Digital stock exchanges and securities: Switzerland makes a start
Switzerland is at the forefront of digital exchanges and securities. Since 1 August 2021, the Swiss Federal Council's legal foundations enabling digital stock exchanges and securities have been in force. In July 2022, the first digital securities were issued in Switzerland. This is part of the Swiss Federal government’s current "Digital Switzerland" strategy, which makes Switzerland one of the most attractive business locations in the world for digital companies.
Switzerland is undergoing a digital transformation. With its "Digital Switzerland" strategy (German only), the Federal Council set out guidelines in September 2020 aimed at enabling the economy and society to take advantage of the many opportunities offered by digitization, such as efficiency gains based on the automation of processes, stronger growth through the use of digital distribution channels or increased convenience for customers.
Digitization brings opportunities for new businesses. Start-ups, especially those using new technologies in a meaningful and value-adding way, are important drivers of the Swiss economy. With the "Digital Switzerland" strategy, the Swiss Federal government intends to promote Switzerland as a location for start-ups and to create suitable conditions, such as better legal certainty for companies.
According to a recent report by the Global Entrepreneurship Monitor, Switzerland is already one of the 10 best locations for entrepreneurs worldwide. In particular, Switzerland ranks in the global top 5 in terms of the transfer of research results to start-ups as well as the attractiveness of regulations and tax advantages.
A particular focus in the strategy belongs to the fintech sector, which combines technological expertise with Switzerland's reputation for trustworthiness, reliability and integrity in banking and insurance. Since 2015, the number of fintech companies in Switzerland has grown from 161 to 384. In the latest annual fintech study by the Lucerne University of Applied Sciences and Arts, Switzerland ranks second among the world's leading fintech locations.
Among the most significant new technologies, namely for the fintech sector, are distributed ledger technology (DLT) and blockchain technology. Ledger stands for a register in which incoming and outgoing transactions are recorded. Distributed in this context means that the bookkeeping is not centralized but decentralized as well as shared and managed with other participants. Characteristic of DLT is that these participants do not know each other and do not know how many jointly manage the register.
Although DLT and blockchain are often used interchangeably, the term DLT encompasses all systems based on distributed electronic registers, including blockchain technology. Although blockchain technology constitutes only one of the possible ways in which data can be stored on such a register, it is undoubtedly the best known. Blockchain technology owes its popularity to its use in the world's largest cryptocurrency, Bitcoin, which has been in existence since 2009. Alternative DLTs include Hashgraph, Iota Tangle and R3 Corda.
A term associated with DLT is token. A token is a digital representation of an entity in an electronic register based on DLT. There are two categories of tokens: Payment tokens, such as namely a unit of the cryptocurrency Bitcoin, which can be traded electronically and converted into real money. A second category forms a legal position such as a claim or membership, comparable to a traditional security. Such tokens can also be traded digitally, analogous to securities.
Regardless of the numerous forms of application of DL and blockchain technologies, the technologies currently still play a subordinate role in Switzerland, as the annual survey of domestic IT decision-makers by Computerworld 2021 (German only) showed. Only around 8% of respondents recognized blockchain technology as a driver of the Swiss ICT industry.
With the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (German only), or DLT Act in brief, as well as the associated ordinance , Switzerland, on 1 August 2021, became one of the first countries in the world to enact legal regulations for DLT. The first amendments to securities law (part of the Code of Obligations) already came into force on 1 February 2021. (Although an official English translation of the DLT Act does not exist as of yet, preprints of the act and its associated ordinance can be found on the website of the Swiss Federal government).
The DLT Act is not a stand-alone, specific law, but rather a blanket act that meaningfully amended a number of existing federal laws - including the Securities law, the Intermediated Securities Act, the Financial Infrastructure Act and the Debt Enforcement and Bankruptcy Act. The legal changes can be summarized in the following three main points.
1) Securities law was amended to provide a secure legal basis for trading rights via electronic registers by introducing so-called ledger-based securities. This newly created legal term covers the category of tokens that represent a legal position (claim, membership). As a result, these tokens are recognized as having similar legal effects to securities.
Instead of being traded on exchanges, these ledger-based securities are traded and transferred via DLT-based electronic registries without the involvement of intermediaries (such as banks). Effectively, these ledger-based securities can be considered digital securities. Similarly, the electronic registries can be considered digital exchanges.
2) Financial Infrastructure Act has been expanded to include a new category of license for DLT trading facilities, a license granted by the Swiss Financial Market Supervisory Authority FINMA. Such a license allows the commercial operation of a facility for the multilateral trading of DLT securities. For this purpose, DLT trading facilities must be represented as legal entities under Swiss law with their registered offices and head offices in Switzerland.
In addition to the newly created ledger-based securities, DLT securities also include other uncertificated securities held in distributed electronic registers. This second, not clearly defined category of DLT securities presupposes that the right of disposal over these uncertificated securities is attributed to the creditor, but not to the debtor, by technical means.
As a result of an amendment to the Intermediated Securities Act, which legally regulates the custody of securities and uncertificated securities and their transfer, DLT trading facilities are now also deemed to be custodians.
3) Finally, the Debt Enforcement and Bankruptcy Act was amended to legally clarify the segregation of crypto-based assets in the event of bankruptcy. This means that in the event of bankruptcy, it is now possible for the bankruptcy administration to issue an order for the surrender of crypto-based assets that can be claimed by creditors.
The DLT Act has laid the foundations for the emergence of digital, DLT-based exchanges that enable the trading of digital securities. This makes Switzerland one of the first countries in the world with legal regulations for DL and blockchain technologies, which will further promote the country as a financial center.
The resulting legal certainty gives companies that use the young DL and blockchain technologies a strategic advantage in international comparison, thereby increasing Switzerland's competitiveness. Fintech start-ups in particular, which operate at the interface between the highly regulated financial market and young technologies that have (as yet) been little regulated, benefit from the consistent application of relevant rules.
Just one month after the law came into force, FINMA granted its first DLT trading facility license to SIX Digital Exchange, the subsidiary of SIX Swiss Exchange, Switzerland's largest stock exchange. The company issued its first digital shares (German only) in July 2022. Although the industry of digital exchanges and securities is currently still in its infancy, the granting of further licenses and the emergence of new digital exchanges in Switzerland is foreseeable.
Conclusion
As a result of the new federal law, the emergence of new companies that can benefit from legal certainty for DL and blockchain technologies is foreseeable. Likewise, this certainty, combined with Switzerland's strength as a research hub for future technologies, will lead to new developments that can be exploited commercially. Overall, the new legislation contributes to the advancing maturity of the DLT and blockchain industry, which was previously considered risky due to the lack of regulation.
Eraneos, part of Eraneos Group, offers blockchain services along the entire life cycle: starting from the assessment stage, where we help clients define their blockchain strategy, clarify possible use cases and assess the potential impact. We develop proof of concepts to help clients visualize the added benefit of the technology, and guide companies through the complexities of implementation.
For more information, please contact our in-house Expert Maria Sommerhalder.