A cornerstone of the DLT Draft Law aims at improving legal certainty in connection with the issuance and transfer of tokenized rights and financial instruments, such as bonds and shares. To that effect, the DLT Draft Law provides for the introduction of a new concept of so-called uncertificated register securities (Registerwertrechte) and specific rules in the Code of Obligations for corporations looking to issue shares in tokenized form.
By Stefan Kramer / Urs Meier (Reference: CapLaw-2020-02)
1) Uncertificated register securities
a) General aspects
The draft of the Code of Obligations (“Draft-CO”) provides for two categories of uncertificated securities: so-called simple uncertificated securities (einfache Wertrechte) and so-called uncertificated register securities (Registerwertrechte). The former are purely contractual uncertificated securities and already exist under current Swiss law (Wertrechte; article 973c CO). The latter are a newly introduced category.
A right will constitute an uncertificated register security if (i) the parties involved conclude a registration agreement (Registrierungsvereinbarung), (ii) the right is entered in a register of uncertificated securities (Wertrechteregister) and (iii) the right can be asserted and transferred to others exclusively via that register (article 973d(1) Draft-CO).
As far as simple uncertificated securities (einfache Wertrechte) are concerned, the DLT Draft Law will not introduce any changes. There will in particular be no changes with regard to possible contents of such uncertificated securities. Hence, simple uncertificated securities will likely continue to be issued (primarily) as an underlying for the creation of intermediated securities (Bucheffekten) under the Intermediated Securities Act (“FISA”).
The new category of uncertificated register securities will in essence serve as a new form of dematerialization of securities and is hence similar to today’s intermediated securities under the FISA. However, the key difference will be that, unlike intermediated securities under the FISA, uncertificated register securities will not require a custodian (Verwahrungsstelle). Establishing and transferring uncertificated register securities will therefore not depend on the involvement of a regulated institution, such as a bank, securities firm or central securities depository, which credits such intermediated securities to particular securities accounts, and thereby (at least indirectly) ensures the safety of the system.
The DLT Draft Law will also allow to “bridge” the new civil law framework with the “traditional” concept of intermediated securities. The currently envisaged amendments of the FISA will allow to register uncertificated register securities with a “traditional” custodian (e.g., a bank) and to subsequently book them into a “traditional” securities account. Hence, uncertificated register securities could in the future be transferred to the “old world” too, if desired.
b) What requirements does the register of uncertificated securities have
to meet?
The DLT Draft Law introduces minimum requirements, which a register of uncertificated securities (Wertrechteregister) will have to meet:
– First, the register must, by means of technical procedures, grant the creditors (Gläubiger), but not the debtor (Schuldner), power of disposal (Verfügungsmacht) over their rights;
– Second, the register’s integrity must be ensured by implementing the appropriate technical and organizational protective measures (such as for example joint administration by several independent parties) that prevent unauthorized changes;
– Third, the content of the registered rights, the functioning of the register itself and the registration agreement (Registrierungsvereinbarung) need to be recorded either directly in the register itself or in accompanying data linked to the register;
– Fourth, the creditors must be able to view the information and data which concern themselves and they must be able to verify, without third party support or intervention, the integrity of the content of the register concerning themselves.
The Dispatch lists certain existing DLT-systems, which the Swiss federal government deems suitable to fulfil the statutory minimum requirements. Both unpermissioned systems (such as in particular Ethereum) as well as permissioned systems (such as in particular Corda and Hyperledger Fabric) are mentioned in this (non-exhaustive) list.
c) Which rights may (not) be tokenized?
Rights that can be issued in the form of a physical security (Wertpapier) under current law may also be issued in the form of uncertificated register securities under future law. The legal positions admissible as underlyings of uncertificated register securities therefore include rights against issuers, such as contractual claims or membership rights (e.g., shares in a corporation).
Under the proposed new rules it will in particular be possible to issue all types of financial instruments as defined in article 3 (a) of the Financial Services Act (“FinSA”) in the form of uncertificated register securities, i.e., amongst others equity securities, such as shares and participation certificates, as well as debt securities, units in collective investment schemes, structured products, derivatives and bonds.
Furthermore, not only asset tokens but also utility tokens may be issued in the form of uncertificated register securities, provided the latter “embodies” rights, such as contractual claims. And also payment tokens and stablecoins may be issued in the form of uncertificated register securities, provided they represent a claim against an issuer (which may not always be the case).
d) Issuance of uncertificated register securities
A prerequisite for the issuance of uncertificated register securities is that the rights are represented in a register which fulfils the aforementioned requirements (see paragraph 1 b) above). The parties bound and obliged by the uncertificated register security must have agreed to the establishment of such uncertificated register security. The registration agreement (Registrierungsvereinbarung) or clause (Registrierungsklausel) required for this purpose contains the agreement between the parties that the relevant right can only be asserted and transferred via the register. Such registration clause therefore has a function, which is comparable to the function of the so-called securities clause (Wertpapierklausel) in the case of physical securities. In line with current practice regarding physical securities, the registration clause may for example be included in subscription forms (Zeichnungsscheinen), terms and conditions of the issuance (Ausgabebedingungen), terms and conditions of bonds (Anleihebedingungen), or in general terms and conditions of business (Allgemeine Geschäftsbedingungen), which are accepted when acquiring the relevant uncertificated register security.
When issuing financial instruments in the form of uncertificated register securities, the registration agreement or clause must be concluded between the issuer and the first holder (entitled party) of the instrument. For reasons of transparency, the registration clause should be recorded either in the register of uncertificated securities (Wertrechteregister) itself or in accompanying data or documents linked to that register. If the first holder subsequently transfers the uncertificated register security, the registration agreement or clause thus also applies to each subsequent holder of that uncertificated register security.
e) Transfer of uncertificated register securities
Once uncertificated register securities have been validly issued, subsequent transfers of these securities may be effected exclusively in accordance with the rules of the relevant register of uncertificated securities (Wertrechteregister). In other words, transferring the uncertificated register securities “outside” of the register will not be possible anymore. If the right issued in the form of an uncertificated register security is, for example, a claim (Forderung), that claim may therefore no longer be transferred by means of assignment (Zession; see article 164 et seqq. CO). Instead, the transfer of the uncertificated register security is governed exclusively by article 973f et seqq. Draft-CO, which is lex specialis and therefore takes precedence over the previous rules. Consequently, a transfer according to the rules of the relevant register is mandatory.
Such a transfer typically consists of transferring a token to the account / address of the recipient (e.g., in the case of ERC-20 tokens on Ethereum). Merely disclosing the private key(s) required to initiate such a transfer to another person’s account / address, does, however, not result in a transfer of the legal position or entitlement, even if that person – by knowing the private key(s) – would gain actual control over these tokens.
With regard to transferring uncertificated register securities the DLT Draft Law also provides for specific rules addressing topics such as when a transfer is deemed to be effected (article 973f (2) Draft-CO) as well as topics concerning the protection of good faith (article 973e (3) Draft-CO and article 973f (3) Draft-CO).
With regard to the acquisition of uncertificated register securities by way of universal succession (Universalsukzession), the DLT Draft Law does not provide for particular rules. In such situations, e.g., an inheritance or merger, the transfer of the uncertificated register securities will be effected by operation of law. Technically, this legal transfer would therefore subsequently have to be reflected in the relevant register, e.g., by transferring the tokens to an account / address of the heirs in the relevant register.
f) Assertion of rights
With regard to the assertion of rights “embodied” in uncertificated register securities, the DLT Draft Law provides that the issuer is only entitled and obliged to make payments “to the creditor identified in the register of uncertificated securities and against corresponding adjustment of the register” (article 973e (1) Draft-CO). It follows from this provision that the issuer is obliged to make payments only to the creditor entitled to these payments according to the register and against corresponding adjustment of the register. The “ownership” of the token according to the rules of the relevant register is thus necessary for the assertion of the right from the point of view of both the creditor and the issuer. Furthermore, it is in the interest of the issuer to adjust the register after the performance occurred, because otherwise the issuer risks having to perform a second time should the uncertificated register security be acquired, in good faith, by a third party. This applies in particular if an issuer fulfils an obligation outside the register (“off-blockchain”), e.g., by paying dividends in fiat money, instead of executing such payments directly within the register itself (“on-blockchain”).
2) Corporate law aspects
According to the DLT Draft Law, a company’s articles of association may provide for, or may authorize the board of directors to resolve on, the issuance of shares in the form of uncertificated register securities (article 622 (1) Draft-CO). In this case, other registers where information regarding a company’s shares (e.g., the share register) or on the shares’ beneficial owners is recorded, may be integrated into the register of uncertificated securities (Wertrechteregister).
The company is responsible for the selection of the register technology based on which the uncertificated register securities are created, as well as for the organization and the security of the register of uncertificated securities (Wertrechteregister) as well as its compliance with the relevant registration agreement. Therefore, if tokenized shares are issued, the smart contract(s) or any other relevant code will need to be programmed and deployed in a manner that ensures compliance with the requirements of Swiss corporate law, including, for example, any applicable limitations on the transfer of shares (Vinkulierung).
3) Appraisal
If the new rules enter into force as currently envisaged, they will significantly improve the Swiss civil law framework for tokenization of crypto-based assets. The introduction of the concept of uncertificated register securities will help to further enhance Switzerland’s attractiveness as a jurisdiction, where in particular tokenized financial instruments such as shares or bonds may be both issued and traded safely. Once that toolkit is in place, it will have to be seen how the markets for such instruments will develop in the future.
Stefan Kramer (stefan.kramer@homburger.ch)
Urs Meier (urs.meier@homburger.ch)