Switzerland: A FinTech Legal Overview
New Licensing Regimes for Payment Instrument Institutions and Crypto Institutions
The Swiss Federal Council has proposed a reform of the Financial Institutions Act, which introduces two new licence categories to strengthen the innovation, integrity and competitiveness of the leading Swiss regulatory framework.
The payment instrument institution licence will replace the existing fintech licence, allowing institutions to accept customer funds without engaging in lending or interest payments. The CHF100 million limit has been abolished, enabling fintechs to grow and take advantage of economies of scale. In case of bankruptcy, customer funds are segregated, a significant improvement over the previous regime. This also complements the already very strong focus on investor protection in the Swiss financial market regulations but also the general Swiss insolvency law, where, in 2021, complete separation in insolvency of segregated and (under the right set-up) pooled crypto-based assets was introduced. Furthermore, only licensed payment instrument institutions will be permitted to issue a special type of stablecoin (ie, crypto-based assets that are issued in Switzerland and designed to maintain a stable value in relation to a single fiat currency), which must be fully backed, segregated from the issuer’s assets and redeemable at par value. This regulatory approach aligns with the growing global trend of fintechs launching stablecoins, particularly as a means to reduce the costs associated with cross-border payments.
The crypto institution licence covers entities providing custody, trading and certain other services involving payment tokens (such as Bitcoin and non-Swiss stablecoins), excluding utility tokens, asset tokens and stablecoins issued by payment instrument institutions. Licensing and activity requirements are modelled on those for securities firms but are less extensive, reflecting the different risk profile of crypto-asset services. Rules on custody are based on existing provisions in the Banking Act.
Existing holders of fintech licences do not have to apply for a new licence but must comply with the new requirements within one year upon entry into force of the new law. To be ready on day one of the new law, new players could take advantage of this grandfathering regime and apply today for a fintech licence. Otherwise, the Swiss Financial Market Supervisory Authority (FINMA) is expected to accept direct applications for the new licences only on day one upon enactment of the new law.
Tokenisation of financial instruments
Furthermore, our practical experience indicates that tokenisation represents a major trend in the financial services industry. The potential benefits of tokenising financial instruments include increased transparency, increased efficiency, lower transaction costs and financial inclusion. Tokenisation has become a lot easier in Switzerland since the introduction of the distributed ledger technology (DLT) laws in February 2021; these grant the possibility of issuing and transferring ledger-based securities (Registerwertrechte) exclusively by a technical transfer on a blockchain or distributed ledger, which will be recognised as legally valid even without:
- the physical transfer of a document or paper (required for certificated securities);
- a written assignment (required for simple uncertificated securities); or
- a booking implemented by a central securities depository (required for book-entry securities).
All rights that can currently be certificated in securities can now also be structured as ledger-based securities – ie, in principle, all contractual rights including, in particular, receivables as well as shares in corporations.
This underlies the rise in interest in tokenising ordinary financial instruments, exemplified by the backed tokenised assets of xStocks and Ondo Finance’s global markets programme, which enable direct trading on the blockchain (almost) in real time and without the involvement of the banking system. All that is required is a mobile phone with access to a wallet. However, the biggest interest is not yet from the issuers of the financial instruments themselves, but rather from the secondary market, with third parties reissuing (“repackaging”) existing financial instruments on the blockchain. They often use structured products, issuing new debt instruments tracking an ordinary financial instrument in the form of ledger-based securities in accordance with Swiss law.
Such products can also be issued via special-purpose vehicles in other jurisdictions, and Swiss law can be chosen as the applicable law for tokenising the product interests to be issued, or even for the full offering documentation. Further, even if issued in another jurisdiction, the underlying assets serving as collateral for the benefit of token holders can be held in custody with Swiss providers in order to take advantage of the stable Swiss legal framework, political stability and longtime expertise in wealth management. Following the rise in inflation in much of the world, many projects are looking to bring fixed-income products onto the blockchain, for which these structured products could be a solution.
Principal Challenges and Key Mitigation Strategies
The risk of money-laundering remains high for fintech companies, and for companies with a crypto-offering. Cryptocurrencies are increasingly used in cyberattacks or to finance illicit activities. Breaches of due diligence obligations under the Anti-Money Laundering Act can result in serious legal consequences and reputational damage for the fintech in question. Furthermore, sanctions – both in general and those specifically related to the war in Ukraine – continue to pose operational risks for supervised institutions.
On 28 February 2022, the Swiss Federal Council decided to follow the EU’s sanctions against Russia by enacting a new Ordinance on Measures in connection with the Situation in Ukraine on 4 March 2022 (the “Ukraine Ordinance”). The Ukraine Ordinance not only encompasses the usual financial sanctions against certain listed individuals, companies and organisations, but also bans the provision of certain financial services, including certain services in connection with crypto-based assets, to Russian nationals and individuals and businesses based in the Russian Federation. Fintech companies are required to adequately identify, limit and monitor all anti-money laundering and sanction risks, and to establish an effective internal control system. In particular, fintechs should strengthen know-your-customer and know-your-transaction processes using advanced identity verification and transaction analytics. Continuous risk assessment is crucial to adapt controls to evolving threats, particularly in crypto transactions. Real-time monitoring systems help detect suspicious patterns and ensure timely reporting to authorities. Building a strong compliance culture through staff training and awareness is equally important.
The use of artificial intelligence (AI) by fintech companies has increased, which not only provides opportunities but also poses risks. In December 2024, FINMA issued its new Guidance on Governance and Risk Management when using Artificial Intelligence, in which it identifies various risks arising from the use of AI by supervised institutions – in particular operational risks but also IT, cyber, legal and reputational risks – and emphasised the need for supervised entities (including fintechs) to properly identify, calibrate and manage such risks. FINMA-supervised institutions using AI are required to develop AI risk awareness by specifically addressing AI in their processes; identifying, weighting, assessing and managing the specific AI risks they face; and adapting their current compliance, risk management and internal control system to AI.