Switzerland’s New Regulations for Blockchain And DLT Trading Facilities Usher In A New Era Of Clearer And Lighter Regulatory Regimes

Switzerland’s reputation as the most business-friendly country for blockchain and distributed ledger technology (DLT) ventures has cemented its role in fostering the development of global applications for tokenized economies – and global companies such as Dfinity and Diem have flocked to its borders and now call it home.

Known for its bottom-up, decentralized economic and political environment, Switzerland offers the ideal ecosystem for disruptive technologies. It has led the way with cryptocurrencies by creating the first regulatory body in the world to establish clear guidelines for ICOs and classifications for tokens, in addition to many other landmark legislative moves to ensure the success of cryptocurrency and DLT companies.

In January 2021 Switzerland will introduce a new license type for trading venues focusing on digital assets (DLT Trading Facilities), creating a clearer and lighter regulatory regime. A DLT Trading Facility is a new form of license for security tokens and other forms of digital assets. This legislation also provides a new license for “Uncertified Registered Securities” to stabilize the uncertainty surrounding civil law treatment of security tokens.

The Swiss regulatory bodies also recognized that to meet the expected needs of fintech start-ups and larger players alike, the DLT Trading Facility License can be applied for in two versions: A smaller, leaner license with lower requirements as well as a more comprehensive license type for higher transaction volumes.

[Source: MME Legal | Tax | Compliance]

The country’s clearly defined tax schemes for blockchain and DLT companies, access to an established ecosystem of service providers with expertise in the blockchain industry, such as law firms, banks, and tax regulation experts, create a supportive business environment. Switzerland’s long tradition in the fintech and the financial sector – and with its thriving “Crypto Valley” – will continue to be the choice of both startups and established global players building new applications for a tokenized economy.

As the global headquarters of the newly renamed Diem Association – formerly known as Facebook’s Libra – Switzerland will see the birth of the stablecoin Diem Dollar as soon as regulatory approval is granted by the Swiss Financial Market Supervisory Authority (FINMA), it is expected to be approved sometime in January.

Switzerland ranked number one of the ten most blockchain-friendly countries in Europe [Source: BlockShow Europe 2019].

An unparalleled brain trust: crypto-friendly research and educational institutions

One of the reasons both U.S. and global crypto and DLT companies flock to Switzerland is due to the unparalleled access to an educated and diverse talent pool made possible by the country’s federal institutes of learning and a two-tiered educational system.

The first university professorship in blockchain was created at the University of Basel in 2018 and the two federal science and technology institutes in Lausanne and Zurich have been recognized as global leaders in crypto education [Source: Coinbase, 2019].

World-renowned institutes committed to DLT and blockchain advances assure access to a highly educated and skilled workforce prepared for the explosive growth in cryptocurrency, DeFi, and blockchain in the 2020s.

The Blockchain Center at the University of Zurich has become the most active academic cluster in Switzerland. It is led by 22 professors who work to investigate blockchain topics from a multidisciplinary perspective.

The remarkable body of research institutions and educational programs devoted to DLT and blockchain technologies are unmatched in the world and make Switzerland an attractive choice for EMEA headquarters and research facilities for crypto companies.

An innovation-friendly regulatory network by design

FINMA’s introduction of unsupervised sandbox regimes in 2017 allowed young fintech startups to grow by not requiring a banking license to accept deposits from the public if certain criteria are met. Rather than stifling innovation, young companies have the freedom to explore and develop before they become regulated.

With clear metrics and guidelines once they approach “bank-like” status, these promising start-ups then apply and are integrated into the regulatory structure. Since 2019, companies who obtain a fintech license have been able to accept public deposits of up to 100 million Swiss francs, greatly simplifying blockchain and crypto companies’ access to the Swiss market.

The innovative sandbox regime introduced only three years ago has had a dramatic effect on the number of fintech and crypto startups that flock to Switzerland. To date, Switzerland boasts:

●  The first regulated crypto banks, SEBA and Sygnum

●  842 blockchain-related companies

●  These companies employ over 4,400 employees

●  This environment has birthed five unicorns: Ethereum, Dfinity, Polkadot, Bitmain, and Diem, with more anticipated. 

[Source: CV VC Top 50 Report H2/2019]

A legacy of firsts in the cryptocurrency ecosystem

The city of Zug was the first state authority in the world to accept Bitcoin as an official means of payment, thus the birth of Switzerland’s “Crypto Valley.” Zug also saw the creation of Ethereum, an open-source platform for decentralized applications resulting in the second most significant cryptocurrency next to Bitcoin.

The success of Ethereum helped create a global ecosystem that stretches from German speaking Zurich, Basel, Lucerne and Bern to French speaking Geneva, Neuchatel and Lausanne as well as Ticino, Switzerland's Italian speaking region, each with its own approach and expertise in the cryptocurrency ecosystem.

In 2018, Switzerland’s regulatory body, FINMA, became the first regulator in the world to publish clear guidelines on ICOs and classifications for tokens. Later that year, the Geneva cantonal authorities released the very first guide dedicated to supporting ICO project promoters.

A favorable legislative and tax system for the decade of crypto and blockchain

In June 2020, Swiss authorities passed a legislative package impacting around a dozen financial laws which brought favorable changes to the blockchain and DLT sector while at the same time, leaving untouched, the respective tax laws which were already seen as highly favorable to this emerging sector.

In 2019, funding of the top 50 Crypto Valley companies totaled US$7.8 billion, and US$3.7 billion for H12020 [Source: CVVC Insights]. As Swiss companies thrive, U.S. companies such as 21Shares, IBM (whose R&D lab was established in Zurich in 1956), and the aforementioned unicorns Dfinity and Diem, reap the benefits of this crypto sandbox.

Switzerland’s newest kid on the block, Diem, plans to develop policies for sanctions compliance and to fight money laundering and terrorist financing, all of huge concern to regulators and Western governments [Source: VentureBeat, 2020].

Crypto and DLT companies looking to put their growth trajectory into hyperdrive should consider the market access advantages Switzerland offers as the 2020s become the decade of cryptocurrencies and blockchain technologies.

Christoph Besmer is the Trade Commissioner for Switzerland and Head of Investment of the Swiss Business Hub USA. For more information visit Blockchain Hub Switzerland or contact christoph.besmer@eda.admin.ch.