vouchers, chips or keys that can be redeemed for contractually owed services. Depending on the specific case, utility tokens may be based on a contractual relationship, but are also possible in completely decentralised ecosystems without any holder claims. Due to the lack of a relationship with the capital market, utility tokens do not generally qualify as securities.
  • ‘Payment tokens’ (synonymous with cryptocurrencies) are tokens intended to be used as a means of payment for acquiring goods or services or as a means of money or value transfer. Payment tokens include cryptocurrencies in the strict sense of the term, such as bitcoin, bitcoin cash and litecoin. In addition, tokens may also be designed and used as a means of payment by securing them with assets such as gold or fiat currencies (ie, stable coins). According to FINMA, the issuance of payment tokens constitutes the issuing of a "means of payment" subject to anti-money laundering provisions, if the tokens can be transferred technically on a blockchain infrastructure. In this case, the issuer must be either affiliated to a self-regulatory organisation or subject to direct FINMA supervision.

A more detailed model of token classification, including the regulatory implications, can be found here.   Depending on the specific project, banking legislation, provisions on securities trading or collective investment scheme legislation may also be relevant. To enhance the business and legal certainty for crypto projects (as well as investors), every project team has the possibility to request a pre-ruling from FINMA and will receive a clear statement whether the individual project includes a regulated activity.

To further strengthen Switzerland's position as ‘Crypto Valley’, the Federal Council published a detailed report on blockchain technology in December 2018. The Federal Council wishes to create the best possible conditions so that Switzerland can further establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies. The report addresses several legal and regulatory questions and proposes specific amendments such as a new civil law instrument for tokenised securities and a distributed ledger technology licence allowing trading and post-trading activities. The new legislation proposal is expected to be published in Spring 2019.

Different EU member state authorities have thus far taken different approaches to the regulation of virtual currencies. Is this due to the different legal frameworks of the member states or (mainly) by institutional practices of the respective authorities?

Not applicable.

How likely is it that the regulation of virtual currencies will be harmonised at EU level? Could a consistent regulatory approach be reached through institutional guidelines for the competent authorities in the member states?

Not applicable.


How are transactions using virtual currencies as the medium of exchange taxed in your jurisdiction?

Responding to the formal request of three Swiss Bitcoin associations, the Swiss Federal Tax Administration has confirmed that Bitcoin should be treated in the same way as the Swiss franc or other fiat currency – that is, trading Bitcoins is neither a delivery nor a service for the purpose of Swiss value added tax (VAT). As a result, a Bitcoin transaction is VAT-free (Article 21(2) of the Swiss VAT Act).

If Bitcoins are used to pay for the supply of goods or services subject to Swiss VAT, the usage of Bitcoins is considered a mode of payment. Consequently, the seller must not charge any additional VAT on a taxable transaction due to the use of Bitcoins as means of payment. This is also the case for other forms of native transaction tokens.

Besides VAT, crypto-currencies are part of the taxable assets of individuals. Capital gains on cryptos, by contrast, are subject to tax only if the relevant assets are business assets. This concerns only individuals qualifying as professional traders. For others, capital gains do not fall under income tax.


If virtual currencies were to become a mainstream payment system, how might this affect the ability to control inflation in your jurisdiction?

Bitcoin and other virtual currencies could affect the stability of prices if they became a broadly accepted means of payment, which is not yet the case. Currently, virtual currencies are mostly used for investment purposes, as a form of a ‘digital gold’, and not to make transactions in daily life.

If crypto-currencies were widely used as payment instruments, there would be a risk that the Swiss National Bank would lose some of its ability to influence and balance the financial markets. However, the Swiss Federal Council declared this risk very low in a 2014 report. Although the market capitalisation of crypto-currencies has been rising significantly since then, they still have no influence on the ability to control inflation. The president of the Swiss National Bank also expressed this view in December 2017, adding that, nonetheless, central banks should monitor the situation.

Fraud and money laundering

What are the potential risks of virtual currencies in terms of fraud? How would these be addressed in your jurisdiction? Have any specific instances emerged in which virtual currencies have been used for money-laundering or other fraudulent purposes?

Bitcoin and other crypto-currencies often raise concerns of money laundering. Token holders are not known in person and there is no controller of a (public) blockchain infrastructure. That said, most crypto-currencies are pseudonymous rather than anonymous. Regarding the most frequently used Bitcoin and Ethereum blockchains, all assets related to a key address, as well as all transactions, are publicly visible, while the person behind this address is usually unknown. Therefore, regulators and prosecutors have possibilities to trace crypto-assets, starting from the genesis block, that may exceed cash assets or book money. Nevertheless, a profound knowledge of the technology and experienced IT forensic experts are needed to support the authorities in this task.

The protection of crypto-currency holders against fraud is primarily based on the cyber provisions in the Swiss Penal Code. Acts that are punishable under the code include:

  • obtaining data without authorisation;
  • gaining unauthorised access to a data processing system;
  • damaging data; and
  • committing (computer) fraud.

To reduce money laundering, the Swiss Anti Money Laundering Act imposes ‘know-your-customer’ obligations on individuals and legal entities that qualify as financial intermediaries and act on a professional basis, especially if they:

  • issue means of payments (payment tokens);
  • transfer liquid financial assets on behalf of a contractual party to a third party;
  • carry out the purchase and sale of currencies; or
  • carry out or support the transfer of money or assets (money transmitting) by accepting cash, cheques or other payment instruments.

A crypto-token will be classified as ‘money’ in the sense of the Anti-Money Laundering Act if:

  • it may be used to obtain real goods or services; and
  • it is accepted by a community as mean of payment, especially if it is listed on major crypto-exchanges.