In our series regarding the Swiss Federal Council report of 14 December 2018 DLT-technologies and Blockchain, our EY-specialists provide you with an overview of the applicability of the current Swiss financial market law on your FinTech-, DLT-, Blockchain-, DAO- business as well as your tokens. Authors: Darko Stefanoski, Orkan Sahin, Loric Szalai
The Swiss Federal Council report of 14 December 2018 outlines, that a functional design of the new business models and tokens needs to be assessed to analyze the applicability of Swiss financial regulations. The Swiss regulator “FINMA” already provided guidance and categorized tokens into Asset-, Utility-, and Payment-Tokens. These categories are useful while assessing the functional design of your FinTech business model.
As part of our series regarding the „Swiss Federal Council report“ we outline in the present first publication the relevance of the Swiss Banking Law and Collective Investment Scheme Law for the FinTech business models.
Swiss Banking Law
Key question is whether or not a banking- or FinTech license is required, when establishing a new FinTech business model. Simply spoken a banking license is required, if public deposits are accepted on a professional basis. The term public deposit has a broad understanding under Swiss Banking Law and includes as well the acceptance of virtual currencies (hereinafter all together “third party assets” or “client assets”). FinTech business models are often based on the acceptance of third party assets and therefore would fall under the Swiss Banking Law. Depending on whether or not the FinTech business model – or part of it – is considered accepting third party assets, a banking- or FinTech license is required. Therefore, it is crucial to legally analyze the functional design of the FinTech business model to assess the obligation to require a banking- or FinTech-license or if an exemption applies.
The professional acceptance of third party assets requires a banking or FinTech license. Based on the conditions defined for the acceptance of Bitcoins and other virtual currencies with a similar functional design a banking license is required if:
- the client needs the support of the company to dispose over his “assets”,
- the company is obliged to make repayments,
- the accepted client “assets” would in the event of bankruptcy fall in the bankruptcy assets of the company.
If your FinTech business model is likely to meet the outlined conditions, you may require a banking license. E-contrario the sole safe-custody–service of “client assets” does not require a banking license if such “assets” are held on the Blockchain and can be allocated to each individual client.
The newly introduced FinTech license is available since 1st January 2019. It allows the acceptance of client “assets” up to CHF 100 million including fiat and crypto currencies. The conditions are:
- the FinTech company does not pay interest on the “assets”,
- the FinTech company is not allowed to re-invest these “assets” on own account (e.g.,to carry out any business activities, such as investing in funds, shares or any other investments, with these assets).
If your FinTech business model further includes the safe-custody-service of crypto – as outlined above – the threshold of CHF 100 million can be exceeded. The FinTech license is obtained by meeting “relaxed” legal requirements compared to a “full” bank license with regard to organizational, risk management, compliance, accounting and capital requirements (3% of the received public deposit or a minimum of CHF 300’000.00) under the Swiss Banking Law.
1. Sandbox: To improve innovation, Switzerland already introduced in 2017 the so-called Sandbox exemption. A FinTech business model is not subject to the Swiss Banking Law if:
- the accepted client “assets” do not exceed CHF 1 million,
- no interest is paid and these “assets” are not re-invested,
- the clients have been informed that the company is not supervised by FINMA and the “assets” are not subject to a deposit insurance scheme.
2. Provision of settlement accounts: The acceptance of “client assets” for settlement purposes is not considered as public deposit under the Swiss Banking Law if:
- no interest is paid and
- the settlement takes place within 60 days.
Today’s fiat currency dealers are not able to benefit from this exemption. In the case your FinTech business model contains elements or is similar to a fiat currency dealer, you may need a Banking license prior to go live. However, depending on your core DLT-technology or Blockchain model it is still possible to benefit from this exemption. Therefore, we recommend a functional design assessment of your FinTech business model.
3. Payment systems: Small payments made by the clients, max. CHF 3’000 per client, on an “account” of your FinTech company is not considered as public deposit if:
- the sole purpose is to buy future goods or services and
- no interest is paid on the “assets”.
4. Payment for service: Tokens accepted as payment for a provided service are not considered as acceptance of “client assets” and therefore exempted from the requirement of obtaining a bank or FinTech license.
5. Issuance of bonds (and comparable debt securities): In the event your FinTech business model includes an Initial Coin Offering (“ICO”), which is qualified as bond, you are not subject to the Swiss banking law, if you provide the investor with a prospectus under Swiss Law. Moreover this exemption will also include the provision of the new Key Investor Document (“KID”) / Basisinformationsblatt (“BIB”) under the new Swiss Financial Service Act (“FinSA”) – effective date 1 January 2020.
6. Guarantee of a Swiss bank: You may provide custody services for crypto assets for clients without a banking license in the event if:
- a Swiss bank guarantees the deposited “client assets“ in case of default and
- pays the interest on these “assets”.
In doing so the requirements to provide the safe-custody-service (as outlined above) do not need to be met.
Collective Investment Scheme Law
The Swiss Collective Investment Scheme Law regulates anybody performing activities around the distribution and management of collective assets (“funds”) as well as the approval of the funds itself by FINMA. Moreover funds can only be structured according the pre-defined form by the law (“formal requirement”).
In the following we briefly outline the rules for Swiss crypto funds, the distribution of foreign crypto funds in Switzerland and the Decentralized Autonomous Organization (“DAO”).
Swiss crypto funds
As mentioned above the available structures of funds are pre-defined by law and need in general an approval by FINMA. Under Swiss law it is possible to structure open-end and close-end alternative investment funds. Such funds may invest in crypto and other tokens as well as in various other assets e.g., securities, derivatives and real estates. As mentioned in the beginning not only the fund but also the asset manager of such alternative crypto funds needs to meet regulatory requirements e.g. organizational and risk management requirements, to obtain the respective license from FINMA. Therefore, it needs to be legally assessed if your business model meets the regulatory requirements when it comes to crypto funds, the distribution or management of such. Bear in mind, that Switzerland is an innovation friendly country and was the first who granted an asset manager license to a Swiss based asset manager for an offshore crypto fund and a distribution license.
In addition Switzerland is currently assessing a new form of funds, the so called “Limited Qualified Investor Fund / L-QIF”. The L-QIF would be a fund type for qualified investors only and will not be subject to an approval process. This type of fund provides room for new innovative FinTech business models.
Distribution of offshore crypto funds in Switzerland
Offshore crypto funds can be distributed in Switzerland. Depending on the targeted type of investor i.e., retail or professional investors, the fund needs to be approved by FINMA. In case of a distribution to retail investors all regulatory requirements need to be met. Until today no application process was initiated for the distribution of an offshore retail crypto fund. In case the offshore crypto fund is solely distributed to professional investors no FINMA approval is required for the fund. However, for the units distributed in Switzerland a representative and paying agent need to be appointed. The representative needs to possess a license from FINMA and the paying agent needs to be a Swiss bank. In both cases the distributor needs to possess the respective license. As mentioned above currently only one Swiss company has obtained a license to distribute offshore crypto funds to professional investors in Switzerland.
Decentralized Autonomous Organization (“DAO”)
Due to the current technological innovation it may be possible that funds including crypto funds are fully automated e.g., the management, the custody and even the distribution may be held on a distributed ledger. First example was the so called “The DAO”. Basically “The DAO” is a “virtual” organization embodied in computer code and executed on a distributed ledger. Simply spoken a DAO is directed by investors but fully managed automatically via smart contracts. The key question with regard to the Swiss Collective Investment Scheme Law is, if such DAOs fulfill the legal requirement of a fund and asset manager. According to Swiss law a fund needs to be managed externally and it needs to be assessed if such DAO can be considered as managed externally. Moreover, the question is if such DAOs can be subject to a fund structure under current Swiss law. A fund can only be structured according to the pre-defined type of funds (“formal requirement”). These questions need to be answered individually. Nevertheless, Switzerland will closely follow the innovation with regard to DAO or other FinTech business models to ensure legal certainty.
How can EY help you?
Our EY specialists can help you in assessing the functional design of your FinTech business model to achieve legal certainty, support in the interaction with the regulators and, if necessary, to obtain a FINMA license to carry out your business.
Contact us for all your legal, regulatory and tax issues and let us be your trusted legal business advisors, so that you can focus on your FinTech business model.