Distributed ledger technology – Switzerland’s pioneering role

Today’s decision by Parliament also makes Switzerland a global leader in DLT at the legislative level. Why is that? And what does the proposal mean for other areas with future potential? Read on to find out more.
Article by Simon Ruesch

The proposal: regulation that creates opportunities

The proposal adopted by Parliament today will finally provide legal certainty for the application of distributed ledger technology (DLT) in the financial sector. It also gives Switzerland the opportunity to further strengthen its position as a leading location for DLT companies. At the same time, it safeguards the integrity and good reputation of the financial centre and Switzerland as a business location. As a result, the work being done on a number of promising projects can be continued and even intensified.

A number of possible applications of DLT in the financial sector are currently being assessed, for example, the tokenisation of assets for trading (Swiss Digital Exchange – SDX) and in trade finance. Trade finance is an extremely paper-intensive and step-by-step business. The traditional process used in this business is greatly slowed down by the involvement of many parties that generally do not know each other. Through the use of DLT, the time required to complete a transaction can be massively reduced.

What is a token?

In the context of DLT, a token is the digital representation of an asset, including the rights and obligations associated with it. This representation is often based on a specific form of DLT called blockchain, which in turn is nothing more than a continuously expandable list of digital information or “blocks”, which are linked together and encrypted cryptographically. FINMA (LINK) distinguishes between payment tokens (e.g. bitcoin), utility tokens (access to a digital application or service) and asset tokens (equities, bonds, derivatives but also real estate and other tangible assets, such as art).

Creating legal certainty within existing legal frameworks

The objective of the DLT proposal is not to create a separate “DLT Act”, but rather to make targeted, selected adjustments to existing legal frameworks, particularly in the securities law, the Financial Market Infrastructure Act and the debt enforcement and bankruptcy law. This will enable rapidly developing DLT technology to be flexibly integrated into the Swiss legal framework if required.

The DLT proposal creates legal certainty in numerous areas that are very important for the financial sector: among other things, it ensures that the Anti-Money Laundering Act and the Financial Services Act also apply to market participants using DLT and that these are integrated both at the regulatory and supervisory level thanks to amendments to the Financial Market Infrastructure Act. Adjustments to the securities law will ensure that the investment tokens, which are structured like registered uncertificated securities, can perform a “securities-like” function. Thanks to the amendments to the debt enforcement and bankruptcy law, it will now be possible to segregate tokens.

Legal certainty as a result of the following adjustments

  • In keeping with the “same business, same rules” principle and with a view to safeguarding the integrity and reputation of the Swiss financial centre, overarching legislation such as the Anti-Money Laundering Act (AMLA) or the Financial Services Act (FinSA) will also apply to new market participants that use DLT.
  • The adjustments to the securities law mean that investment tokens, which are structured like registered uncertificated securities, can perform a “securities-like” function. This ensures, for example, that “tokenised” equities will receive the same legal treatment as equities under current securities law.
  • The creation of a new type of authorisation in the Financial Market Infrastructure Act (FMIA) will ensure in principal that blockchain-based financial market infrastructures will also be integrated in terms of regulation and supervision.
  • The adjustments to the debt enforcement and bankruptcy law (SchKG) will ensure that investors are entitled to claim segregation for tokens in the event of an insolvency, thus indemnifying them. The management of collective accounts will be recognised and the claim to surrender will qualify as justified if the assets are allocated to a community and it is clear which share of the community assets the individual investor is entitled to.
  • Further, an amendment to the Financial Services Act (FinSA) will reduce the administrative burden on DLT trading systems and, in general, on financial services providers that supply financial services exclusively to institutional or professional clients. They will not be required to affiliate themselves with an ombudsman’s office.

The Swiss consensus-based system serves as a catalyst for once

Switzerland is often referred to as a consensus-based democracy whose political processes are somewhat slow. The DLT proposal shows that precisely this consensus-based system – which sometimes seems sluggish – also has advantages that can serve as catalysts in some circumstances. Instead of a certain majority exercising power, a focus is placed on reaching a consensus and therefore on fostering a constructive dialogue between all political stakeholders. This ongoing dialogue results in the establishment of stable and open channels of communication. All political stakeholders with a long-term commitment can therefore become involved at an early stage and engage in dialogue on an ongoing basis. The DLT proposal is a perfect example of this.

The authorities, politicians and the sector – an effective dialogue

The opportunities and concerns identified by the sector in the area of DLT were brought to the attention of politicians and the authorities at an early stage – their expertise was explicitly sought. The consensus-building process was initiated and successfully driven forward early on by all stakeholders (the authorities, politicians, associations, etc.), thus supporting the competent authorities in their work on the proposal. After only a few months, the Federal Council was able to submit a detailed and politically stable proposal – one that creates new opportunities – to Parliament at the end of November 2019. Parliament made only a few, expedient adjustments to the proposal. It was then unanimously approved by the National Council (192 votes to 0) and the Council of States (42 votes to 0) in the summer and autumn sessions, respectively. By fully approving the proposal, Parliament literally gave it the “green light”, thus sending a remarkably clear signal.

Given the green light: by unanimously voting in favour of the DLT proposal, the National Council and Council of States sent a clear signal.

Switzerland must also seize opportunities beyond DLT

With this signal, Parliament is demonstrating the necessary sensitivity and understanding of the importance of opportunities and competitive framework conditions for the Swiss economy. This awareness must, however, serve as a constant guide for all legislative projects – a guide that will continue to provide direction for Swiss politicians in the future.

The Federal Council, Parliament and Swiss citizens will have numerous possibilities to concern themselves with proposals for opportunities in an equally exemplary manner in the future: the authorities are currently working on identifying digitally incompatible formal requirements, which could – or should – lead to legislative adjustments to make Switzerland more “digitally compatible”. The Swiss population, for its part, is expected to vote on the introduction of a national, harmonised e-ID at the beginning of next year.

It is crucial for Switzerland to recognise, create and take advantage of such opportunities – including those beyond DLT – in a timely manner. The DLT proposal that has been adopted and Switzerland’s simultaneous assumption of a pioneering role in this area should remind us of this and serve as an example.

Digital Finance & Cybersecurity

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