Providing cryptocurrency trading and custody services in Switzerland is legal and regulated by the SFTA and FINMA. In Switzerland, cryptocurrencies and virtual currencies are classified as assets or property. The exchange is legal, and the country has taken a positive stance on cryptocurrency regulation, based on the nature of the assets and investor protection. Exchange offices and virtual currency platforms are considered equivalent to financial institutions in Switzerland and must therefore demonstrate compliance with local AML/CFT and consumer protection obligations, although some banking rules and thresholds are less onerous. The Swiss Federal Tax Administration (SFTA) considers crypto assets: they are subject to Swiss wealth tax, income tax and capital gains tax, and must be declared in the annual tax return.

Cryptocurrency Exchange Rules

Switzerland introduced a cryptocurrency listing process that requires permission from the regulator, the Swiss Financial Market Supervisory Authority (FINMA), to operate. While government deposits of up to 1 million Swiss francs are exempt from cryptocurrency licenses, exchanges must inform their customers in writing that their funds will not be protected if the company is regulated by FINMA.

Swiss cryptocurrency rules also apply to ICOs: In 2018, FINMA published a set of guidelines to apply current financial legislation to proposals in areas ranging from banking to securities trading and collective investment schemes (depending on their structure). In 2019, the Swiss government also approved a proposal for the Federal Council to adapt existing rules to include cryptocurrencies. In September 2020, the Swiss Parliament passed the Blockchain Act, which additionally defines the legality of cryptocurrency exchanges and cryptocurrency exchanges in Swiss law. Once the tokens can be technically transferred to the blockchain infrastructure, the legislation requires compliance with local ICO, AML and CTF requirements.

Future cryptocurrency regulations

The Swiss government has announced that it will continue to work on a regulatory framework that is conducive to cryptocurrencies. In 2016, the city of Zug, a world-renowned cryptocurrency hub, introduced Bitcoin as a way to pay city dues, and in January 2018, Swiss Economy Minister Johann Schneider-Ammann said he seeks to make Switzerland a "crypto nation." Similarly, Swiss Minister of International Finance Jörg Gasser stressed the need to promote cryptocurrencies while respecting existing financial standards.

With these goals in mind, at the end of 2020 the Swiss Ministry of Finance began consultations on new common cryptocurrency rules that would enable it to take advantage of blockchain technology without stifling innovation.

Familiarity with the regulatory framework

Market size

Switzerland is home to the Zug Crypto Valley near Zurich and has an active community of crypto-focused companies. Although it is difficult to place Switzerland in the rapidly growing global cryptocurrency community, Switzerland has played a pioneering role in this field. It is a key jurisdiction for initial coin offerings (ICOs) and security token offerings (STOs) and offers a well-developed infrastructure and a solid legal framework for companies active in the cryptocurrency space.

Legal basis

Switzerland has a favorable and attractive legal framework for crypto assets, although it does not have a separate legal framework. As far as cryptocurrencies are concerned, the regulatory framework for the issuance and trading of these assets has existed for many years.

Switzerland has now improved its regulatory framework for equity tokens, such as asset tokens and service tokens, which represent claims to issuers or third parties, through the Federal Act on the Adaptation of Federal Law to the Changes in the Distributed Ledger Technology (DLT Law), which has been amended in various ways in Swiss legislation to take into account the potential of distributed ledger technology (DLT). In particular, the DLT Law introduces DLT rights as digital alternatives to digital securities as a new asset class. DLT rights should be transferable only via the blockchain. In addition, Swiss law introduces a new category of trading platform licenses for trading DLT rights in them. In addition, additional rights have been introduced to separate crypto assets owned by third parties (e.g. wallet providers) in the event of the insolvency of the third party.

The Swiss Financial Market Supervisory Authority (FINMA) has repeatedly stated that it will not distinguish between different technologies used for the same activity: in other words, it will apply the principle of "same business, same rules" to any new technology. FINMA currently follows this principle when applying Swiss financial market law based on blockchain crypto assets and applications, and will also apply it to DLT law in the future.

Standard classification of tokens

On February 16, 2018, FINMA published the Guidance on the Application of Swiss Financial Markets Law in its Guidelines on Initial Coin Offerings (ICO Guidelines). 3 In the ICO Guidelines, FINMA explains how cryptocurrencies and other coins or tokens (and cryptocurrencies, tokens) or other assets registered in a distributed registry should be classified under Swiss law.

According to the ICO Manual, FINMA defines the following label categories:

1. Payment of tokens or cryptocurrencies is only a means of payment and does not entail any claim against the issuer;

2. a service token that grants access or permission to a digital application or service if the application or service is already operational at the time the token is sold;

3. An asset token that constitutes an asset, such as a debt or equity claim, or a claim on principal, against the issuer or a third party.

FINMA also explains that tokens can also have a hybrid form, containing elements of more than one category. These hybrid tokens must jointly comply with the regulatory requirements applicable to each relevant token category. FINMA recognizes that token classifications may change over time. The issuance of tokens is important for assessing the regulatory impact of an ICO. However, the initial classification may change after the ICO. For any trading activity of tokens on the secondary market, its classification in the context of the relevant trading activity needs to be considered.

Furthermore, in its ICO Guidelines dated September 11, 2019, the Financial Authority published an opinion on the regulatory classification of stablecoins, i.e. primarily asset-backed tokens. Under Swiss law, tokens are not considered a separate token type, they are generally classified as asset tokens or a hybrid of payment tokens and asset tokens, depending on the rights assigned to the stablecoin.

Payment tokens are not considered legal tender or other means of payment under Swiss law. However, the Swiss Federal Council explains that payment tokens can be used as a private means of payment if the parties to the transaction agree that the payment token will be used as an applicable means of payment for such transaction. In addition, the issuance of payment tokens is subject to Swiss anti-money laundering rules (Section V).

Inquiries to the Swiss Financial Market Supervisory Authority

Despite the MAS recommendations, given that the field is nascent, the structure of the token proposals is constantly changing in terms of their application to real projects, and comfort is usually ensured by sending a request for confirmation from the MAS to the regulatory body for exemptions.

FINMA recommends such “no action” requests to confirm the interpretation of the regulations.

Securities and Investment Law

Swiss securities law applies to the issuance of asset tokens or any hybrid form of tokens, including functionalities of asset tokens (e.g. stable tokens or service tokens using an underdeveloped platform).

However, payment tokens and service tokens that do not have claims on the issuer or third party are not subject to Swiss securities law as they do not represent any rights. Such payment tokens and service tokens should now be classified as intangible digital assets.

Issuance of tokens representing rights against the issuer or third party

The DLT Act introduces DLT rights (DLT rights) as a new asset class. The Swiss Code of Obligations (CO) applies to tokens of assets or services, representing any claim against the issuer or a third party. DLT rights are designed as the digital equivalent of documentary or non-documentary securities, implemented by binding the rights to tokens instead of certified securities instruments or registration in a non-documentary securities registry. DLT rights cannot be exercised or transferred outside the corresponding distributed registry. In terms of the scope of DLT rights, any right that can be issued as a documentary or non-documentary security can be issued as a DLT right. Therefore, they can be used to make interchangeable contractual claims (e.g. debt obligations). However, ownership or actual control of cryptocurrencies or assets cannot be formalized as DLT rights.

Under the Distributed Registry Act, to grant rights to a distributed registry, the relevant rights need to be registered in the distributed registry pursuant to an agreement between the issuer and the first holder, and it is agreed that these rights can only be transferred and exercised in the corresponding distributed registry. It is also recommended that the parties clearly declare their intention to establish the DLT Law within the framework of DLT rights and Swiss law will apply. In the absence of such a choice of law, the Swiss International Code of Private Law, as modified by the DLT Act, provides that the law of the issuer's place of incorporation or residence applies, subject to special rules related to property rights.

Furthermore, the DLT Law specifies certain characteristics that a distributed registry must comply with. Such a distributed registry should grant the right to dispose of DLT rights only to the owner of the DLT rights (and not to the debtor), protect its integrity through appropriate technical and organizational measures against unauthorized access and modification; register or make available through the distributed registry the terms of transactions and the corresponding distributed registry rights, and ensure that the records of the distributed registry are accessible to the public. However, the DLT Law does not specify any technical requirements, such as the minimum number of registrants or the consensus mechanism to be used.

Finally, DLT rights can serve as a basis for the creation of unrecorded securities under the Swiss Federal Securities Intermediaries Act (FISA) by transferring their rights to a custodian within the meaning of FISA, whereby the custodian records the DLT rights in one or more securities accounts. Only DLT rights held as unrecorded securities can be transferred under FISA. The custodian must block DLT rights only if they are held as unrecorded securities.

Token Transfer Requirements

Under Swiss law, payment tokens and service tokens, which do not impose any claims on the issuer or third parties, can be legally created and transferred according to the terms of the respective distributed register. Therefore, the transfer can actually be achieved through a transaction between two wallets.

On the other hand, asset tokens or service tokens issued as DLT rights, representing any claim against the issuer or third parties, can only be transferred according to the rules of the respective distributed registry. Without considering how the relevant rights that are not specifically digitally represented in the DLT Act are transferred, the DLT Act has clearly stipulated the finality rules of such transfers, even if the transmitting party is bankrupt. If DLT rights holders purchase DLT rights from unauthorized sellers, they will also enjoy fair protection, just like holders of paper security certificates.

Tokens classified as securities

Under section 2(b) of the FMSA, a security is a certified or uncertified security, derivative security, intermediate security or DLT right that is standardised and suitable for large-scale trading. Under section 2(1) of the FMSA, “standardised and suitable for large-scale trading” means instruments that are marketed to the public with the same structure and denomination or sold to 20 or more clients on the same terms and conditions.

FINMA explains in the ICO Manual how these rules should be applied to tokens as follows:

1. Payment tokens are not considered securities because they are intended to be used as a means of payment under FINMA. Payment tokens cannot be defined as securities because they do not represent any rights that can be exercised against the issuer or third parties.

2. Utility tokens can be considered securities if the platform on which they can be used is not yet ready for operation during the token sale or if the tokens represent rights that can be applied to the issuer or third parties. These service tokens are believed to have an investment purpose. FINMA also explains that a case-by-case analysis is needed to determine whether a service token can be used for its own purposes. In particular, it points out that test concepts or test versions of platforms or applications, where the utility cannot (yet) be used, are not sufficient to exceed the definition of securities for the purposes of the FMIA. However, the qualifications based on the token may change over time,

3. Asset tokens are considered securities if they are sold publicly or by 20 or more persons.

FINMA states that any legally secured rights of investors to receive or purchase tokens in the future, such as simple future token agreements, are considered securities if these rights have been offered by more than 20 persons in a public manner and on the same terms. On the other hand, pre-sale rights are not considered securities if the terms used in the pre-sale transaction are not standardized or different terms are used for each investor: for example, by changing the number of rights, the price or any blocking position.

1. Where the liability is a debt security that is a standardized product suitable for large-scale trading or a non-instrumental right with similar functions, and the creditor provides disclosure at the time of issuance (for example, in a prospectus or private placement memorandum) that includes the minimum disclosures described in section 5(3)(b) of the BDM, the obligation is not considered a deposit; and

2. In the event of liabilities arising from client funds deposited in settlement accounts of securities firms, asset management companies or similar financial intermediaries, provided that these funds are used to settle transactions with clients, do not pay interest and – with the exception of the Company’s securities accounts – are settled within 60 days at the latest.

Furthermore, Swiss law provides for an exemption for the sandbox under Article 6(2) of the BORO. Under this exception, it is permitted to accept deposits of up to CHF 1 million from the public (i.e. from more than 20 persons) without a banking licence, provided that the deposits do not generate interest income and that, before accepting the deposits, the investor has been informed that the receiving natural or legal person is not regulated by the Swiss Financial Market Supervisory Authority and that the investment is not protected by any deposit protection scheme.

In addition, organizations that accept deposits from the public up to CHF 100 million, provided that these deposits are not reinvested or generate interest, can apply for a "light" banking license. Certain exceptions apply to a light banking license compared to a full banking license with regard to organizational, risk management, compliance, regulatory auditor qualifications and capitalization requirements. Light banking licenses are effective from January 1, 2019. This may be an interesting option for organizations working in the crypto space that intend to accept deposit amounts from the public below CHF 100 million.

When providing a token storage service, a question arises: under what circumstances does a banking license or a banking licence need to operate? If the provider does not store payment tokens on an individual basis (e.g., on the individual public address of each customer), but rather stores them on a complex customer account (e.g., on the public address of several customers), a banking license or a banking licence is required for such storage activities on a common customer account.

In the case of token brokerage services, if the service provider accepts fiat currencies or tokens in its own accounts, or provides public keys for such services, the activity may be subject to the restrictions of a banking license. In this case, the service provider will have to rely on the above exemption. However, this exception does not apply to cryptocurrency dealers who engage in activities comparable to currency dealers (even if their customers face the same risk of insolvency as currency dealers).

Prospectus Requirements

Regardless of whether tokens are classified as securities or not, in relation to any tokens representing digital rights that may be exercisable against the issuer, a question arises as to whether the tokens are subject to prospectus requirements under the Swiss Financial Services Act (FinSA). Under the FinSA, prospectus requirements generally apply to public offers of all securities, including tokens that qualify as securities (see Section II.iv).

Furthermore, with regard to financial instruments offered to retail investors, FinCA has introduced the obligation to prepare an investor master file as an additional disclosure document, similar to that currently applied to retail and insurance investment products packaged in the EU under the Regulation. This new obligation also applies to certain types of tokens that qualify as financial instruments (e.g. asset tokens with structured products or derivative economies).

Regulatory Implications of Classifying Tokens as Securities

If they are classified as securities, they are subject to the FinSA regulatory framework and the Financial Institutions Act (FinIA). Under this regulatory framework, a securities firm license is required for any token brokering activities performed on behalf of clients (other than institutional clients) and for any market creation activities for such tokens. In addition, a securities firm or bank securities license is required for activities such as underwriting such tokens that are performed in accordance with professional standards and for issuing tokens that qualify as derivatives. Each activity gives rise to licensing requirements when performed on a professional basis.

Additionally, the classification of tokens as securities also impacts the FMIA’s licensing requirements for any secondary trading platforms that can sell such tokens.

Collective investment law

In any investment in tokens through a collective investment scheme or fund and in tokens issued to represent units in a collective investment scheme, the provisions of the Swiss Collective Investment Schemes Act (CISA) and its implementing regulations must be taken into account. For the purposes of CISA, a collective investment scheme is a pool of assets that attracts investors with the purpose of collectively managing assets on behalf of the investors. CISA regulations apply to the legal form of the chosen collective investment scheme or fund.

Therefore, the issuance of tokens and any business activities related to tokens (regardless of their classification) where assets from clients are pooled (i.e. investments are not allocated to each investor) pursuant to such activities, or when clients’ assets are managed by third parties on behalf of those clients, may be subject to CISA and FinIA requirements and should be analysed from the perspective of Swiss collective investment scheme supervision.

Commercial enterprises are generally not subject to CASA. However, the distinction between a business and a collective investment scheme can only be made on a case-by-case basis.

Banking and money transfers

Under the Swiss Banking Act (ABS), a banking licence is required if the primarily financial company accepts deposits from the general public (i.e. more than 20 persons) or publicly advertises these activities. Under the Swiss Banking Regulation (CFA), any undertaking is generally regarded as engaging in deposit-taking activities unless one of the exceptions listed in Articles 5(2) and (3) of the CFO applies.

In the context of token sales, the most important exceptions are:

1. The obligation is not considered a deposit if the obligation is a debt security or a non-documented right with similar functions that is a standardized product suitable for large-scale trading and disclosure is provided to creditors (for example, in a prospectus or private placement prospectus at the time of issuance) including the minimum disclosures described in section 5(3)(b) of the BDM; and

2. With regard to liabilities arising from clients' funds, settlement accounts held by securities firms, asset management companies or similar financial intermediaries do not pay monetary interest as long as these funds are used to settle transactions with clients and - with the exception of securities accounts of the company - are settled within 60 days at the latest.

Furthermore, Swiss law provides for a sandbox exemption under Article 6(2) of the BORO. Under this exception, deposits of up to CHF 1 million may be accepted from the public (i.e. more than 20 persons) without the need for a banking licence, provided that the deposits do not accrue interest and that, before accepting the deposit, the investor is informed that the natural or legal person to whom the deposit is to be made is not regulated by FINMA and that the investment is not protected by any deposit protection scheme.

In addition, organizations that accept deposits from the public of up to CHF 10 million, as long as these deposits are not reinvested or generate interest, can apply for a "light" banking license. Certain exceptions apply to the organization, risk management, compliance, regulatory auditor qualifications and capital requirements compared to a full banking license. Light banking licenses are available from January 1, 2019. This may be an interesting option for organizations working in the cryptocurrency space that intend to accept deposits from the public in amounts below CHF 100 million.

When providing token storage services, a question arises: under what circumstances does a banking license or a banking licence need to operate? If the provider does not store payment tokens on an individual basis (e.g., a separate public address for each customer), but rather stores payment tokens on complex customer accounts (e.g., a common public address for several customers), then a banking license or a banking licence is required for storage activities on such common customer accounts.

In the case of token brokerage services, a banking license may be required if the service provider accepts fiat currencies or tokens in its own accounts or public keys, or provides public keys for such services. In this case, the service provider will have to rely on the above exemption. However, this exception is not available for cryptocurrency dealers who engage in activities comparable to currency dealers (even if their customers face the same risk of insolvency as currency dealers).

The fight against money laundering

Applicable regulations

Under Swiss law, AML regulation consists of the Swiss Anti-Money Laundering Act (AMLA) and the Anti-Money Laundering Act (AMLA). The AML applies to entities such as financial intermediaries. In short, any person who, in addition to regulated entities, accepts, holds or deposits the assets of others or promotes the investment of these assets in a professional manner is classified as a financial intermediary under Article 2(3) of the AMLA. In addition, the Action Plan contains a non-exhaustive list of activities that are considered financial intermediation. In the context of ICOs and tokens, the issuance of means of payment that cannot be used exclusively by the issuer, the provision of services related to monetary payment transactions, and asset transfer and currency exchange services are important financial intermediation activities.

Financial intermediaries within the meaning of the EPA must be affiliated with a self-regulatory organization (SRO) authorized under AML. In addition, financial intermediaries must comply with the obligations under the Anti-Money Laundering Act, including but not limited to the obligation to identify and identify their clients (FCA) with their counterparties and their beneficial owners, and to report to the financial authorities in case of suspected money laundering or financing of terrorism. Swiss Anti-Money Laundering Reporting Office.

In FINMA Guidelines 02/2019 on Blockchain Payments dated 26 August 2019, FINMA states that financial intermediaries supervised by FINMA must comply with traffic rules for blockchain transactions. As they are SROs, other financial intermediaries must also comply with traffic rules for AML purposes. Under the traffic rules, the relevant Swiss financial intermediary must transmit the same information as required for electronic fiat transfers or must (1) identify the recipient in accordance with Swiss UNDER rules as if the recipient were a client of the Swiss financial intermediary and (2) verify the recipient’s right of disposal of the wallet used by it through appropriate technical measures determined by the relevant Swiss financial intermediary.

ICO

Depending on the classification of the tokens issued by the ICO, the issue could be classified as a financial intermediation. FINMA provides clear instructions on this matter in its ICO guidelines, as shown below.

The issuance of payment tokens is classified as the issuance of payment instruments and therefore constitutes financial intermediation under AML law.

Issuance of service tokens, which are some kind of payment functionality, applicable to a specific application or platform (e.g. the ability to pay for services used on such a platform using service tokens). Financial intermediation is an intermediation activity under AML law. However, if the service token does not have any kind of payment functionality or if the payment functionality is exceptionally considered as ancillary to the service token, the issuance of service tokens is not considered as financial intermediation. To take advantage of this exception, it is necessary that the main purpose of the service token is to grant access to non-financial applications, so that the entity providing the payment functionality is also the organization managing the non-financial application, and access to non-financial applications cannot be granted without including the additional payment functionality built into the service token. However, please note that FINMA applies this exception very strictly and in practice any service token with any payment functionality is considered as a financial intermediation under AML law.

The issuance of asset tokens does not qualify as a financial intermediary under AML law, provided that the asset tokens are classified as securities and are not issued by a bank, securities firm or other prudentially regulated entity. However, in practice, issuers of asset tokens are often required to voluntarily undergo some CAC and identification processes due to the need to comply with the requirements of the banks to which the ICO proceeds will be transferred.

The granting of rights to purchase tokens in the future as part of a pre-transaction does not constitute financial intermediation, provided that the issuer is not a bank, securities firm or other subject to prudential supervision. However, the subsequent issue of means of payment under AML law (i.e. payment tokens and, in these exceptional cases, service tokens) does constitute financial intermediation for pre-ICO investors. Therefore, the obligations arising from the AML law come into force at the time of its adoption.

With regard to ICOs subject to AML law, FINMA points out that obligations arising from AML law (e.g. KYC) can be delegated to financial intermediaries in Switzerland that are affiliated with an SRO or supervised by FINMA, provided that any funds from the ICO are received through a financial intermediary: that is, any tokens or fiat currency paid by investors must be transferred to the public key or account of the outsourcing partner before being transferred to the corresponding issuer.

Trading and brokerage services

Exchanging fiat currency for tokens or vice versa, or exchanging two different tokens, is considered financial intermediation under the terms of the AML law.

If a service provider directly provides exchange services (i.e. acts as an exchange partner for its customers), this activity is classified as currency exchange under the AML Act. For these services, if the foreign exchange transaction is associated with a cryptocurrency, the minimum threshold is CHF 1,000, and transactions below this threshold are not subject to identification obligations under the KCS or the AML Act.

If a service provider provides exchange services involving third parties (e.g. a token exchange platform) or if a service provider acts as an intermediary in the provision of services involving the transfer or exchange of tokens or fiat currencies and is involved in the payment process, these services are classified as money and asset transfer services pursuant to Article 4(2); the service provider is considered a financial intermediary for the purposes of the AML Law.

In addition, FINMA pointed out that when providing payment services with entities under its control, the transfer of crypto assets to external wallets (e.g., wallets managed by a third party) is only allowed if the recipient's wallet address belongs to one of its customers. FINMA attributes this practice to the fact that there is currently no method of providing identity information about the sender and receiver of a transaction in the blockchain, similar to traditional bank transfers (e.g., SWIFT).

Hosting Services

If a custodian service provider has the right to handle the private keys of the stored tokens (custodian wallet), it is considered a financial intermediary. In addition, such activity may require a banking license (see Section IV).

Exchange Regulation

Tokens that qualify as securities

In August 2021, the DLT Act introduced a new category of trading platform license, in which DLT rights qualify as securities. Thus, the legislator abandoned the principle of technological neutrality regulation to remove obstacles that prevented the creation of trading platforms in Switzerland to trade trading tokens classified as securities (at least until such DLT securities are structured as non-documentary securities). Under the previous licensing option, trading platforms could not integrate post-trading activities into the trading platform. In addition, settlement and clearing of transactions required a separate central counterparty and central securities depository. With regard to trading in a distributed registry, such transactions are usually carried out simultaneously with the transaction by registering the transaction in a distributed registry, without involving additional intermediaries involved in settlement or clearing. In addition, trading platforms are not allowed to provide direct access to retail customers.

The DLT Act amends the FCIA by introducing a DLT trading system that provides for the multilateral trading of DLT rights or other rights governed by foreign law, which are represented in a distributed registry, and securities that meet at least one of the following requirements (collectively, DLT securities): the trading system allows unregulated legal or natural persons to trade as participants, the operator of the trading system centrally deposits the DLT securities on a distributed registry based on uniform rules, or the trading system operator conducts subsequent transactions (such as settlement and clearing) in the DLT securities under uniform rules and procedures.

Furthermore, the DLT Act allows firms regulated as securities firms or banks to manage organized trading mechanisms for trading DLT rights.

Other Tokens

Regarding the regulation of exchanges of payment tokens and service tokens that do not fall into the category of securities, under Swiss law, the operation of such businesses does not require a license, except to ensure compliance with Swiss AML requirements (Section V). However, since these transactions usually involve the acceptance of fiat currency or such tokens into an account or public key of the exchange operator, this may trigger the requirement for a banking license as a form of acceptance, i.e., deposits from the public (Section IV).

As with brokerage services, exchanges can benefit from the settlement account exemption if customer funds are used only for exchange transactions and are only accepted into their own accounts or public keys; no interest is paid and they are transferred within 60 days. In addition, this exemption only applies if the customer is not subject to a similar bankruptcy risk as a currency dealer (Section IV).

Furthermore, exchanges can benefit from the sandbox exemption under Article 6(2) of the SBO if the value of fiat currencies and tokens accepted from exchange participants does not exceed CHF 1 million and participants are informed that the exchange operator is not regulated or supervised and does not have any deposit protection.

In any case, the token exchange operation is a money and asset transfer service pursuant to Section 4 (2) of the AML Act. Therefore, the exchange operator is a financial intermediary and must join the SRO or obtain a license from FINMA Financial Intermediaries.

Regulation of virtual currency mining

In an infinite decentralized network, such as the Ethereum or Bitcoin blockchain, extracting the native token of the corresponding distributed register (usually a payment token) plays an important role in recording transactions in the distributed register, due to the lack of a central authority that controls transactions. In order to ensure the security of financial transactions and to ensure that there is no fraud, miners (or cryptominers) must verify transactions and add them to the distributed register.

The work of miners is open to the entire ecosystem of the distributed registry: everyone has the possibility to participate in this network to mine tokens. For each block of transactions, miners use a mathematical protocol to verify the transactions and validate them before distributing the results on the distributed network. This process creates a virtual currency, as miners are rewarded with new virtual currency for their mining activities.

Overview of Swiss Cryptocurrency Regulation

Regulatory framework

Currently, there is no special legislation regulating the status of miners in Switzerland. Under Swiss law, token mining (self-issuance of tokens) does not require a license, provided that the miner does not carry out any regulated activities, which are described in Sections II-V.

Tokens that qualify as securities as standalone offerings generally do not require a license as a securities firm under the FinIA. This conclusion is also true in the following cases, even if the tokens are considered derivatives, as long as these derivatives are not offered to the public in a professional manner.

FINMA audit and enforcement proceedings related to mining

FINMA tends to have a positive attitude towards blockchain technology, but closely monitors all market participants to ensure that Swiss blockchain networks remain fraud-free, especially in the context of ICOs. It often emphasizes the risks associated with investors and promises to take action against ICO business models that violate or circumvent regulatory laws.

For example, in July 2018, FINMA initiated legal proceedings against Swiss mining company Envion AG for violations of Swiss financial regulations with its ICO. This led FINMA to conclude that the company collected deposits without a banking license and ordered the company to be liquidated due to insolvency.

Since the regulatory status of token mining activities may raise several questions, it is always advisable to send a letter to FINMA regarding unacceptability, e.g. in relation to a specific mining activity, in order to ensure that the proposed activity complies with all regulatory requirements (Section II.IV).

Issuer regulations

Regarding the legal and organizational form of token issuers, two types of forms are usually used: foundation and joint-stock company.

A fund ensures full independence and control of the fund's board of directors, since there are no shareholders. However, its assets must be used in accordance with the fund's purpose as stated in the fund. Therefore, profit distribution is limited to this purpose and it is not possible to distribute profits to the founders. Moreover, each fund is additionally subject to state control. Please note that some tax exemptions are usually granted to funds or joint stock companies pursuing governmental and non-commercial purposes. However, the conditions for such exemptions are very strict and usually do not meet the requirements of ICO organizations.

In the context of ICOs, the Swiss legal form of a fund is in most cases not suitable, as long as a commercial purpose exists at least to some extent and the issuer does not pursue non-commercial purposes. . Since its rigid structure does not usually provide the flexibility that is usually required, in particular since the founders do not have any property rights or other control over the assets or funds of the fund and have no legal means to influence the conduct of the fund's activities. Instead, a joint stock company is a more appropriate corporate form for ICO issuers.

ICO issuers registered as a stock corporation must deposit CHF 50,000 (minimum authorized capital is CHF 100,000) with a Swiss bank. After registration, there are no restrictions on where the account can be managed. Issuers can also open accounts in foreign banks.

Issuers must comply with the regulatory requirements applicable to issuers, which are specified in Sections II to VI.

Depending on the classification of the tokens issued, the token issuer may be subject to the AML Law if the issuer carries out financial intermediation activities (see Section V.II). In terms of ICOs and tokens, the issuance of payment instruments, which cannot be used exclusively with the issuer, the provision of services involving money and asset transfer services or money exchange services, for example, are all financial intermediaries (Section V).

sponsor

While no activities fall within the scope of regulated activities described in Sections II-VI, token sponsorship activities in Switzerland, including the marketing, advertising and promotion of tokens, are currently not subject to a license.

However, this is due to the following reasons:

1. Under the licensing requirements of the SBA or FinIA: if the sponsored company has foreign regulatory status as a bank or securities firm under foreign law because it carries out banking or securities transactions under Swiss law or it uses the terms “bank” or “securities firm” in its company name, then any marketing activities carried out in or from Switzerland for that foreign bank or broker – provided that such activities are carried out by Swiss professional and permanent employees – may bring the activities of the foreign bank or broker within the scope of the licensing requirements of a FINMA branch or representative office; or

2. Offering statement requirements: If the tokens are to be considered for a public offering that qualifies as securities under FinSA, or under CO, only before December 1, 2020.

Cryptocurrency taxation in Switzerland

In August 2019, the Swiss Federal Tax Administration (FTA) published a working paper on the tax regime for cryptocurrencies and ICOs for wealth tax, personal income tax and corporate income tax, as well as tax withholding and stamp duty purposes. The practices described in this working paper are described below. However, it should be noted that this is only a brief review and that not all tax issues related to cryptocurrencies or ICOs have been considered and given a final answer. Therefore, the tax administration practices described below are subject to development and change. Therefore, it is strongly recommended to obtain a prior tax decision from the tax authority responsible for tax administration before conducting an ICO.

Furthermore, the following explanation is limited to the tax consequences for issuers registered in Switzerland who have issued coins or tokens with monetary rights in the form of asset tokens and utilities against any counterparty.

Finally, the tax treatment of tokens at the investor level and the tax regime for cryptocurrencies in the form of purely digital payments (native tokens or payment tokens) are not considered.

Taxation of Tokens

Asset tokens are rights between investors and issuers, consisting of a fixed compensation for the issuer's business or a certain, pre-determined investor equity stake in the value of control, such as earnings up to interest and taxes (EBIT). Therefore, the tax classification of asset tokens depends largely on the civil structure of the legal relationship.

So far, asset tokens have been divided into the following three subcategories for tax purposes:

For the issuer, the tax treatment of these three types of asset tokens is described below, provided that the issuer is a company registered and has tax residence in Switzerland.

Debt tokens are considered bonds for tax purposes and are therefore treated as follows:

Equity tokens are considered derivative financial instruments for tax purposes and are therefore treated as follows:

Corporate income tax: Funds raised through the issuance of equity tokens are classified as taxable income and reported as revenue in the issuer's income statement. If the issuer has assumed a contractual obligation to implement a specific project, then the reserves can be recognized as an expense, thereby reducing taxable income accordingly. Reserves that are no longer required after the completion of the project should be included in the income statement. Payments made to investors based on their rights to a certain share of the profits or the liquidation results (or both) are generally treated as tax-deductible expenses. However, this means that investors are aware at the time of payment that the issuer holders do not own more than 50% of the equity of the issued tokens and that the payment to the token holders does not exceed 50% of the EBIT. If these conditions are not met, then a tax-deductible profit distribution will occur.

Withholding Taxes: Equity tokens or their payments are not subject to withholding taxes; however, if the issuer’s shareholders own more than 50% of the issued tokens and payments to token holders exceed 50% of EBIT, FTA assumes, as described above, a hidden distribution of profits, which is taxable. FTA also reserves the right to levy withholding taxes in any case of tax evasion.

Stamp Duty: The issuance of tokens is not subject to stamp duty, as tokens are not participation rights within the meaning of stamp duty law. In the case of equity tokens purchased by shareholders of the issuer, the question arises whether the payment is taxable. This depends on whether the purchase price is appropriate for the purpose of promotion. If there is such a record, no tax will be levied, but if there is no record, a 1% tax will be levied. Derivative financial instruments are generally not taxed under stamp duty law, so secondary market transactions are not subject to transfer tax.

Participation tokens are also considered derivative financial instruments for tax purposes and therefore receive the same tax treatment as equity tokens for tax purposes. They are treated in accordance with the above clarification on the taxation of equity tokens.

Taxation of Service Tokens

For the purpose of tax analysis, it is assumed that the issuer commits to use the proceeds from the sale of service tokens exclusively for the development of a digital service and to provide investors with access to or the right to use that service. The issuer has no additional obligations towards the investors. Utility tokens should essentially be classified as a contractual relationship between the issuer and the investor. The obligation is that the issuer should act in accordance with the contractual agreement between it and the investor. Therefore, for tax purposes, service tokens are treated as follows:

1. Corporate Income Tax: Funds raised through the issuance of utility tokens are classified as taxable income and recorded as revenue in the issuer's income report. If the issuer has assumed a contractual obligation to implement a specific project, then the reserves can be recognized as an expense, thereby reducing taxable income accordingly. Reserves that are no longer required after the completion of the project should be included in the income statement.

2. Withholding taxes: Rights related to a contractual relationship are not subject to withholding taxes. Thus, the right to use digital services will not be taxed at source.

3. Stamp Duty: The issuance of tokens is not subject to stamp duty as they are not participating rights within the meaning of the Stamp Duty Act. In the case of utility tokens purchased by shareholders of the issuer, the question arises whether the payment is taxable. This depends on whether the purchase price is properly used for the services provided by the tokens. If there is such a record, no tax will be levied, but if there is no record, a 1% tax will be levied. Utility tokens do not qualify as taxable securities under the Stamp Duty Act and therefore are not subject to both issuance and trading on the secondary market.

MiSA

The DLT Act removes some of the most important obstacles in Swiss law and establishes a solid legal framework for the development of primary and secondary markets for digital assets and for the issuance and trading of rights represented in tokens. In the future, new aspects to be included in DLT law in practice need to be considered. However, with regard to cross-border issues, the impact of the new legislation may in the future be limited by new legislation currently in force in other relevant markets, such as the proposal for the Markets in Crypto-Assets Regulation (MiCA) published by the European Commission on September 24, 2020, which may impose additional requirements on the distribution of tokens issued in Switzerland within the European Union.

Our firm’s lawyers are always happy to answer all your questions regarding obtaining a cryptocurrency license in Switzerland and accompany your company throughout the entire licensing process.

Setting up a Crypto Company in Switzerland

Switzerland is considered one of the most attractive jurisdictions for starting a cryptocurrency business due to the government’s positive attitude towards this groundbreaking industry, allowing crypto companies to innovate in a stable yet dynamic environment.

If you are looking to open a company in the world-renowned Crypto Valley or other reputable Swiss regions, one of the key aspects to be aware of is the requirement for a crypto license, which must be obtained before starting a crypto business in Switzerland if your crypto activities fall into one of the regulated categories. These licenses are issued by the Swiss Financial Market Supervisory Authority (FINMA), and their main goal is to ensure compliance with AML/CFT regulations.

The nature of crypto activities determines the administrative requirements for each company, as well as the involvement of regulators, so it is crucial to clearly define the scope of crypto operations before initiating the company formation process.

As you become the proud founder of a Swiss crypto company, remember to seek support from influential organizations such as the Crypto Valley Association, which aims to build a world-leading blockchain and crypto ecosystem by promoting cooperation among market participants and authorities.

Business Entity Type

In Switzerland, all companies are established under the provisions of the Swiss Commercial Code. The following types of shareholding companies can qualify for a crypto license: a limited liability company (GmbH), an unlimited partnership (KmAG) or a joint stock company (AG). You can choose the type of company that best suits your business model and size. Depending on the legal business structure you choose and the quality of your documents, the incorporation process can take up to four months.

Any of these companies can be established by a legal entity or by an individual shareholder who is legally resident in Switzerland, who does not have to be a Swiss citizen but must hold a B permit in order to engage in economic activity or employment in the country.

Initial share capital requirements are determined by the type of legal business structure and the type of crypto license (if you are applying for multiple licenses). For example, a fintech license applicant must transfer the full amount of CHF 300,000 (approximately EUR 289,000) into the initial share capital account.

Whichever equity company you choose, keep in mind the following general aspects:

• Although the availability of a company name should be checked prior to registration, no reservations are allowed; the name must be unique and authentic and must also contain the abbreviation of the company's legal structure (AG, SA, KmAG or GmbH)

• A notarial deed of incorporation must be signed by a notary public

• Depending on the complexity of the business and cantonal fees, company registration costs can amount to several thousand Swiss francs, including notary fees.

• Shareholders and board members must be qualified (fit and proper to perform senior management functions, including making prudent and effective decisions)

• Hiring local employees is mandatory

• Appointment of a Swiss corporate lawyer is mandatory

• It is essential to design and implement internal AML/CFT and other risk management policies that are appropriate to the specific circumstances of the proposed economic activity and the scale of the business.

• Allows to have operating company bank accounts in foreign banks

• Must have a registered office in Switzerland which carries out business activities and employs local employees (alternatively, you can seek domicile with another company or individual)

Required files:

• Detailed review of business plans and company commercial activities

• Founder’s ID

• Residence permit

• A copy of the rental agreement proving the registered office in Switzerland

• Articles of Association

• Articles of Association

• Stampa statement certifying that there are no assets or property to be recovered other than those listed in the Articles of Incorporation

• Lex Friedrich statement, which is a permission granted to foreign citizens to buy real estate in Switzerland

Limited Liability Company (GmbH)

The minimum share capital is CHF 20,000 (approximately EUR 19,668), which must be transferred to a recently opened Swiss bank account or deposited in assets such as cryptocurrencies.

Key features of a GmbH:

• For small and medium-sized enterprises

• At least one founder (natural or legal person)

• Unlimited number of shareholders

• Exclusively responsible for debts, although the articles of incorporation may provide for an obligation to pay additional capital

• Taxing profits at the corporate level

• Shareholders are taxed on dividends distributed

• Management is delegated to all partners

• Annual audit reports are mandatory (except for small companies)

The articles of association of a limited liability company (GmbH) shall include the following:

• Unique and compatible company name

• Registered office address in Switzerland

• Clearly defined business objectives and core activities to be implemented

• Specified equity and contribution amounts (in the form of cash, in-kind or external debt)

• Specific methods used to inform stakeholders

Unlimited Partnership Company (KmAG)

This business type is the least common among crypto entrepreneurs. However, it is often used when a business with unlimited liability (such as a sole proprietorship or general partnership) needs to access more capital.

Main features of KmAG:

• No minimum capital requirement

• Capital by shares

• At least two partners, at least one of whom is a natural person and shall have unlimited liability, making him a general partner

• A legal person can become a partner in a limited liability partnership, making it a limited liability partner (liability is limited to a certain amount registered in the commercial register)

• If the limitation of liability is not entered in the commercial register, the partner is liable without any limitation unless he can prove that the third party was aware of the limited liability.

• Limited partners have limited rights and liabilities (i.e. they cannot be held responsible for the overall management of the company)

The articles of association of a KmAG should contain the following information:

• Unique and compatible company name

• Registered office address in Switzerland

• Clearly defined business objectives and core activities to be implemented

• Specified equity and contribution amounts (in the form of cash, in-kind or external debt)

• Details of shares (type, number and par value)

• Rules for the organization of ordinary shareholders' meetings and shareholders' voting rights

• Information on the appointment of company management (board of directors) and audit (statutory auditors)

• Specific Methods of Shareholder Notification or Statement

Stock Corporation (AG)

The minimum share capital is CHF 100,000 (approximately EUR 98,000), with no less than 20% and no less than CHF 50,000 (approximately EUR 49,000), which must be transferred to a Swiss bank account or paid in cryptocurrencies or other assets.

Main features of a joint stock limited company (AG):

• At least one founder (natural or legal person)

• Taxing profits at the corporate level

• Unlimited number of shareholders

• The liability of shareholders is limited to the amount of shares subscribed

• Shareholders are taxed on dividends distributed

• The board of directors is the governing body authorized to represent the company externally.

• The board of directors may decide to delegate day-to-day management responsibilities to a third party by implementing the articles of association

• Annual audit reports are mandatory (except for small companies)

The Articles of Association of a Joint Stock Company (JSC) shall contain the following information:

• Unique and compatible company name

• Clearly defined business objectives and core activities to be implemented

• Registered office address in Switzerland

• Specified equity and contribution amounts (in the form of cash, in-kind, or external debt), including the number and value of shares owned by each shareholder

• Specific methods used to notify shareholders

What needs to be done

In general, setting up a Swiss company requires taking the following steps:

• Register your company name through the EasyGov platform, which will automatically enter your company into the Swiss Trade and Companies Register and assign a unique corporate identification number (UID)

• Make sure the name has not been registered by someone else by checking the Central Index of Business Names

• Open an account in a Swiss bank and transfer the required minimum share capital

• If the capital exceeds CHF 1 million (approximately EUR 983,000), a stamp duty of 1% will be levied on the minimum share capital and can be paid within 30 days from the date of company registration.

• The Swiss Bankers Association has published guidance on opening corporate bank accounts for blockchain companies, which can be accessed here

• Find a notary public who will review the articles of incorporation and other corporate documents and prepare a statement of incorporation after you provide proof of the original share transfer

• Companies with a turnover of more than CHF 100,000 (approximately EUR 98,000) must register with the commercial register of the canton in which they are located.

• The fee is CHF 600 (approximately EUR 590)

• Notarized documents can be submitted by post or online through a dedicated website

• Apply for a cryptography license from FINMA

• Register with the federal and state tax authorities

• Registering employees with the Federal Social Insurance Office and the State Compensation Office (Ausgleichskasse)

• Buy commercial insurance

Once the application has been processed, the Commercial Register will publish the new company's data in the Swiss Commercial Gazette when it is deemed fully registered.

Once you have obtained your cryptography license, you can start conducting cryptographic activities in Switzerland. If there are any future changes in your company, such as new top management, various technical adjustments or updates to key documents, you should inform FINMA, which will allow you to resume your business.

Depending on your business model and the nature of your cryptography-related activities, you may apply for one of the following licenses:

• The fintech or financial intermediary license is the most popular and allows companies to accept government deposits of up to 100 million Swiss francs (about 96 million euros), or store and trade crypto assets that cannot be invested and do not pay interest.

• A banking license allows you to accept an unlimited number of deposits from individuals or legal entities

• An investment fund license allows fund managers to oversee collective fund assets on behalf of clients

• DLT Trading Venue License Allows Multilateral Trading of DLT Securities

Taxation of Crypto Companies in Switzerland

Taxes in Switzerland are collected and administered by the Federal Tax Administration (FSA), cantons and municipalities. Federal tax rates are stable, while cantonal tax rates are determined annually and published on each canton's official website.

All types of companies engaging in crypto activities in Switzerland are generally subject to the following federal, cantonal or municipal taxes:

• Corporate Income Tax (CIT) – 12%-21%

• Capital Gains Tax (WCL) – 0.001%-0.5%

• Value Added Tax (VAT) – 7.7

• Withholding tax (GSP) – 35%

• Social security contributions – 0.5 – 5.3

• Stamp duty – 1%

Switzerland has concluded international agreements on the elimination of double taxation with about 100 countries, allowing taxpayers to protect their taxes in two different countries.

Our team of lawyers, who specialize in providing customized, value-added support, will be happy to support you in submitting crypto license applications and establishing a cryptocurrency company in Switzerland. From the beginning of the process, you will be supported by experts in the fields of company formation, anti-money laundering law, financial accounting and taxation.