Switzerland Introduces Dynamic Framework to Regain Its Crypto Crown
Banking restrictions and lack of a regulatory framework within the crypto space have had a significant impact on the cryptosphere.
As reported by PWC, countries which used to be the top ICO hubs in 2017 — such as Switzerland, USA, China and Russia — have lost momentum to give way to other countries such like Cayman Islands, British Virgin Islands, UK, and Estonia.
Switzerland, the home of the popular “Crypto Valley” — which hosts over 600 blockchain startups — recently introduced a document outlining a proposed legal framework in the hope of regaining traction.
Swiss Banks Fear Decentralized Cryptocurrencies
Those who want to raise capital through the ICO model need the ability to store the funds raised— traditionally contributed in the form of Bitcoin or Ethereum — in a bank.
Unfortunately, due to he need to cover expenses, pay bills and staff in fiat, and to the unwillingness of banks to handle cryptocurrencies, most ICO startups are obliged to find a way to convert the capital to a sovereign currency.
Even in this case, most banks are reluctant to accept funds raised through an ICO due to the lack of guidelines and regulation. An article on SWI (swissinfo.ch) mentions that:
“Banks are currently hesitant to open business accounts for companies with particular touchpoints to ICOs and cryptocurrencies due to risks such as fraud or money laundering…” SWI swissinfo.ch, 2018
As previously discussed, the fear of losing business to offshore rivals — such as Liechtenstein — had pushed the “Swiss Finance Minister along with the central bank and Swiss Bankers Association (SBA)” to join forces in the hope of providing the much needed framework for banks to regain confidence in the industry without being put at risk.
Switzerland see no reason to provide blockchain specific regulation
Moving forward from that comment, Switzerland’s Federal Council recently (14 December, 2018) published a report titled “Legal Foundations for Distributed Ledger Technology and Blockchain in Switzerland”. This report outlines ways by which the Federal Council will support innovation, and emphasizes that:
“Switzerland should not fundamentally call into question its proven and balanced legal framework, but should swiftly make targeted adjustments as needed where there are gaps or obstacles with regard to DLT/blockchain applications.
[further adding that] the Anti-Money Laundering Act is currently sufficiently technology-neutral to also cover activities related to cryptocurrencies and initial coin offerings (ICOs) to a large extent.” — Switzerland Federal Council, Legal Foundations for Distributed Ledger Technology and Blockchain in Switzerland, 2018
The report outlines the “future design of the legal framework” by which Switzerland will support blockchain innovation and companies “through legal certainty, efficient regulation, and a good reputation” while eradicating foul play — “fraudulent or abusive behaviour”. Furthermore, the Federal Council is open to adjustments for projects that provide “higher transparency, resilience, or efficiency”. The report also expresses the positive impact blockchains and other forms of distributed system will have on the economy:
“This development is predicted to have significant potential for innovation and efficiency gains in the financial sector as well as other sectors of the economy. In recent years, a remarkable ecosystem with innovative fintech and blockchain companies has developed in Switzerland, especially in the financial sector.”
Bottom-up Approach
Much like the decentralized mature and direct-democracy approach of the Swiss government, the Federal Council has specified a bottom-up approach — meaning that it is the market and society that should determine “which technology should prevail and to what extent” as opposed to the authorities. Their open-minded approach means that if a project is “technically feasible, offers economic potential” without “excessive risk” then the legal framework should support it.
Technology-neutral Approach
The Swiss authorities have left the framework open for innovation by introducing flexible boundaries — principle-based — so that they do not favor a particular type of technology or implementation. As an example, legal adjustments can be requested if existing laws are geared towards centralized systems instead of digital or decentralized systems. As stated:
“The principle-based approach supports technological neutrality by crafting rules specifying which goal or impact should be achieved, but providing leeway where possible for how to achieve this in detail.”
Moreover, the Swiss authorities will be open to feedback from the industry. In this way the authorities can take an active role in learning about the rapid development of technologies from industry leaders to provide “innovation-friendly framework conditions”.
Fintech Authorization
Fintech authorization — enacted from January 2019 — would give companies the ability to accept “public deposits of up to CHF 100 million [around $101M USD] on a professional basis”.
The deposits can be in the form of fiat currencies or cryptocurrencies and the limit could be increased in “exceptional cases” by The Swiss Financial Market Supervisory Authority (FINMA). If the deposits are held on behalf of a client — purely as safekeeping — then that limit does not apply.
Furthermore, companies with fintech authorization can hold “tokens classified as securities for clients, without needing additional authorisation as security dealers or security firm”.
Treatment of Tokens as Deposits & Under Bank Insolvency Law
This particular aspect of the report discusses company insolvency laws as well the “treatment of tokens and similar assets under bank insolvency” to recognize that tokens such as Bitcoin or Ether are an asset and acceptable as a deposit.
If tokens are held on behalf of a creditor then they should not included as an organisation’s own assets. As mentioned, “such a right to segregation already exists in certain conditions today with respect to the transfer of cash… This must also apply in cases in which it is ensured that tokens held in custody (e.g. Bitcoin) are not included in the custodian’s bankruptcy assets.”
Non-custodial wallets and DEXs
Bitcoin and other cryptocurrencies were by design intended to be used without an intermediary — hence the word decentralization. This means that, as a user, you control your private keys (see an article discussing the importance of this).
Almost all of the issues with stolen funds or hacked exchanges derive from people abdicating their personal responsibility along with the associated freedom and security. Furthermore, the entire crypto system was designed to give users the power to step away from obsessive and intrusive surveillance.
Many prefer to pass that responsibility to third-party operators — referred to as custodial wallets or exchanges (Coinbase, Bitfinex, etc). This creates a centralized point of failure that can be forced to introduce points of control for regulatory requirements. Nevertheless, this has been the preferred method of choice for the majority of people.
Thankfully, Decentralized Exchanges (DEXs) as well as easy to use non-custodial wallets came to return some much needed sanity by allowing people to trade and transfer funds without giving up their private keys (see Samourai Wallet).
With that in mind, we can return to the report:
“The Federal Council is currently refraining from proposing that non-custodian wallet providers be subject to the Anti-Money Laundering Act. In contrast, in order to increase clarity for market participants, the current subjection of decentralised trading platforms to the Anti-Money Laundering Act should be anchored more explicitly in law and the possible subjection of other such platforms should be examined in the light of international developments.”
The report adds that Decentralized exchanges, using smart contracts, are “subject to AMLA [Anti-Money Laundering Act], as they can dispose of third-party assets by confirming, approving or blocking orders” — though if they have no influence apart from joining the buyer and the seller then they “are not subject to the AMLA.”
The report also sheds light on existing limitations of applying AML laws to exchanges by admitting that “in principle, only exchange transactions between fiat currencies and cryptobased assets allow for secure identification of the beneficial owner”.
Overall, we can see the flexibility and open-minded approach of the Swiss Federal Council. They have not limited their laws to specify how a technology, which is yet to show its true potential, should operate.
The new Swiss framework seems by far the most dynamic approach one could hope for from a government, and should give banks the peace of mind they needed to deal with cryptocurrencies whilst ensuring investors are kept safe.
Image from pixabay.
