Cryptoasset trading

Fiat currency transactions

What rules and restrictions govern the exchange of fiat currency and cryptoassets?

The professional purchase and sale of cryptoassets against fiat currencies (eg, Swiss francs) but also between different cryptoassets, constitute a currency exchange (a two-party transaction) or money remittance (a three-party transaction) activity subject to the Anti-Money Laundering Act (AMLA) unless they qualify as securities or utility tokens.

In the case of money exchange transactions, for example, the contracting party must be identified if there is a minimum of 5,000 Swiss francs (comprised of 1,000 Swiss francs respectively in transactions with virtual currencies) and its beneficial owner must be identified if there is a minimum of 15,000 Swiss francs. The changer must take appropriate measures to ensure that the wallet is that of the customer (a two-party transaction) and not that of a third party; otherwise, it would be a money remittance activity and the identification obligation would apply to zero Swiss francs for outbound transactions and 1,000 Swiss francs for inbound transactions.

Concerning transactions of payment tokens, financial intermediaries must apply the Travel Rule based on the Financial Market Supervisory Authority (FINMA) Anti-Money Laundering Ordinance (AMLO-FINMA) on every transaction, including transactions to wallets held with unregulated wallet providers (ie, stating the name, address and wallet address of the sending party and the name and wallet address of the receiving party).

Trading in crypotassets, which are securities, either on behalf of clients or on one’s own account (if certain turnover thresholds are exceeded), generally requires a securities-house licence. The licensing requirements also apply to the entity’s public issuing of derivatives or the placing of securities for issuers. The bilateral systematic internalisation of cryptoassets and related derivatives or financial instruments is subject to additional regulatory requirements under the Financial Market Infrastructure Act (FMIA).

Accepting client deposits generally requires a banking licence. Cryptocurrencies and their associated private keys may be deposits under the Swiss Banking Act.

Professional foreign exchange dealers may not accept public deposits unless they have a banking licence. The same applies to cryptoasset dealers, who convey over or safekeep the private keys of their clients. However, depending on the number of funds collected, a fintech licence may be obtained.

Exchanges and secondary markets

Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?

Bilateral trading (broker or dealer activities)Licence requirements and duties of conduct

Professional trading in securities (ie, asset tokens) typically requires an authorisation according to the Financial Institutions Act as a securities house granted by the FINMA. The detailed requirements and authorisation process depend heavily on the place of domicile of the securities house and the business activity pursued. A Swiss-domiciled securities house is any legal entity or partnership that professionally sells or buys securities:

  • on its own account on the secondary market with the intent of reselling them within a short time (eg, own-account dealers and market makers);
  • on behalf of third parties (eg, client dealers);
  • by publicly offering securities to the public on the primary market (eg, issuing houses); or
  • by professionally creating derivatives and offering them publicly on the primary market (eg, derivatives houses). 

 

Undertakings that acquire or dispose of payment or asset tokens in secondary trading on behalf of clients qualify as financial service providers according to the Financial Services Act (FinSA) and are subject to the duties of conduct at the point of sale.

 

Derivatives trading obligations

Trading in cryptoassets that are derivatives may be subject to multiple derivatives trading obligations under the FMIA depending on the status of the counterparties involved, such as reporting, clearing and risk mitigation (eg, trade confirmation, portfolio reconciliation, portfolio compression, dispute resolution and valuation, including initial and variation margins).

 

Trading platforms – order matching

Centralised or decentralised trading platforms on which cryptoassets qualified as securities are traded usually require an authorisation as a financial market infrastructure (FMI) of the category of a stock exchange or multilateral trading facility (MTF). Only regulated participants may trade on such an FMI (ie, no retail clients).

An authorised bank or securities house may run an organised trading facility on which financial instruments other than securities may be traded. Organised trading facilities are also directly accessible to retail clients. Trading platforms for payment tokens are not subject to an FMI licence if they offer only spot transactions. Trading only utility tokens triggers no FMI licence requirements as utility tokens do not qualify as financial instruments.

 

Trading platforms – clearing and settlement

Providing clearing and settlement services involving the power to dispose of private keys usually triggers banking regulations in connection with payment tokens, fiat currencies or securities house regulations in connection with asset tokens. Further, an entity that clears and settles payment obligations based on uniform rules and procedures could even require an FMI licence, similar to a payment system.

If an organised trading facility provides transaction settlement in connection with payment tokens or fiat currencies, it must keep client assets on settlement accounts for no longer than 60 calendar days to limit regulatory requirements to anti-money laundering duties. Insofar as such platforms also offer their customers the management of accounts (eg, for the settlement of margins) and thereby keep the cryptoassets in pooled accounts on the blockchain, a subordination under the Banking Act must also be examined. The fintech licence can be an attractive option for these ventures.

 

DLT trading facility licence

Since many distributed ledger technology (DLT) based infrastructures have an integrated approach to exchange and post-trade services, Switzerland has introduced, as of 1 August 2021, a new category of FMI tailored to the specifics of a DLT-based multilateral exchange of ledger-based securities with direct access by retail clients that allows for operating matching, execution, clearing, settlement and custody within the same legal entity. Additionally, cryptocurrencies are allowed to be traded on a DLT trading facility.

Custody

How are cryptoasset custodians regulated?

Custody services in connection with utility tokens only are not regulated.

 Normal custody of payment and asset tokens

Simple custody of asset tokens with the power to dispose of private keys is only subject to the AMLA. However, the activity of a central securities depository is subject to a FINMA licence. In contrast, the custody of a payment token can also be subject to a banking or fintech licence if the custody wallet provider maintains the private keys and does not fully segregate the tokens per individual client on a technical level or on a book-record level and is not contractually obligated to keep the payment tokens ready at all times for the client. 

The custody of assets, whether cryptoassets or assets from the analogue world, does not in itself constitute a financial service within the meaning of article 3(c) of the FinSA. This activity lacks, as a minimum, the requirement of the activity carried out for customers concerning the acquisition or sale of financial instruments or the acceptance and transmission of orders relating to financial instruments or asset management activity. In particular, if the sole purpose of the transfer of the assets is safe custody and there is no power of attorney to invest them, there is no asset management.

Accordingly, a custody service provider is not covered by FinSA as long as its service is limited to custody per se. However, if a sale of tokens considered to be financial instruments is only possible via an account with the provider of custody services, for example, because the private key is located therein, a financial service under FinSA is likely to exist.

 Central securities depository of asset tokens

A central securities depository is a category of FMI subject to a FINMA licence. It is the operator of a central custodian (ie, an entity for the central custody of securities and other financial instruments based on uniform rules and procedures) or a securities settlement system (ie, an entity for the central custody of securities and other financial instruments based on uniform rules and procedures), or both. According to our view, the pure issuance of security tokens or payment tokens does not qualify as a securities settlement system or a payment system, provided that the respective blockchain or DLT is actually operated in a decentralised manner.

Since a fully-fledged security cryptoasset exchange usually intends to offer post-trading services requiring a licence as a central securities depository, attention is needed that one legal entity is not allowed to hold two different FMI licences. Thus, two legal entities would be required for these projects.

All custody providers with any means to convey over the cryptoassets of their clients, are subject to the AML provisions. This means it may not only include the power to dispose of the private keys but also any means to influence or control the smart contract enacting transfers provided that there is a permanent business relationship with the client (such as registration, account, login and contractual agreement). 

Broker-dealers

How are cryptoasset broker-dealers regulated?

Licence requirements and duties of conduct

Professional trading in securities (ie, asset tokens) typically requires authorisation according to the Financial Institutions Act as a securities house granted by the FINMA. The detailed requirements and authorisation process depend heavily on the place of domicile of the securities house and the business activity pursued. A Swiss-domiciled securities house is any legal entity or partnership that professionally sells or buys securities:

  • on its own account on the secondary market with the intent of reselling them within a short time (eg, own-account dealers and market makers);
  • on behalf of third parties (eg, client dealers);
  • by offering securities to the public on the primary market (eg, issuing houses); or
  • by professionally creating derivatives and offering them publicly on the primary market (eg, derivatives houses).

 

Undertakings that acquire or dispose of payment or asset tokens in secondary trading on behalf of clients qualify as financial service providers, according to the FinSA, and are subject to the duties of conduct at the point of sale.

 Derivatives trading obligations

Trading in cryptoassets that are derivatives may be subject to multiple FINMA derivatives trading obligations depending on the status of the counterparties involved, such as reporting, clearing and risk mitigation (eg, trade confirmation, portfolio reconciliation, portfolio compression, dispute resolution and valuation and initial and variation margins).

Decentralised exchanges

What is the legal status of decentralised cryptoasset exchanges?

The scope of regulations depends on the level of decentralisation of the different value-chain services involved.

 

Trading and order matching

Usually, order-matching mechanisms are organised centrally, which often triggers an FMI-licence requirement as a stock exchange, multilateral trading facility or organised trading facility. In the case of completely decentralised solutions, no FMI licence would be required.

Since 1 August 2021, a new category of FMI, the DLT trading facility for the trading of ledger-based securities that, according to FINMA, qualify as asset tokens, has been introduced. It allows for multilateral trading with direct retail access.

 

Clearing and settlement

Often, decentralisation refers to decentralised clearing and settlement processes (ie, peer-to-peer transaction clearing or settlement without trading platform involvement). Therefore, if the trading platform neither operates a smart contract involved in the transaction nor has any power to dispose over the private keys during these transactions, generally, neither AML regulations nor banking or securities-house licence requirements are triggered.

However, if the smart contract is operated by the corresponding trading platform and provides technical control and influence options, these decentralised trading platforms are, under FINMA practice, generally at least subject to the AMLA, because they have control over third-party assets through the confirmation, release or blocking of orders. In particular, DeFi structures often come into the scope of the AMLA because it covers also support in transacting in cryptocurrencies within permanent business relationships.

Peer-to-peer exchanges

What is the legal status of peer-to-peer (person-to-person) transfers of cryptoassets?

Peer-to-peer transactions generally do not fall under the scope of the AMLA if the wallet service provider has neither the power to dispose over the private keys nor any other influence on the transaction or the smart contract conducting the transaction. However, if a wallet service provider can assert control over the assets of the participants or influence these transactions or the smart contract conducting these transactions, the AMLA will apply. Even non-custody wallet providers can be in scope of the AMLA if they are considered supporting transactions in cryptocurrencies within permanent business relationships.

FMIA derivatives trading obligations apply to all (counter) parties of transactions with asset tokens qualifying as derivatives.

Trading with anonymous parties

Does the law permit trading cryptoassets with anonymous parties?

Generally, the law does not prohibit trading with anonymous parties. However, FINMA Guidance of February 2019, ‘Payments on the blockchain’, clarified that financial intermediaries doing orders with payment tokens must fully comply with the Travel Rule according to FINMA’s Anti-Money Laundering Ordinance and there is – contrary to the Financial Action Task Force recommendations – no exception in Swiss AML regulations for payments involving unregulated wallet providers. Finally, sanctions regulations according to the Embargo Act (EmbA) must be considered.

Foreign exchanges

Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?

If a foreign stock exchange or multilateral trading facility enables trading of cryptoassets qualified as securities, it requires FMIA recognition before it can grant access to Swiss-regulated participants.

Depending on the specific business model and structure, foreign trading platforms directly addressing unregulated Swiss clients must check whether:

  • they provide a financial service and are therefore subject to the FINSA rules of conduct;
  • they publicly offer financial instruments and are therefore subject to the FINSA prospectus and basic information sheet obligations; or
  • the FMIA derivatives trading obligations apply in connection with derivatives transactions.

Under what circumstances may a citizen of your jurisdiction lawfully exchange cryptoassets on a foreign exchange?

There are no restrictions in Swiss law in this regard, except that:

  • the Swiss client must check if the FMIA derivatives-trading obligations apply in connection with derivatives transactions; and 
  • in official FINMA-practice in connection with decentralised exchanges (DEX) for payment tokens, every user is considered to be a money exchange service provider under the AMLA if he or she acts on a professional basis.
Taxes

Do any tax liabilities arise in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?

Generally, all types of cryptoassets and corresponding transactions are subject to federal, cantonal and communal taxes, such as income, wealth and profit tax, stamp duty and withholding tax or value added tax.

The Federal Tax Administration has introduced the following.

  • On 27 August 2019, it published a working paper on cryptocurrencies and initial coin offerings and initial token offerings in connection with wealth, income and profit tax, withholding tax and stamp duty, in which they particularly state that they are guided by the token classification of the FINMA ICO Guidelines (lastly amended on 3 August 2022).
  • It amended its ‘VAT Information 04’ brochure on 1 January 2018 with a section on services in connection with blockchain and distributed ledger technology.

 

All federal, cantonal and communal tax authorities allow for the filing of tax rulings and have collected considerable experience over many years.