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 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.

For example, in the case of money exchange transactions, where the value is more than Sfr5,000 the contracting party must be identified, and where the value is more than Sfr25,000 the beneficial owner must be identified. The exchanger must take appropriate measures to ensure that the wallet belongs to the customer (a two-party-transaction) and a third party, because otherwise it would constitute a money remittance activity and the identification obligation would apply from an amount of Sfr0 for outbound transactions and Sfr1,000 for inbound transactions.

With regard to payment token transactions, financial intermediaries must apply the travel rule based on the Anti-money Laundering Ordinance of the Swiss Financial Market Supervisory Authority 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 privately (if certain turnover thresholds are being exceeded), generally requires a securities house licence. The licensing requirements also apply to the entity’s public issuing of derivatives or 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 exchanges dealers may not accept public deposits, without a banking licence. The same applies for cryptoasset dealers, who convey over the private keys of their clients. However, as stated above, depending on the amount 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/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 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 period of 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 which 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 therefore 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, as well as initial and variation margins).

Trading platforms – order matchingCentralised 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. 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 settlementProviding clearing and settlement services involving the power to dispose over 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 a 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 such ventures.

New developmentsSince many distributed ledger technology (DLT)-based infrastructure has an integrated approach to exchange and post-trade services, the Federal Council has proposed the introduction of a new category of FMI tailored to the specifics of a DLT-based exchange of securities cryptoassets with direct access by retail clients.

Custody

How are cryptoasset custodians regulated?

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

Normal custody of payment and asset tokensSimple custody of asset tokens with the power to dispose over private keys is only subject to the AMLA. However, the activity of a central securities depository is subject to a licence from the FINMA. In contrast, the custody of payment token can additionally be subject to Swiss banking regulation, if the custody wallet provider maintains the private keys and does not fully segregate the tokens per individual client on a technical level (ie, not only on a book records level).

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 Financial Services Act (FinSA). This activity lacks, as a minimum, the requirement of the activity carried out for customers in relation to 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 asset transfer 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 the FinSA as long as its service is limited to custody per se. However, if a sale of the tokens considered to be financial instruments is only possible via an account with the provider of custody services (eg, because the private key is located therein), a financial service pursuant to the FinSA is likely to exist.

Central securities depository of asset tokensA central securities depository is a category of FMI subject to a licence by FINMA. 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).

Since a fully fledged security cryptoasset exchange usually intends to offer post-trading services requiring a licence as a central securities depository, it must be remembered that a legal entity is not allowed to hold two different FMI licences. Thus, two legal entities would be required for such projects. However, the Federal Council has proposed the introduction of a specific category of FMI licence for DLT-based exchanges for cryptoassets. This approach would remedy the aforementioned problem of the requirement of multiple licences for such projects.

Broker-dealers

How are cryptoasset broker-dealers regulated?

Licence requirements and duties of conductProfessional trading in securities (ie, asset tokens) typically requires an authorisation according to the Financial Institutions Act as a securities house granted by 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 period of 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 which 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 therefore are subject to the duties of conduct at the point of sale.

Derivatives trading obligationsTrading in cryptoassets that are derivatives may be subject to multiple derivatives trading obligations of 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, as well as 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/order matchingOrder matching mechanisms are usually organised centrally, which often triggers a FMI licence requirement as stock exchange, multilateral trading facility or organised trading facility. In case of completely decentral solutions, no FMI licence is required.

Clearing and settlementOften decentralisation refers to decentralised clearing and settlement processes (ie, peer-to-peer transaction clearing or settlement without involvement of the trading platform). Therefore, if the trading platform neither operates a smart contract involved in the transaction nor has any power to dispose over private keys during such transactions, generally anti-money laundering regulations and banking and securities house licence requirements are not triggered.

However, if the smart contract is operated by the corresponding trading platform and provides technical control and influence options, such decentralised trading platforms are, in accordance with FINMA practice, generally at least subject to the AMLA, as they have control over third-party assets through the confirmation, release or blocking of orders.

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 such transactions or the smart contract conducting such transactions, the AMLA will apply.

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

Trading with anonymous parties

Trading with anonymous parties

In general, the law does not prohibit trading with anonymous parities. However, FINMA Guidance 02/2019 "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.

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 recognition by FINMA 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?

Swiss law imposes no restrictions in this regard except that the Swiss client must check whether the FMIA derivatives trading obligations apply in connection with derivatives transactions.

Taxes

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

In general, all types of cryptoasset and related transactions are subject to federal, cantonal and communal taxes, such as income, wealth and profit tax, stamp duty and withholding tax and value added tax (VAT).

In particular, the Federal Tax Administration:

  • on 27 August 2019 published a working paper about cryptocurrencies and initial coin offerings and initial token offerings in connection with wealth, income and profit tax, as well as withholding tax and stamp duty, in which they must state that they are guided by the token classification of the FINMA initial coin offering guidelines; and
  • on 1 January 2018 amended its brochure, VAT Information 04 to add a section about services in connection with blockchain and DLT.

Law stated date

Correct on

Give the date on which the above content is accurate.

16 December 2019.