(Mar. 3, 2021) On February 1, 2021, some parts of the Act to Adapt Federal Law to Developments in Distributed Ledger Technology (DLT Act) (Bundesgesetz zur Anpassung des Bundesrechts an Entwicklungen der Technik verteilter elektronischer Register), an omnibus bill, entered into force. (DLT Act at 21.) The amendments to several civil and financial market laws enable the introduction of ledger-based securities that are represented on a blockchain. In particular, the amendments establish a legal basis for the trading of rights through electronic registers, provide rules for the segregation of crypto-based assets in the event of bankruptcy, and add a new license category for distributed ledger technologies (DLT) trading systems.
For the remaining parts of the DLT Act that are not yet in force, implementing ordinances are needed. The public consultation on the draft omnibus ordinance (Mantelverordung) ran from October 19, 2020, to February 2, 2021. The remaining provisions are slated to enter into force on August 1, 2021.
The DLT Act addresses open questions that were highlighted in a December 2018 report from the Swiss Federal Council (the Swiss government) titled the Legal Framework for Distributed Ledger Technology and Blockchain in Switzerland.
Content of the DLT Act
Trading of Rights through Electronic Registers
Tokens in the form of cryptocurrencies are classified as intangible assets under Swiss civil law. Civil law does not provide any specific requirements for or obstacles to the transfer of tokens that represent a value such as cryptocurrencies. However, to improve legal certainty, the DLT Act regulates the transfer of rights on the blockchain by means of digital registers. It introduces a new category of ledger-based securities (Registerwertrecht) in the Code of Obligations (Obligationenrecht, OR). (OR art. 622, para. 1; art. 973d.) The wording of the provision is technology-neutral and does not mention the term DLT, but describes its characteristics instead. The technical details for the digital register are not regulated either; the law provides only a basic framework. (Message Regarding the DLT Act at 259.)
A ledger-based security is defined as a right that, according to an agreement of the parties, is registered in a ledger-based security register and can be asserted and transferred only via this register. (OR art. 973d, para. 1.) The ledger-based security register must fulfill the following requirements:
- It gives creditors, but not the debtor, power of disposal over their assets by means of a technical process.
- Its integrity is protected through appropriate technical and organizational measures to prevent unauthorized modifications, such as joint management by several participants that are independent of each other.
- The content of the rights, the functioning of the register, and the register agreement are recorded in the register or in the accompanying data.
- Creditors may access information and register entries that concern them, and may test the integrity of the register entry that concerns them without the help of third parties. (Id. art. 973d, para. 2.)
Debtors of ledger-based securities are obligated and allowed to render performance only to a creditor whose name is registered in the ledger-based security register. (Id. art. 973e, para. 1.) A bona fide purchaser may rely on the content of the register (protection of good faith). (Id. art. 973e, para. 3.) The transfer of the ledger-based security is subject to the terms of the registry agreement. (Id. art. 973f, para. 1.) Debtors of ledger-based securities are obligated to provide information on the content of the ledger-based right and the functioning and integrity of the ledger-based security register to potential purchasers. They are liable for any damages incurred due to incorrect or misleading information or information that does not fulfill the legal requirements. Agreements that exclude or limit their liability are void. (Id. art. 973i.)
Segregation of Crypto-based Assets in the Event of Bankruptcy
The DLT Act introduces special provisions for the treatment of crypto-based assets in bankruptcy proceedings. Crypto-assets will be segregated when the custodian has exclusive actual power of disposal over the crypto-assets. The claim is justified when the debtor is obligated to have the assets readily available for a third party and they can be assigned to that third party, or when the assets can be assigned to several people and it is evident which share of the community assets belongs to the third party. (Federal Act on Debt Collection and Bankruptcy art. 242a, as amended by the DLT Act.)
An additional legal provision is introduced to provide for the segregation of data in the bankruptcy estate to which the beneficiary is able to demonstrate a special entitlement. (Id. art. 242b.) An example would be data of a company that is stored with a cloud provider. (Message Regarding the DLT Act at 266.)
New License Category for DLT Trading Systems
The Financial Market Infrastructure Act (FinMIA) adds DLT trading systems to the list of financial market infrastructures. In addition, ledger-based securities are included in the definition of “securities,” and “DLT securities” are added as a new category. (FinMIA art. 2, letter a, no. 5a, art. 2, letters b, bbis, as amended.) Financial market infrastructures require authorization from the Swiss Financial Market Supervisory Authority (FINMA) before they can commence operations. (Id. art. 4, para. 1.) A DLT trading system is defined as “an institution for multilateral trading of DLT securities whose purpose is the simultaneous exchange of bids between several participants and the conclusion of contracts based on non-discretionary rules and which fulfills at least one of the following requirements:
- Participants are admitted according to article 73c, paragraph 1, letter e.
- It is an entity for the central custody of DLT securities based on uniform rules and procedures.
- It clears and settles transactions in DLT securities based on uniform rules and procedures.” (Id. art. 73a, as amended.)
Small DLT trading systems, meaning those that pose only a low risk to financial stability and to financial market participants, may be exempted from some of the regulatory requirements. The Swiss Federal Council is authorized to determine threshold values. (Id. art. 73f, as amended.)
In addition, the DLT Act provides several amendments that became necessary to add to other laws due to the topics regulated in the DLT Act. The Banking Act is amended to expand the existing Fintech license and to introduce consequential changes due to the new bankruptcy provisions. (Banking Act art. 1b, paras. 1 & 4(d), art. 4sexies; art. 16, para. 1bis; art. 37d, as amended.) The Financial Services Act (FinSA) is amended to include ledger-based securities in the definition of “securities.” (FinSA art. 2, letter b, as amended.) The Swiss National Bank will supervise systemically important DLT trading systems. (National Bank Act art. 19, para. 1, as amended.) DLT trading systems are included in the definition of “financial intermediaries” and must therefore abide by the anti-money laundering rules. (Anti-Money Laundering Act art. 2, para. 2, letter dbis–dquater, as amended.)