The reliable and easy transfer of assets on a blockchain is a key prerequisite for the economic exploitation and development of new technologies. Asset transfers currently occur through the use and transfer of tokens. If tokens contain a claim against the issuer (e.g. the right to use certain services), then claims under applicable Swiss law must be transferred by way of assignment in accordance with article 164 et seq. CO, provided the tokens are not securitized or issued as book-entry securities.

This is the English translation of the article published by the authors in the IT Jusletter on 24 May 2018 which has been derived from the Position Paper on the legal classification of ICOs published by the Blockchain Taskforce of the Swiss Federal Council in April 2018.

By Rolf H. Weber / Salvatore Iacangelo (Reference: CapLaw-2018-30)

 

1) Starting Point

Nowadays, services and payments are provided more and more by way of digital means. The value of any services transmitted is resulting from (encrypted) data packages being forwarded. Financing can also be gathered digitally. In fintech, the concept of tokens as means of transfer of digital values has become widely accepted.

Tokens are issued directly on a blockchain and exist as digital units and part of a protocol in a (typically publicly accessible) database, which documents their existence and transfer. Issuers can configure the tokens differently; hence, in practice they represent a wide variety of content or rights. In its ICO Guidelines published on 16 February 2018, FINMA differentiates between three categories of tokens, however, in practice, there are further, so-called hybrid categories of tokens.

If tokens contain a claim against the issuer (e.g. the right to use certain services), then under applicable Swiss law the transfer must be executed by way of assignment in accordance with article 164 et seq. CO, provided the tokens are not securitized or issued as book-entry securities. Technically, there is a legal issue arising from such a transfer because Swiss law requires a valid assignment to be in written form (article 165 (1) and 973c (4) CO for the transfer of uncertificated securities).

In reality, however, the transfer of tokens takes place only on a blockchain and not in written form. Therefore, despite the representation of a claim in a token, such claim cannot lawfully be transferred by a mere database entry on a blockchain. Although both, a physical signature or a qualified electronic signature, would meet the legal requirement of the written form, such form is neither common nor practicable nor sensible when transferring tokens on a blockchain.

Unless the above-mentioned written form requirement is met (as required for the transfer of tokens that represent a claim), the transfer of a token would be invalid, and thus the claim would not have been validly transferred to the purchaser. Therefore, the question to consider is whether tokens can be transferred (de lege lata) in a form other than a written assignment or whether there is a need for a respective change in law (de lege ferenda).

De lege lata, the only viable way would be to acknowledge that tokens can be transferred like securities, i.e. that securities can be issued in form of tokens. Any alternative hereto would require a change in law. Therefore, we deliberately focus on the approach de lege lata in order to trigger a discussion on the risks and the viability thereof before concluding that a change in law might become inevitable.

2) Legal Qualification of Tokens

a) Qualification of Tokens as Securities

i. Securities Concept

According to Art. 965 CO, a security is any certificate to which a right is linked in such a way that it can neither be claimed nor transferred without the certificate. Thus, in order to be a security, there must be (i) a certificate, (ii) which securitizes a claim, and (iii) the link between claim and certificate must be narrow as to avoid an entitlement to the claim without the certificate.

ii. Criteria for the Qualification of Securities Certificates

(1) The Certificate

In private law terms, a certificate is a written document containing a declaration with private law relevance. A certificate thus consists of (i) a declaration bearer and (ii) a declaration of intent associated therewith, typically on a piece of paper. With respect to so-called electronic certificates, some legal scholars are of the view that a certificate does not necessarily have to be in paper form, but that any “material” on which declarations can be attached should be considered an appropriate certificate substance, irrespective of any form. A certificate is thus a bearer for a sign, i.e., the securement of information for later retrieval; the substance of the declaration bearer seems to be irrelevant, as correspondingly regulated in criminal law.

Further, some legal scholars are of the opinion that securities are not subject to the simple written form requirement according to article 12 et seq. CO, but rather to the principle of form freedom according to article 11 (1) CO. Whether the signature constitutes a validity requirement for a security is thus dependent on the right to be securitized (e.g., articles 622 (5), 1096 (7), 1100 (6), 1153 (1) CO). Consequently, a certificate does not necessarily have to be expressed in written form.

The certificate should: (i) be able to record a statement, (ii) be accessible to a designated group of persons, and (iii) have a certain durability, even if the declaration bearer and the declaration of intent are not necessarily inseparable. If these criteria are met by an electronic data carrier, it can qualify as an electronic certificate pursuant to article 965 CO. However, the use of electronic data carriers as a certificate is excluded if the signature is a validity requirement and the signature cannot be attached by an electronic signature (for example in the corresponding smart contract).

An exception applies in cases where a facsimile signature is customary (article 14 (2) CO) and where it can be technically attached.

In a next step, the question arises as to whether a token, respectively a token in connection with its underlying publicly accessible database on a blockchain and the private key, can be considered a certificate pursuant to article 965 CO. For this, it is necessary that a token comprises a declaration bearer and a declaration of intent associated therewith. Along with a publicly accessible database which has a definable collection of data on a blockchain, a token can qualify as a kind of declaration bearer if the token contains a hash value (as the case may be in connection with a smart contract) that is visible to all network participants concerned and unambiguously refers to the declaration of intent underlying the issue of the token, which is typically included in a (conventional) document (e.g., white paper).

A token, respectively a publicly accessible database on a blockchain, is indeed a new technology that is not physical, such as a CD, however, tokens in connection with a publicly accessible database and the necessary technical means are suitable to record a declaration. This declaration in a token is then permanently linked to its underlying publicly accessible database on a blockchain. The content of the declaration can be accessed by anyone at any time on the respective blockchain. However, only the owner of a private key remains entitled to the token. Blockchain technology also ensures that the data is immutably stored, respectively that any changes are visible and traceable.

Accordingly, there are good reasons why a blockchain can fulfil the same functions as an electronic data carrier or a conventional paper certificate. According to this view, a token in connection with the underlying publicly accessible database on a blockchain and the private key can fulfill the requirements of a certificate pursuant to art. 965 CO, at least provided that the right underlying the token does not require the written form and neither an electronic nor a facsimile signature can be attached.

(2) The Securitized Right

Basically, there are three categories of rights that can be securitized in a security: (i) claims, (ii) membership rights and (iii) real rights (rights in rem).

Due to their shapeable characteristics, the tokens must be qualified on a case-by-case basis. However, most tokens include a claim as they give the token holder a right against the token issuer. Such entitlements are mainly enshrined in utility tokens (e.g., right to access a particular platform) and asset tokens (e.g., right to dividends). Tokens comprising certain claims can be securitized in a security. However, it is not possible to shape payment tokens in form of securities – i.e. units of mere cryptocurrencies and thus not legally recognized, but factually usable means of payment. Payment tokens do not entitle the token holder to any claims against the issuer.

(3) The Connection between Right and Certificate

In addition, the certificate has to be linked with the right in such a way that the right cannot be exercised without the certificate. This is ensured by means of a certificate clause. There are five different types: (i) simple presentation clause, (ii) simple legitimation clause, (iii) simple security clause, (iv) order clause, and (v) holder clause.

There are three categories of securities: registered securities, instruments to order and bearer securities. A security is deemed to be a bearer security if the wording or the form of the certificate shows that the current bearer is recognized as the beneficiary (article 978 CO).

With respect to the question of whether tokens are to be qualified as one of the three types of securities, it can be stated that the certificate consists of a combination between the token, the information stored in the publicly accessible database on a blockchain and the private key. A token is a bearer security, if the right is securitized in such a way that the bearer and only the bearer of the token (together with the private key) is entitled to request performance. Therefore, the obligated party is solely able to perform to the bearer with discharging effect. The form of the certificate, i.e. the token stored in the publicly accessible database on a blockchain in connection with the private key, evidences that the respective owner of the private key is recognized as the entitled party (cf. article 978 (1) CO). Only the owner of a private key can claim the right securitized within the token. The token (along with the private key and the distributed ledger on the blockchain) contains a bearer clause as the owner of the private key is entitled to claim the right by merely presenting the token and the private key.

(4) Interim Conclusion

Since only the bearer of the private key can control the token like the bearer of a classic “security”, based on a teleological interpretation, there are good reasons to qualify a token as a security pursuant to article 965 CO. Given the absence of court practice with this respect, however, there is (still) no legal certainty. Hence, this contribution aims to trigger the discussion around these specific legal issues.

b) Qualification of Tokens as uncertificated securities

i. Concept of Uncertificated Securities

As an alternative to the discussed securities, uncertificated securities are rights with the same function as securities (article 973c (1) CO).

ii. Criteria for Qualifying Uncertificated Securities

In order to issue uncertificated securities, the following conditions must be met: (i) authorization by the issuer, (ii) rights with the same function as securities and (iii) entry in the book of uncertificated securities.

(1) Authorization by the Issuer

The issue of uncertificated securities requires an authorization or a consent of the depositor – either in the terms of the issue or in the articles of association of the company (article 973c (1) CO). The terms of issue (borrowing terms) may be construed as a summary of all the relevant terms of the issue (such as amount, maturity, interest rate, etc.) based on which the issuer concludes independent stand-alone contracts with a large number of lenders. If membership rights are involved, an authorization is required in the articles of association of the company. In case that a consent of the parties entitled to the uncertificated security (as depositor) is given, uncertificated securities can be issued based on such consent of the entitled party.

The token issuer may further specify the terms of issue of his tokens in the “token terms” (usually published in a white paper, prospectus or even separately). These token terms comprise all essential elements of the tokens. The token issuance is subject to an authorization in their terms, unless it is related to membership rights.

(2) Rights with the same Function as Securities

Uncertificated securities may be defined as rights that are issued in a large number and are generally identical based on a common legal basis (e.g. articles of association or terms of issue).

Tokens are issued in a large number, they are generally identical and have similar characteristics (e.g., same debtor, same rights, same denomination). Hence, the person who acquires the uncertificated security is irrelevant. For the rights contained in uncertificated securities, reference is made to the above explanations related to the securitized rights.

(3) Book of Uncertificated Securities

According to article 973c (3) CO, uncertificated securities are created by entry into the book of uncertificated securities (constitutive effect), which is administered by the issuer (article 973c (2) CO). In the book of uncertificated securities, the issuer keeps the records of the number and denomination of the issued uncertificated securities and of the creditors. For this purpose, an electronic bookkeeping of the uncertificated securities is sufficient.

Tokens are generated on a blockchain, which e.g. does not only register ownership rights in a distributed ledger, but also token transactions. Since the book of uncertificated securities can also be administered electronically, a blockchain can be considered a book of uncertificated securities. Thus, tokens representing uncertificated securities are generated by way of entry on a blockchain.

iii. Interim Conclusion

The rights established in the token can be qualified as uncertificated securities pursuant to article 973c (1) CO; in its ICO Guidelines published on 16 February 2018, FINMA follows the same line of thinking. Unlike securities, uncertificated securities lack the connection to a certificate, which is why the uncertificated security is separate from the token and can be separately transferred. This is in contradiction to the practice as a token, similarly to a security, is aimed to fulfil a function of legitimation and transferability with respect to the underlying right.

c) Summary

Tokens intended to convey relative rights can thus be shaped and issued in the form of securities (based on a teleological interpretation under current law) as well as of uncertificated securities. In practice, usually uncertificated securities are issued. Ultimately, it depends on the intention of the issuer whether he wants to issue tokens in the form of securities.

3) Transfer of Tokens

a) Transfer of (digital) Securities

The transfer of securities is governed by the rules of property law (article 922 et seq. CC). The transfer of the securitized right takes place not by assignment but by transfer of possession of the certificate itself (article 967 CO).

A transfer of possession is necessary because only the bearer of the certificate can claim the securitized right. The transfer is governed by article 922 CC, but there are in general also alternative transfer options applicable for securities.

i. Transfer of Title

According to article 922 CC, title is transferred by handing over the item itself as well as by the conclusion of a valid transfer contract (article 922 CC as well as article 967 (1) and (2) CO). The transfer of possession must meet the following conditions: (i) the transferor must be the immediate possessor of the item, (ii) the factual control must be transferred to the transferee and (iii) both parties must have the willingness to transfer the item. In the case of bearer securities, no special formalities apply to the transfer agreement.

The determination of the meaning of the “transfer criterion” pursuant to article 922 CC in connection with article 967 CO has to be done in accordance with generally accepted interpretative methods. From the outset, two traditional methods of interpretation, namely grammatical and historical interpretation, are not applicable against the background of a new technological phenomenon, e.g. the token. Therefore, the teleological elements of interpretation that relate to the meaning of a norm are paramount. The Federal Supreme Court is regularly committed to a method pluralism, i.e. to a case-by-case application of those interpretation elements that give access to the proper meaning and content of a norm.

Tokens are ultimately digital data. Due to lack of physicality, tokens do not qualify as physical item and therefore cannot be physically transferred. Therefore, it is largely uncontested in legal doctrine that the traditional transfer of title is not applicable to the transfer of tokens. However, it remains to be analyzed whether the above-mentioned acknowledgment of digital securities can influence the assessment from a property law point of view.

Following the understanding that certificates can also have a digital shape, a digital transfer should be possible, even if the transfer does not take place physically. Against the background of the technical developments in recent years and based on a teleological interpretation, the transfer of title pursuant to article 922 CC should also allow for a valid transfer through digital means. This is because it ultimately fulfills – with the exception of the physical transfer (which incidentally is already considered fulfilled under current law when the removal permission of the item is given) – each criterion of a valid transfer: The token issuer and the token buyer (or the token sellers and the token buyers) conclude a contract (e.g. purchase agreement) in which a clear intention for a transfer of title of the token is expressed. In addition, the factual authority is transferred to the purchaser by the fact that the owner of the token or the private key has the actual power over a token, as required by article 919 (1) CC.

ii. Transfer of Title by way of Instruction

In special cases provided by law, the transfer of title mentioned above is not a requirement of a lawful transfer (so-called transfer surrogates, article 924 (1) CC). Such a legal transfer surrogate is the transfer of title by way of instruction. The transfer of title by way of instruction does not transfer the immediate possession, but the indirect possession. The immediate possessor remains the third party that holds the item.

In order for a transfer of title to happen by way of instruction, (i) there must already be staged possession, (ii) ownership of and control over the item must be with the possessor (and not with a possessor’s agent), and (iii) there must be an agreement between the seller and the purchaser (agreement on the transfer of title by way of instruction) based on which the third party (as immediate possessor) exercises possession on behalf of the purchaser.

The transfer of title is triggered by a mere agreement between the seller and the purchaser. The written form, which is problematic for a token transfer, is not required for such an agreement. This transfer of title has only effect vis-à-vis the third party once the third party has been notified by the seller. This means that the third party does no longer exercise possession for the seller, but for the purchaser. The legal relationship between the third party and the purchaser continues to be the original one between the immediate possessor and the seller.

A staged possession exists when the item is in the custody of a third party holding the item as the immediate possessor (e.g. tenant-landlord). The immediate possessor is a person who can directly exercise factual authority over an item (i.e. without intermediary). If the possessor transfers the exercise of the factual authority to a third party, he becomes an indirect possessor.

If a token buyer purchases a token, the token issuer will transfer the token on a blockchain directly in the token buyer’s wallet. His possession of the token is – provided the token has been lawfully transferred – autonomous and immediate. The factual direct authority is only with him and only the token buyer, being the owner of the private key, has access to the token. Thus, he can act directly and without an intermediary. Therefore, there would be no staged possession and a valid transfer of title by way of instruction would not be possible.

However, if necessary, staged possession can be assumed if the token remains with the token issuer and the token is not transferred to the token buyer (e.g. based on a specific agreement). In such a setting, the token buyer would be the indirect possessor and the token issuer the immediate possessor. By mere agreement, which does not need to be in writing, the possession of a token could be transferred from the token issuer to the buyer. The indirect possession would pass from the previous token owner to the buyer. The token issuer remains the dependent, immediate possessor and would now have possession for the buyer. The staged possession would thus continue to exist after the transfer of the indirect possession of a token.

However, in this relationship, it is necessary that the token issuer has possession of the token and not only acts as a possession agent. This is regularly the case if the token issuer would hold the token for the token buyer because the token issuer would depend on the instructions of the token buyer. He would thus only be a possession agent. Therefore, the legal institution of the transfer of title by way of instruction, which has the advantage to have effect without the written form requirement, would not be applicable to most token transfer transactions.

iii. Interim Conclusion

Following the understanding that securities can also be shaped digitally, the digital transfer should equally be possible, and this as a special type of transfer of title. The transfer of title by way of instruction would only be applicable in rare cases. Legal certainty is missing so far due to the lack of court practice.

b) Transfer of Uncertificated Securities

The problem with the qualification of tokens as uncertificated securities lies in the transfer thereof. According to article 973c (4) CO, the transfer of uncertificated securities requires a written assignment declaration. Hence, for a lawful transfer of tokens – which are issued in the form of uncertificated securities – either the law should be revised or the scope of the transfer provisions should be extended as to allow transfers for digitally transferable uncertificated securities in a form-free manner. Such an extension of the scope would also require a change of law; a concrete proposal is formulated below.

Martin Hess and Stephanie Lienhard (Übertragung von Vermögenswerten auf der Blockchain, in: Jusletter of 4 December 2017) have submitted (and substantiated in detail) a proposal – based on the change in securities law initiated by the FISA (Bucheffektengesetz, BEG) – which was published and based on the idea that, following the de-materialization of the security by the uncertificated security pursuant to article 973c CO, also the digitization by tokens could be covered by law with a new article 973d CO.

The authors are of the opinion that the mentioned appropriate proposal should be formulated in more technology-neutral terms as to comprehensively cover – to the extent possible – any future developments in the area of bitcoin, protocols, distributed ledgers, and tokens etc. without requiring yet another law change. Such a new legislative provision, which would have to be incorporated in the CO as article 973d, could have the following wording:

• The debtor may issue fungible rights in a digitally transferable form having the same function as uncertificated securities (as defined in article 973c CO) or substitute digitally transferable securities with fungible securities or global certificates entrusted to a single custodian, provided that the conditions of issue or the articles of association of the company provides for it, or the depositors have given their consent.
• The debtor registers the number and denomination of the issued digitally transferable uncertificated securities and their creditors in a decentralized transaction ledger.
• The digitally transferable uncertificated securities are created upon entry in the decentralized transaction ledger, provided independent expertise has checked and confirmed their functional reliability and compliance with the terms of issue or the articles of association of the company.
• The disposition of digitally transferable uncertificated securities (transfer of title, granting of collateral with full legal rights or as a pledge) takes place through the transfer of the digitally transferable uncertificated securities in the decentralized transaction ledger.
• The provisions of the Federal Act on Intermediated Securities (FISA) are applicable analogously.

These terms cover all tokens that contain claims, membership rights and real rights (rights in rem) vs. an issuer, as well as asset tokens. This would allow what already is allowed within the regulatory framework under current law: The asset tokens could be transferred in a form-free manner pursuant to article 24 FISA.

c) Transfer of Payment Tokens

Payment tokens do not provide specific rights to the token holder and are therefore neither securities nor uncertificated securities. The same applies to those utility tokens which, due to a decentralized infrastructure, do not constitute relative rights in view of the lack of a counterparty. Cryptocurrencies and, thus, also payment tokens are generally not recognized as legal currencies. However, the development and use of private means of payment do not violate Swiss currency law. Under civil law, private means of payment, such as payment tokens, can be stipulated to be acceptable means of payment, as exemplified by the WIR money in circulation for over 80 years. The only requirement is that the parties accept payment tokens as a means of payment. The provisions of the Code of Obligations are applicable for the stipulation of payment tokens.

However, the question also arises with regard to payment tokens as to how they can be lawfully transferred. In order for the debtor to fulfill his debt, title on a payment token must be lawfully transferred, i.e. as in the case of a purchase agreement, ownership on the stipulated private means of payment needs to be transferred. This transfer is governed by the aforementioned principles of property law of article 922 seq. CC. Payment tokens can therefore also be lawfully transferred to the creditor by a digital transfer in the sense of the aforementioned considerations.

d) Other Transfer Options

i. Transfer by way of Assignment

If tokens contain a claim against the issuer, the claims under applicable Swiss law must in principle be transferred by way of an assignment in accordance with article 164 et seq. CO, provided the tokens are not securitized or issued as book-entry securities. The assignment, as mentioned, can only achieve practicability if article 165 CO were revised.

ii. Transfer by way of Contract Transfer

Another legal option would be to transfer the entire contract instead of a single token. Swiss law namely allows not only to transfer specific claims, but also contracts as a whole. This means that the transfer of the original contract between the token issuer and the original token holder takes place by way of a new contract between the two original parties and a third party, i.e. the new token holder.

The token holder transfers all rights and obligations under the original contract to a third party. After the transfer, the third party becomes the contractual party and replaces the previous token holder. All involved parties must agree to this transfer in order for the transfer to be valid.

The contract relating to the transfer of the original contract is subject to the same formal conditions as the original contract. As a result, unless there are formalities required for the original contract, the contract does not need to be in writing. Since the transfer of a contract, unlike the assignment of claims, does not require any written form, the contract transfer can occur in a form-free manner. In particular, given that a party is in a position to express its consent to the transfer of a contract in advance, the token issuer can already consent to the transfer of tokens (or the token contract) when issuing the tokens. However, it should be noted that the participation of an issuer in a contract transfer is impracticable if the transfer is made via a trading platform. A permanent offer in the general terms and conditions for the transfer to any third party is contested by the scholars and causes in practice also difficulties in view of the global adoption of general terms and conditions.

iii. Transfer through Creation of Book-Entry Securities

Another way to transfer tokens in a form-free manner is to issue tokens as book-entry securities. In this case, tokens would need to be deposited as securities or uncertificated securities with a custodian or registered in its main register and the respective rights are to be credited in a securities account (article 6 (1) FISA). The transfer of book-entry securities takes place by means of an instruction of the seller (article 24 FISA), which is not subject to any formal requirements.

The creation of tokens as book-entry securities, however, is hampered by the requirement of the central custodian. According to article 4 FISA, securities accounts can only be managed by one custodian. The provision of article 4 FISA is concluding according to the will of the legislator. Article 4 (2) FISA, therefore, provides for a specific list of domestic financial intermediaries which may act as custodian, and article 4 (3) FISA contains a provision concerning foreign financial intermediaries.

Even without an in-depth analysis, the issuers of tokens or the “operators” of a block-chain protocol (e.g. Ethereum) cannot act as a bank (lit. a), a securities dealer (lit. b), a fund management company (lit. c), the Swiss National Bank (e) or the Swiss Post (f). At best, the central securities depositories (lit. d) could be considered under article 61 FMIA. However, in this respect, at most only the “operator” of a blockchain protocol would be eligible, such as e.g. the Ethereum Foundation, which could be considered the operator of a central depository (i.e. an institution that centrally manages securities and other financial instruments based on common rules and procedures). However, this option is not applicable as a blockchain (or blockchain protocol) is a decentralized ledger or registry that is precisely not administered by a central agency.

iv. Transfer by way of Instruction

Furthermore, payment tokens, as already done for cashless payments, could be transferred by way of instruction, which is generally valid in a form-free manner (pursuant to article 466 seq. CO). However, the traditional legal framework governing instructions does not fit well with the token transfer characteristics; in particular, a revocation (article 470 CO) is technically impossible.

4) Outlook

We are of the opinion that, based on a teleological interpretation of article 922 CC, the existing law does not preclude the pure digital transfer of tokens, provided that they are shaped as electronic securities and kept in a decentralized transaction ledger. Such an interpretation is also justified by the practical circumstances and the economic efficiencies associated with it. However, given the lack of court practice on these aspects, the legislator should consider to eliminate any residual uncertainty and initiate a change in law by introducing a new article 973d CO.

Rolf H. Weber (rolf.weber@bratschi.ch)
Salvatore Iacangelo (salvatore.iacangelo@baerkarrer.ch)