As the second batch of regulations concerning distributed ledger technology (DLT) just entered into force on 1 August 2021, this article highlights some of the key changes made to the Blanket Ordinance in the Area of Blockchain (Mantelverordnung im Bereich Blockchain) between the draft subject to consultation on 19 October 2020 and the final version of the ordinance that was published on 18 June 2021, with a focus on provisions that are of interest for capital market activities relying on DLT and related products. 

By Stefan Kramer / Sandrine Chabbey (Reference: CapLaw-2021-50)

1) Introduction

On 1 August 2021, the second part of the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (Bundesgesetz zur Anpassung des Bundesrechts an Entwicklungen der Technik verteilter elektronischer Register, DLT Law) entered into force, clarifying, among other things, the treatment of crypto assets in an insolvency of the wallet provider and introducing a new platform to facilitate trading in digital assets. 

Simultaneously with the entry into force of these provisions, the Federal Council enacted, after a consultation phase, the so-called Blanket Ordinance in the Area of Blockchain (DLT Ordinance) setting out relevant implementing provisions. The purpose of this article is to outline some of the key changes between the final DLT Ordinance and the draft submitted for consultation. 

2) The Final DLT Ordinance – Certain key developments

a) DLT Trading Facilities

The DLT Ordinance notably introduces changes to the Financial Market Infrastructure Ordinance (FMIO) to adapt it to the concept of a DLT trading facility, which was newly introduced in the Financial Market Infrastructure Act (FMIA). While the new regulation essentially subjects the new financial market infrastructures to the existing rules applicable to other multilateral trading facilities, with a few tweaks where necessary, the initial proposal from the Federal Council faced some criticism.  

Among other things, the decision to exclude derivatives designed as DLT-based securities (DLT-Effekten ausgestaltete Derivate) from trading on the new platforms was often considered as ill founded by participants to the consultation procedure. Their arguments were at least partially noted by the Federal Council who decided to allow derivatives on DLT trading facilities, but only products without time value or leverage components (Produkte ohne Zeitwert- und Hebelkomponente). 

Conversely, the Federal Council dismissed the suggestion to increase the “safe haven” for non-regulated activities by setting a higher threshold for an activity to be deemed as conducted on a professional basis. Under the updated FMIO, DLT trading facilities operate on a professional basis, and hence may be subject to a licensing obligation, if they reach either of these three thresholds: (a) its gross proceeds exceed CHF 50,000 in a calendar year; (b) it maintains business relationships with more than 20 private participants (as defined under article 73c(1)(e) FMIA) or at least one regulated participant (in accordance with article 73c(1)(a)-(d) FMIA) during a calendar year; or (c) it has unlimited power of disposal over DLT-based securities owned by third parties in an amount exceeding CHF 5 million at any given time. Despite a few adjustments, this definition essentially corresponds to the version subject to consultation.

Even if one of these thresholds are met, it shall be kept in mind that some entities may benefit from a lighter licensing regime if they qualify as small DLT trading facilities. More specifically, according to article 58k FMIO, a DLT trading facility is deemed as small if its activity remains below these thresholds in relation to DLT-based securities: (a) annual trading volume of CHF 250 million; (b) custody volume of CHF 100 million; and (c) annual settlement volume of CHF 250 million. 

b) Acceptance of Crypto-Assets by Banks and other Custodians

The entry into force of the DLT Ordinance further amended the Banking Ordinance (BO) to account for changes introduced in the Banking Act (BA). In particular, the Federal Council was tasked with specifying under which conditions the custody of crypto-assets could trigger a licensing obligation under the new article 1b(1) BA. 

During the consultation procedure, the definition of such crypto-assets (article 5a BO) received a large amount of criticism, which noted in particular its lack of clarity and often suggested refining its scope. The final version of the DLT Ordinance addresses some of the criticism through a slight redraft of article 5a(1) BO intended to clarify its general scope. In addition, article 5a(2) BO was amended to expand the list of assets which are not deemed as crypto-assets for the purpose of article 1b(1) BA and hence may not justify the related licensing obligation. Under the current article 5a(2) BO, exempted assets comprise in particular (a) assets which are held in client accounts by securities firms or DLT trading facilities that do not carry interest and serve the purpose of executing clients’ trades; (b) assets which are held for similar purposes by precious metal dealers, asset managers or similar entities (provided that the execution takes place within 60 days); (c) assets of Swiss or foreign banks (or other entities subject to state supervision); and (d) assets of institutional investors with professional treasury operations. 

On the other hand, the Federal Council refused to raise the thresholds for the acceptance of crypto-assets to be deemed as conducted on a professional basis, asserting that this activity poses significant reputational risk to the Swiss financial centre, hence requiring stricter regulations. Like the limit imposed on derivative trading mentioned above, this shows that, while the Swiss authorities are willing to promote DLT-based innovation, they remain careful in their approach of the new technology. 

c) Anti-Money Laundering Framework

One of the most discussed provisions of the draft DLT Ordinance was the amendment of the scope of the Anti-Money Laundering Act (AMLA) by explicitly stating in the ordinance (AMLO) that assistance provided in connection with the transfer of virtual currencies are services related to payment transactions subject to the AMLA if such services are provided in the context of a durable business relationship (dauernde Geschäftsbeziehung). More specifically, the choice to refer to the “durable business relationship” as trigger for subjection to anti-money laundering regulation instead of the more commonly used reference to the ability to dispose of assets was subject to extensive criticism. Participants to the consultation procedure notably outlined the fact that this reference may be too broad to target relevant service providers efficiently and may create significant uncertainties for market participants. 

In spite of these feedbacks, the Federal Council decided to persist with their chosen solution, albeit with a few alterations, insisting in particular that the ability to dispose of third party assets is no longer appropriate to capture all relevant service providers (see new article 4 (1) (b) AMLO). It therefore remains to be seen how the provision will be interpreted in practice. The Federal Council, however, clarified that fully autonomous systems without a durable business relationship (vollständig autonome Systeme, ohne dauernde Geschäftsbeziehung), such as certain autonomous protocols that exist in the Decentralized Finance (DeFi) community, continue to be outside the scope of
the AMLA.

3) Conclusion 

With the entry into force of the remaining provisions of the DLT Law on 1 August 2021, the process of adapting Swiss law to the challenges of DLT has reached completion. For the first time, Swiss law now provides for a robust framework for the issuance and trading of tokenized assets, including tokenized financial products. However, in the different comments to the new rules, the authorities are already hinting that it might not be the end of the process and that further legislative evolution may be desirable, not only to continue adapting existing rules to the new technologies, but also to keep up with innovation. 

Stefan Kramer (stefan.kramer@homburger.ch)
Sandrine Chabbey (sandrine.chabbey@homburger.ch)