The Swiss fintech and crypto landscape has evolved significantly over the past years,leading up to a recent boost in regulatory developments with further changes on the horizon.
Status quo and the upcoming agenda on fintech
Swiss financial regulation is characteristically principle-based rather than rule-based,allowing it to cope with a good measure ofinnovation without the need for constant changes to the legal framework. Nevertheless, the Swiss Financial Market Supervisory Authority (Finma) undertook significant efforts to support the emerging fintech sector and to clarify regulatory uncertainties, starting in late 2016.In particular, Finma amended some of its regulatory circulars to be technology-neutral, with a view to facilitating fintech business models without foregoing its regulatory objectives. Thus, it lifted the formal requirement for asset management contracts to be agreed in writing and enabled video and online identification processes to satisfy client onboarding requirements stemming from Swiss anti-money laundering (AML)regulation. Finma also launched a dedicated fintech desk to address requests in the areas offintech and cryptocurrencies.
Further to the measures taken by Finma, certain regulatory easements targeting -- but not limited in scope to -- fintech operators were enacted in 2017 by the Swiss Federal Council (the Swiss federal government). Specifically, the Federal Banking Ordinance(BO) was amended with effect as ofAugust 1 2017 to broaden the space within which a fintech business can operate without triggering a requirement to obtain a full banking licence.This was mainly achieved by allowing the holding ofthird party monies in interest-free settlement accounts for a longer period of time (60 days instead of the previous seven) without such funds qualifying as(bank-type) deposits from the public. In addition,a regulatory sandbox regime was introduced,allowing the acceptance of client deposits in an amount of up to CHF1 million
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Daniel Flhmann Partner, Br & Karrer Zurich, Switzerland T: +41 58 261 56 08 E: email@example.com W: www.baerkarrer.ch
About the author Daniel Flhmann is a partner in Br & Karrer's financial services department and co-head of the fintech practice group. His work focuses on banking, insurance and financial market laws as well as on the area of collective investment schemes. A special focus of Flhmann's practice lies on fintech, both in the context of advising startup businesses and more established financial institutions, as well as on blockchain technology and the legal framework of its application in practice.
(approximately $1.04 million) without a banking licence.
That said, important items of the Swiss fintech agenda will only enter into force at a later stage, given that they require amendments to federal statutory laws. In particular, these include the envisaged new fintech licence type(sometimes referred to as a banking licence light) as well as certain amendments to the consumer credit regime in Switzerland with a view to crowdfunding (see further below). It is expected that such amendments to statutory laws will become effective in January 2020.
Eric Stupp Partner, Br& Karrer Zurich, Switzerland T: +41 58 261 5390 E: firstname.lastname@example.org W: www.baerkarrer.ch
About the author Eric Stupp is a partner in Br & Karrer. He heads the financial services department and co-heads the internal investigations/cross-border proceedings and fintech teams. His practice focuses on advising banks, insurance companies,asset managers and other financial intermediaries on regulatory matters and enforcement proceedings. In recent years, he has regularly advised financial institutions and industrial companies in connection with internal investigations.
regarding several ICOs. On the other hand, Finma expressed
support for blockchain technology and, in particular,issued guidelines on the regulatory treatment of ICOs in February 2018. The guidelines supplementan earlier, more general guidance paper and summarise the principles Finma applies in assessing ICO projects and, more generally, blockchain tokens, under various Swiss financial market laws. In particular, Finma's focus in the area ofICOs lies on assuring compliance with securities offering,trading and exchange rules as well as AML regulation.
categories oftokens based on their economic functionality:(1) payment tokens,(2) utility tokens and(3)asset tokens. Finma uses these token categories to assess requests regarding the regulatory qualification of tokens and token offerings using a regulatory matrix. In particular, tokens may qualify as securities (this is in particular the case for asset tokens and utility tokens lacking a fully developed technical functionality) or as payment instruments in the meaning of AML regulation(as with payment tokens and utility tokens where the payment aspect is not merely ofan accessory nature).
The so-called three buckets concept used in Finma'sICO guidelines intentionally leaves room for hybrid token models. Finma even indicated in a recent roundtable event that it expects tokens to change their regulatory classification over the course oftheir lifetime. For instance, a utility token might qualify as a security at the point in time oftheICO,but potentially no longer once the development ofthe platform enabling the actual utility of the token is completed and the platform becomes operative. Finma so far left it open how it intends to address this particularity going forward.
In our view, the Finma ICO guidelines have a remarkable impact on pending and future ICOs. In particular, it appears the archetype ofa utility token, ie a token that neither qualifies as a security subject to securities laws nor as a payment instrument subject to mandatory AML regulation, will have a very narrow field of application. Rather, Finma's classification is such that many tokens will qualify as securities. Token sales are also more likely to become subject to mandatory AML/KYC duties (though voluntary KYC processes have been put in place for many ICOs already in the past for various reasons including the exclusion of investors from jurisdictions with a less than welcoming regulatory environment).
Under Swiss law, the shift towards a
Initial coin offerings
Separately from its focus on fintech, Finma has become more active in the area of blockchain-driven business models and initial coin offerings(ICOs),since 2017.
On the one hand,Finma was swift to take enforcement action as the hype around cryptocurrencies was building.It closed down certain non-compliant digital coin providers and initiated investigative proceedings
Finma wasswiftto take enforcement action as the hype around cryptocurrencies
As a general principle, Finma reviewsICO projects presented to it on case-by-case basis. To facilitate this process and to guide interested parties, it defined three main
security qualification of tokens means that issuers may need to prepare a prospectus ifthe tokens represent shares or bonds. Moreover, tokens that are considered securities at their
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place ofissuance are,as a factual matter, more likely to qualify as securities also in other jurisdictions in which they are offered, potentially triggering filing or registration duties for public offerings in a number of places. As a further consequence, the secondary market in tokens will be impacted, with brokers, underwriters and exchange platforms facing more stringent regulatory requirements if they offer or trade in securities.
Peter Hsu Partner, Br& Karrer Zurich, Switzerland T: +41 58 261 5394 E: email@example.com W: www.baerkarrer.ch
Rashid Bahar Partner, Br & Karrer Zurich/Geneva, Switzerland T:+41 58 261 5392 E: firstname.lastname@example.org W: www.baerkarrer.ch
A new regulatory licence type will be Introduced to address the perceived needs of fintech businesses
While many will see this trend towards a professionalisation ofthe ICO and secondary token markets as a drawback, there can be little doubt that at least a moderately regulated environment will be beneficial for sustainable development of blockchain-based financing and token-operated business models in the long term.
Against this background,Finma expressed its willingness to examine well-documented ICO projects (the annex to the ICO guidelines specifies the documentation requirements) and to provide a view on the regulatory qualification and associated duties. It will therefore in many cases remain good practice to obtain regulatory clearance for a particular ICO structure or business model before the launch (Finma does not review projects that have been launched prior to its involvement, but may initiate enforcement proceedings if it has a concern that they do not comply with financial markets laws and regulations). Finma also intends to further develop the regulatory practice in the blockchain space and it may in the future issue a more detailed circular on the topic.
jilockchain task force
On a more fundamental level, the Swiss Federal Department of Finance (FDF) launched a blockchain task force (in which our law firm is also represented) to further
About the author Peter Hsu is a partner in Br & Karrer's financial services department and the key contact for the practice area of insurance. His work focuses on banking, insurance,financing and capital markets. He regularly advises Swiss and foreign banks,securities dealers,insurers and other financial intermediaries as well as fintech businesses with regard to a wide range of regulatory and contract law matters and in enforcement proceedings.
analyse the current legal and regulatory framework around blockchain tokens and to identify the areas to be addressed in future legislative and regulatory projects.
The blockchain task force is not only focused on matters offinancial regulation, but also discusses civil law aspects. In particular, one ofthe topics ofthe position paper the task force is expected to publish in late April 2018 revolves around the transfer of uncertificated securities (Wertrechte) and other rights represented in a token under Swiss civil law. Furthermore, the position paper will address the treatmentoftokens under AML,securities and banking regulation.
As mentioned above, significant developments in fintech regulation will unfold in the near future. In particular, a new regulatory licence type will be introduced to address the perceived needs of fintech businesses (though, in the spirit of technology-neutral regulation, the licence will also be available to businesses without a fintech angle).
About the author Rashid Bahar is a partner in Br & Karrer. He focuses on banking, finance and capital markets. He regularly advises financial institutions on transactional and regulatory matters. He is often involved in M&A transactions and complex financings, where he advises both lenders and borrowers. He heads the funds, financial products and asset management practice group. As part of his practice, he also advises Swiss and international investment fund and asset managers.
The new licence type will bridge the gap resulting from the fact that, as a general principle,only regulated banks in Switzerland are allowed to accept deposits from the public on a professional basis, although many developing fintech businesses, such as crowdfunding platforms, by design need to accept and hold on deposit substantial client funds without actually engaging in typical commercial banking. Such businesses have a very different risk profile from a bank but are at present relegated to either operating under the exemptions from the definition ofdeposits from the public (eg the abovementioned settlement account exemption)or settling for a full banking licence. However,mostfintechs would not go down the second route given the demanding standards which have to be fulfilled in order to obtain and maintain a Swiss banking or securities dealer licence.
In response to this dilemma, to lower the market entry barrier, the Swiss Federal Council proposed in late 2016 to introduce a new licence type for fintech innovators with significantly less onerous regulatory requirements than those applying to a traditional banking licence. The creation of
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this new licence type requires an amendment of the Swiss Banking Act by Parliament. Taking into account the current pace of the dispute resolution process between the two chambers of Swiss Parliament (the lawmaking project has been piggybacked onto a larger proposal for revision ofSwiss financial services and financial institutions laws), the new rule is expected to enter into force in January 2020.
Pursuant to the draft ofthe relevant new provisions, the holder ofa fintech licence will be allowed to accept deposits from the public in amounts up to a total ofCHF100 million,
As a counterpart for the less onerous regulatory requirements, a fintech licence holder will not be allowed to pay interest on or re-invest the deposits,effectively excluding the conduct of typical commercial banking business. It remains to be seen how the new licence type will be received in the market once introduced (in preparation, in 2017 Finma launched a voluntary survey to gauge interest and gather information on potential activities that might be conducted under the new licence). The success will in our view be highly dependent on the final implementation of the rule, the handling of the application
This process has been undertaken sofarin a prudentand considered manner withoutany
apparenttendencyfor regulatory overkill
gap is created by the fact that non-professional lenders acting on a crowdlending platform are typically exempt from duties under the Consumer Credit Act. Furthermore, the platforms themselves only have limited duties based on their status as an intermediary. As a consequence, traditional consumer credit providers(or other crowdlending platforms or lenders) may not have the full picture of a potential borrower's existing credit exposure when assessing his or her creditworthiness.
This information asymmetry is intended to be addressed by a revision of the Consumer Credit Act, which will subject crowdlending intermediaries (ie platforms) to certain reporting duties and further obligations in connection with the review of the creditworthiness ofthe borrowers.This shift of responsibility from the lenders to the intermediary should close the gap outlined above.The changes are expected to enter into force concurrently with the fintech licence project.
subject to the competence of Finma to approve a higher maximum amount if adequate safeguards for the protection of customers are in place.
Although the Banking Act will apply by analogy to fintech licence holders, the requirements for obtaining and maintaining the licence, in particular organisational, capital and audit requirements, are expected to be significantly reduced when compared with a banking licence on account of the different risk profile offintech operators.The deposits will also not be protected by the Swiss depositor protection scheme, a fact that the licence holders will need to inform their clients about.
process for the new licence by Finma and the practical ongoing compliance burden on the licence holders.
Consumer protection in crowdlending
Crowdlending as an alternative source of funding has shown rapid growth rates in Switzerland. However, consumer credit regulation has not evolved at the same rate, leading to potentially inferior consumer protection, mainly due to the lack of reporting duties to central credit information depositories in crowdlending scenarios. This
Legislating in moderation
The Swiss law-making bodies and Finma,as the main financial regulator, have taken up the challenge of addressing the increasingly rapid developments in the areas of fintech and cryptocurrencies. In our view, this process has been undertaken so far in a prudent and considered manner without any apparent tendencyfor regulatory overkill. As a result, the climate in Switzerland for financial innovators remains favourable, as evidenced by the everincreasing number ofstart-up companies and experienced players in Switzerland alike becoming active in these areas.
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