The spectacular rise of bitcoin and other digital assets again puts the spotlight on digital assets as a new, emerging asset class. Competition for the best talents in the space between jurisdictions is growing ever fiercer. One of the early pioneers and up to now leading jurisdictions, Switzerland has also morphed into a leader in the banking of digital assets over the last few years—a living testimony to the fact that Swiss banking is reinventing itself.
- Switzerland as a global hub for digital assets
Switzerland is home to the world’s first digital-assets bank and one of the most extensive ecosystems in the space. There is a trend of large international banking groups making their Swiss subsidiaries their digital-assets centers of competence as well as one of larger international banking and financial-market infrastructure groups acquiring Swiss-authorized financial-services providers in the industry.
Multiple ingredients make Switzerland attractive as a key place for setting up banking digital-assets operations—a material one being its regulatory framework, which offers flexibility and, simultaneously, security.
- Multiple forms of digital assets
Switzerland has an extensive array of digital-assets categories available. Digital assets are qualified either as payment tokens—for use now or in the future as means of payment in acquiring goods or services or as means of money or value transfer—or as utility tokens—to provide digital access to applications or services by means of blockchain-based infrastructure. Payment and utility tokens are not treated as securities or financial instruments. Asset tokens represent assets, such as debt or equity claims on issuers, but can also represent physical ownership of assets. Crypto-based assets are assets that serve factually—or according to the intention of the organizer or the issuer to a considerable extent—as means of payment for the purchase of goods or services or transfer of money and value. DLT (distributed ledger technology) securities are either registered, uncertificated securities or other uncertificated securities held in distributed electronic registers and by means of technical procedures give creditors, but not debtors, the power to dispose of the uncertificated security.
- A simple AML (anti-money-laundering) registration already opens up multiple business cases
Setting up a digital-assets-based business in Switzerland can easily be done. A rather straightforward registration with an organization for AML purposes, which requires only compliance with AML duties, already allows registrants to start operating in digital assets in Switzerland within a few weeks. These activities are client trading activities in payment and utilities tokens and derivatives that are not securities. An AML registration is the logical first step for many new market entrants in becoming operational in digital assets.
- Banking authorization
A banking activity is the professional acceptance of public deposits and crypto-based assets, generally of more than 20 depositors, or public promotion of the willingness to accept deposits or crypto-based assets. This activity requires authorization. Banking activity in digital assets can be executed through multiple avenues—either a banking or fintech (financial technology) enterprise or a branch or representation office of a foreign bank in Switzerland. The Swiss Financial Market Supervisory Authority, FINMA, has already approved two Swiss digital-assets banks that operate in digital assets only. Others are in the process of being approved. FINMA treats digital-assets client dealers that engage in similar activities as client FX (foreign-exchange) dealers the same as they do the latter. Client digital-assets dealers that accept fiat money for digital assets from clients on accounts and are themselves party to digital-assets transactions with their clients generally require a banking or fintech-enterprise authorization. This is, however, not the case if an asset manager has the sole power of attorney, allowing the management of digital-assets positions.
- Fintech-enterprise authorization
Fintech-enterprise authorization is a “banking license light”. It will allow an enterprise to hold public deposits or certain crypto-based assets, for example, in the form of payment tokens or utility tokens—or fiat similar to that of a bank, up to an amount of CHF 100 million. It will, however, not be possible to transact in these deposited assets or crypto-based assets without the consent of the depositor—for example, by lending them to third parties—and no interest can be paid on these public deposits or crypto-based assets. The deposited assets are, unlike a bank’s, not subject to the legal privilege of privileged deposits. On the flipside, the regulatory capital required is much lower than that required from a bank (CHF 300,000 as a minimum or 3 percent of the public deposits or crypto-based assets). The fintech-enterprise authorization also allows for additional alleviations, such as accounting rules according to the Swiss Code of Obligations. An entity wishing to receive a fintech-enterprise authorization will have to undergo a licensing process with FINMA.
- Foreign banks
Foreign banks, meaning banks that are duly licensed as banks abroad, have the term bank in their names or are executing banking activity have to apply for a license in Switzerland if they are professionally employing personnel in the country on an ongoing basis and are operating in or from Switzerland either as a branch or representative office. (Branches of foreign banks enter into transactions, hold customer accounts or legally oblige the foreign bank in any way. Representative offices of foreign banks are active for a foreign bank in any way other than a branch, such as by forwarding customers’ orders or marketing activities. These authorizations allow for banking activities in digital assets.)
- Trading in digital assets that are securities
Trading in digital assets that are securities requires the trading entity to be authorized as an investment firm. Securities are standardised, certificated and uncertificated financial instruments suitable for mass trading. Payment tokens and utility tokens are not securities or financial instruments and generally do not trigger the obligation to be authorized as an investment firm.
A security can trigger multiple legal consequences when traded. These consequences include:
- Persons professionally trading in securities potentially have to apply for authorization as an investment firm (the Swiss equivalent of an investment firm or broker/dealer).
- Facilities allowing for multilateral trading of securities require authorization as a stock exchange or multilateral trading facility (MTF) or must be reported as an organised trading facility (OTF).
- DLT-trading facilities allow for multilateral trading in DLT securities or other assets between regulated and non-regulated participants.
- Facilities allowing for the bilateral trading of securities must be operated by a duly authorized operator (the Swiss bilateral version of an OTF, which replaces the systematic internaliser in the European Union [EU]).
- Asset-management activities
Asset-management services related to digital assets are on the rise. From a regulatory point of view, they can be separated into collective investment schemes (CISs) and individual portfolios.
- Swiss collective investment schemes
In Switzerland, open-ended collective investment schemes might be set up in the form of a contractual fund or an investment company with variable capital (SICAV). With open-ended collective investment schemes, investors have either direct or indirect legal entitlement, at the expense of the collective assets, to redeem their units at net asset values (NAVs). Closed-ended collective investment schemes in Switzerland might be set up in the form of limited partnerships for collective capital investments or investment companies with fixed capital (SICAFs). What they all have in common is that they must be authorised by FINMA, and they can have digital assets as underlyings.
- Foreign collective investment schemes
Digital assets contained in foreign collective investment schemes can generally be distributed in the Swiss market. FINMA must approve foreign collective investment schemes prior to any distribution to private clients. The duly appointed and FINMA-authorised representatives of foreign collective investment schemes must submit the relevant binding documents—such as the sales prospectuses, articles of association and fund contracts—to FINMA. In addition to a representative, a paying agent must also be appointed. Foreign open-ended collective investment schemes are either assets that were accumulated based on a fund contract or another agreement with a similar effect for the purpose of collective investment or have investors with legal rights to the redemption of their units at the net asset value with regard to the company itself or with regard to a closely associated company. In addition, they must be managed by a fund-management company, with its registered office and main administrative office abroad.
- Management of collective investment funds
Anyone managing collective investment schemes must obtain authorisation from FINMA. There are generally two types of asset managers: fund-management companies and asset managers of collective investment schemes. Fund-management companies are the main companies managing collective investment schemes. They manage collective investment schemes at their own discretion and in their own names but for the investors’ accounts. An asset manager of collective investment schemes ensures the proper conduct of portfolio and risk management for one or more collective investment schemes. It needs prior authorisation by FINMA. It may, in addition, also perform administrative activities, discretionary management of individual portfolios, investment-advisory services, distribution of collective investment schemes and representation of foreign collective investment schemes. Specific tasks might be delegated, provided it is in the interest of efficient management. Investment decisions might, however, be delegated only to an asset manager of collective investment schemes who is subject to recognised supervision.
- Distribution of collective investment funds
The distribution of collective investment schemes requires entry into the client-advisor registry if:
- The distributor is prudentially supervised abroad only if the distribution is made to private investors;
- The distributor is not prudentially supervised abroad independent of the category of the investor (private, professional and institutional).
Any such distribution must also comply with the other obligations imposed under the Swiss Financial Services Act (FinSA).
- Actively managed exchange-traded products (ETPs)
A rather new but very attractive way to actively manage digital assets for retail investors and an alternative to funds and structured products is the actively managed exchange-traded product (ETP). They are listed on one of the Swiss stock exchanges and can have up to 50 payment tokens as underlyings. They do not need authorization from FINMA. Listed ETPs can be passive products or actively managed products. Managers of actively managed products can be structured in a way that they do not need authorization.
- Individual portfolio management and advisory functions
The management of individual portfolios of and trustee services related to digital assets has undergone a paradigm change under the new FinIA (Financial Institutions Act) regime. There will be a new authorisation category for asset managers of individual portfolios (external asset managers) and trustees managing such digital assets. The licensing requirements are sufficient regulatory capital (typically CHF 100,000) and organizational requirements. However, multiple de minimis rules are applicable, such as no requirement to have an independent risk-management function when the gross revenue does not exceed CHF 2 million, the staff does not exceed five persons, and there is no business model with increased risks.
Most portfolio managers and trustees in digital assets will benefit, depending on their status to be authorized during the transition period up to the end of 2022.
- Summary and outlook
Switzerland is a leading hub for banking activities in digital assets. Its financial, political and regulatory stability and foresight provide a good framework for establishing all banking activities related to digital assets.
ABOUT THE AUTHOR
Martin Liebi is Attorney-at-law, Director of Legal FS Regulatory and Compliance Services and Head of Capital Markets Legal, PwC Switzerland. As a legal and capital-markets expert, he plans, structures and manages large regulatory and compliance projects and advises financial-services providers in all regulatory matters with regard to European Union and Swiss law.