I. Background

Following a report released in December 2018, the Swiss Federal Council published the initial draft law concerning blockchain and distributed ledger technology in March 2019 (see our Bulletin of March 25, 2019). This initial draft went through comprehensive public consultation. Based on the feedback received, the Swiss Federal Council has now published the final DLT Draft Law.

Stefan Kramer and Prof. Dieter Zobl of Homburger have supported the preparatory work through their participation in expert commissions that advised the Swiss Federal Government in connection with the initial draft.

II. Tokenization of Rights

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» and specific rules in the Swiss Code of Obligations for corporations looking to is­sue shares in tokenized form.

Uncertificated Register Securities

The purpose of the new concept of Uncertificated Register Securities (Registerwertrechte) is to allow for a legally robust tokenization of rights by provid­ing for the possibility of an electronic registration of rights that has the same functionality and entails the same protection as a negotiable security.

Legal positions that qualify as admissible underly­ing rights of Uncertificated Register Securities in­clude rights against counterparties or issuers, such as contractual claims and membership rights (e.g., shares in a corporation). Therefore, asset tokens, utility tokens, hybrid tokens as well as «stable coins» may be issued in the form of Uncertificated Register Securities. Payment tokens (i.e., «pure» cryptocurrencies, such as for example Bitcoin), however, are not covered by this new concept since they do not give rise to claims against an is­suer or a third party.

In order to create Uncertificated Register Securi­ties, the involved parties (e.g., the issuer of a finan­cial instrument as debtor and the holders of the fi­nancial instrument as creditors) need to enter into a registration agreement (Registrierungsverein-barung) according to which the relevant right (i) is entered into a so-called «Register of Uncertificated Securities» (Wertrechteregister) and (ii) may exclu­sively be asserted based on and transferred via this register.

The register must meet certain statutory minimum requirements. It must, in particular, by means of technical procedures, grant the creditors, but not the debtor, actual power of disposal (Ver-fügungsmacht) over their rights. In addition, the register’s integrity must be ensured by implement­ing the appropriate technical and organizational protective measures that prevent unauthorized changes. The draft law does not provide detailed guidance on what appropriate measures may en­tail, but expressly mentions the example of joint administration by several independent parties.

In its dispatch, the Swiss Federal Council dis­cusses (non-exhaustive examples of) existing DLT-systems that are currently deemed suitable to fulfil the statutory requirements and mentions both permissionless (e.g., Ethereum) and permissioned (e.g., Corda, Hyperledger Fabric) DLT-systems.

The new rules will also allow to bridge the new framework and the traditional concept of securities by allowing for Uncertificated Register Securities to be registered with a custodian (e.g., a bank or a DLT Trading Venue) and, subsequently, to be booked into a regular securities account, thereby converting the Uncertificated Register Securities into «traditional» book-entry securities (Bucheffekten).

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. 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.

The company is responsible for the selection of the register technology based on which the Uncertifi-cated Register Securities are created, as well as for the organization and the security of the Regis­ter of Uncertificated Securities 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).

III. DLT Trading Venues

The Swiss Federal Council further proposes to in­troduce a new license category for (centralized) fi­nancial market infrastructures. These so-called «DLT Trading Venues» (DLT-Handelssysteme) may offer services in the areas of trading, clearing, set­tlement and custody of DLT-based assets not only to regulated financial market participants but also to unregulated corporates as well as individuals, including potentially retail investors.

A license as a DLT Trading Venue can be obtained by trading venues that allow for the simultaneous exchange of offers between several participants and the conclusion of contracts based on non-dis­cretionary rules and, in addition, provide for:

• the admission of unregulated corporates or in­dividuals;
• the custody of DLT Securities based on uni­form rules and procedures; or
• the clearing and settlement of trades in DLT Securities based on uniform rules and proce­dures.

«DLT Securities» (DLT-Effekten) are securities that are suitable for mass trading and either have the form of (i) Uncertificated Register Securities (Reg-isterwertrechte) or the form of (ii) other uncertifi-cated securities (Wertrechte) that are held in dis­tributed electronic registers and, by means of tech­nical procedures, grant the creditors, but not the debtor, the actual power of disposal over the un-certificated securities. The latter category will in particular allow a qualification of uncertificated se­curities, which are issued under foreign laws as DLT Securities for purposes of the Swiss DLT law.

In contrast, payment tokens (i.e., «pure» cryptocur-rencies, such as for example Bitcoin) as well as utility tokens that do not serve an investment pur­pose are not covered by the definition of DLT Se­curities since they are, according the current prac­tice of the Swiss Financial Market Supervisory Au­thority FINMA («FINMA»), not considered securi­ties. However, a DLT Trading Venue may also per­mit the trading of payment and utility tokens that do not qualify as DLT Securities.

The licensing requirements for DLT Trading Ven­ues are largely modelled on the existing require­ments for traditional trading venues (i.e., stock ex­changes and multilateral trading facilities) modified by adding specific rules with respect to, for exam­ple, the admission of participants and the admis­sion of DLT Securities. Furthermore, the DLT Draft Law requires the Swiss Federal Council to estab­lish, or delegate authority to FINMA to establish, additional requirements for certain types of DLT Trading Venues, namely DLT Trading Venues that intend to admit retail investors. At the same time, the draft law confers discretion to the Swiss Fed­eral Council to grant relief, or delegate authority to FINMA to grant relief, from certain requirements applicable to DLT Trading Venues that are consid­ered «small» in terms of number of participants or trading and custody volume, respectively.

IV. Segregation of Crypto Assets in Insolvency

Crypto assets (kryptobasierte Vermögenswerte) such as cryptocurrencies and tokenized financial instruments are and will often be stored with third party custodians, such as for example wallet pro­viders.

Under current Swiss law, it is unclear whether crypto assets held by a custodian on behalf of a client will be segregated in bankruptcy, especially if the creditor or investor does not hold the private key(s). The DLT Draft Law therefore proposes to introduce a new segregation regime that will allow the segregation of crypto assets for the benefit of the relevant creditors or investors, if certain re­quirements are met, including, in particular, the fol­lowing: First, the relevant custodian must have the obligation vis-à-vis the relevant creditor or investor to keep the crypto assets available for him at all times. This means that the custodian may, for ex­ample, not use such crypto assets for proprietary business or own-account transactions. Second, the crypto assets will only be segregated if they can be either (i) unambiguously allocated to the individual creditor or investor (however, there will be no need that such allocation occurs directly on the relevant DLT-system itself) or (ii) allocated to a community and it is evident what share of the joint holdings belongs to a given creditor or investor. The latter option will allow a pooling of crypto assets held for several creditors or investors.

Since the new segregation regime will impact Swiss banking regulation too, the DLT Draft Law also provides for the introduction of specific new rules in the Swiss Banking Act, e.g., in the area of licensing requirements.

V. Outlook

The effective date of the proposed new law is not yet known. Given that the parliamentary process will formally start next year, an entry into force in early 2021 seems possible.