SWITZERLAND: An Introduction

Fintech/Crypto Regulations

Switzerland provides a clear regulatory framework for fintech companies, crypto custodians and staking providers based on two key principles: “substance over form” and “same business, same rules”. This framework is currently being reviewed in order to increase legal certainty and boost innovation. The Swiss Financial Market Supervisory Authority (FINMA) aims its supervision in this area at balancing innovation with investor protection and market integrity. Fintech companies may benefit from a special “fintech licence“, which allows for certain regulatory relaxations to promote technological advancement but also allows for deposit taking of up to CHF100 million. Crypto custodians are required to comply with anti-money laundering regulations but are otherwise unregulated if the custody is such that clients’ crypto-assets can be segregated in a bankruptcy of the custodian. For staking providers, the regulatory status and treatment depend on the specific way such staking is done. FINMA’s guidance offers details on these matters, reflecting Switzerland’s commitment to fostering a secure and innovative financial sector.

Fintech-Specific Regulation

The Swiss fintech-specific regulation comprises three “pillars“: the so-called fintech licence, a regulatory innovation area (“sandbox“) and the settlement accounts exemption.

Fintech licence

The Swiss Banking Act provides for two licensing categories: (i) the regular banking licence and (ii) the fintech licence (also referred to as a “banking licence light“).

With the fintech licence, companies not engaging in the classic banking business (interest rate differential business) – eg, by using short-term deposits for long-term lending or investment activities – now have a viable regulatory alternative. The fintech licence is attractive for companies that are mainly active in the financial sector, but which (i) limit their operations to accepting either deposits of less than CHF100 million or crypto-assets and (ii) do not invest the accepted funds nor pay interest thereon. Hence, the licence may, for example, be attractive for companies offering payment services or platform funding services.

If the maximum deposit threshold of CHF100 million is exceeded, the company must notify FINMA within ten days and must submit a regular bank licence application within 90 days.

Sandbox

The “sandbox” exemption allows engaging in activities which under former regulation would have triggered bank licensing requirements. Companies accepting deposits from the public are deemed not to be acting on a commercial basis, provided:

• the deposits or crypto-assets accepted do not exceed the threshold of CHF1 million;
• the company does not engage in the interest rate difference business; and
• the clients are informed prior to depositing the funds that the company accepting the funds is not supervised by FINMA and that the funds are not protected by the Swiss deposit insurance regime.

The “sandbox” exemption is designed to create a regulatory safe harbour, in which fintech companies, are able to test their business ideas and provide certain financial services without becoming a regulated entity under Swiss banking regulation. However, it must be noted that companies engaging in activities within the “sandbox” are still likely to be subject to Swiss anti-money laundering regulations (and may therefore nonetheless need to adhere to certain regulatory requirements under Swiss law). Therefore, the “sandbox” should not be misunderstood as a “regulation free” area.

FINMA Guidance on Staking of Crypto-Assets

On 20 December 2023, FINMA issued guidance on the treatment of staking services under Swiss financial market regulatory laws (the “Guidance”). The Guidance provided certain clarifications regarding the regulatory treatment of staking services. Pursuant to the Guidance, the regulatory requirements applicable to the relevant staking services differ depending on whether the relevant service provider is engaging in taking deposits or merely acting on a fiduciary basis when accepting crypto-assets from its clients.

The custodian’s obligation to ensure the crypto-assets‘ “immediate availability” remains key

The Guidance’s approach to determining whether the staking service provider is engaging in regulated deposit-taking or is merely acting on a fiduciary basis is based on the three tiers of crypto-asset custody that were introduced under the Distributed Ledger Technology (DLT) Act.

As the main requirement for determining which of the two analyses applies to Swiss staking service providers, the Guidance focuses on the obligation to ensure the immediate availability of the crypto-assets and how such an obligation may be affected by different staking arrangements in constellations under which staking involves the possibility of lock-ups or slashing.

For the fiduciary analysis to apply to Swiss non-bank staking service providers engaged in direct staking of payment tokens, the Guidance requires that the staked payment tokens continue to be held in individual custody, with a separate and assignable blockchain address for each client (at the level of the original custody address, the staking address and the withdrawal address).

Delegation by a licensed bank or securities firm to a third-party provider of staking services

For the fiduciary analysis to apply with respect to a Swiss bank or securities firm that appoints a third-party staking service provider to provide staking services to the institution’s clients, the following conditions must be met according to the Guidance:

The bank or securities firm must enter into a fiduciary agreement with the client that contains a specific fiduciary mandate from the client, including the selection of crypto-assets and the amount. In FINMA’s view, the bank acquires a contractual claim against the third-party staking service provider for the return of the staked crypto-assets, and the fiduciary agreement is intended to ensure that the fiduciary analysis applies to this contractual claim.

AI Regulation

Since OpenAI made ChatGPT publicly available in November 2022, the considerable potential of AI in numerous industries has become apparent to the broader public. AI offers vast possibilities, but it also poses significant risks to civil society, law and government. The pursuit of progress raises important and complex policy and ethical questions. Governments around the world have been racing to catch up with technology’s progress and establishing plans for the potential regulation of AI – with the European Union recently announcing that the policymakers have reached an agreement on the key elements of a comprehensive AI Act.

In view of these international developments, in late November 2023, the Federal Council instructed the Federal Department of the Environment, Transport, Energy and Communication (DETEC) to draft an overview of possible regulatory approaches to AI by the end of 2024. The Federal Council intends to use the DETEC’s assessment as the basis for issuing proposal for an AI-related regulatory framework in 2025. Pursuant to the Federal Council’s announcement, DETEC’s analysis will be based on existing Swiss legal concepts to identify regulatory approaches compatible with the EU’s AI Act, the Council of Europe’s AI Convention, and fundamental rights.

Digital Swiss Franc

A recent Swiss Bankers Association’s whitepaper introduces the concept of a book money token (BMT), a digital currency designed to support Switzerland’s digital economy. The BMT is envisaged to take the form of a stablecoin based on distributed ledger technology and aims to enhance transaction efficiency, reduce risks and open new business opportunities. It is intended to maintain the Swiss Franc’s stability and technological sovereignty. The BMT will be programmable, leveraging smart contracts for complex applications, and it will be issued by regulated intermediaries. The whitepaper explores three variants of the BMT, with the “Joint Token” model being the most promising. This model involves a consortium of banks issuing a unified BMT, ensuring stability and broad acceptance. The initiative aims to bolster Switzerland’s financial infrastructure and digital economy.