How Switzerland’s Flexible Approach to Regulation Fosters Blockchain Innovation

Photo by “NicoElNino” on “iStock”

As the blockchain landscape continues to evolve, different countries are taking vastly different approaches to regulation. For example, China has placed an outright ban on cryptocurrencies and ICOs. In the US, there has long been talk of regulating digital currencies, but as yet no laws have been passed.

Meanwhile, some countries have seized the opportunity to attract investment and innovation by embracing blockchain. Switzerland is one such country, leading the way in establishing a pragmatic approach to regulation which encourages the establishment of blockchain startups in the nation.

The central principle of the Swiss approach has been to avoid issuing specific legislation on blockchain or digital currencies. Instead, the Swiss Financial Market Supervisory Authority (FINMA) uses a set of guidelines to determine if any given token is compliant with existing anti-money laundering (AML) or securities legislation.

The guidelines define three separate categories of digital tokens:

  • Payment tokens
  • Utility tokens
  • Asset tokens

Payment tokens are synonymous with cryptocurrencies such as Bitcoin or Litecoin. Utility tokens are purely for the purposes of accessing a given application or service. Asset tokens represent assets such as a debt or equity claim on the issuing party. The guidelines compare asset tokens to equities, bonds or derivatives in terms of their economic function. Therefore, they are treated as securities under Swiss law.

The guidelines also set out that these categories are not mutually exclusive. If an ICO offers up a utility token for an application or service that doesn’t yet exist, it will be treated as a hybrid utility and asset token. FINMA will assess each token offering on a case-by-case basis, using the guidelines to determine whether or not it should fall under securities legislation.

Unusually Relaxed?

The regulatory approach to tokens is something of a departure from the usual Swiss legal system. Switzerland (and most European countries, in fact) operate a system of civil law, where legislation provides a framework for determining what’s legal or not. However, the Swiss approach to digital tokens is more similar to the US system of common law, which is based on legal precedent.

It seems almost surprising that a country which prides itself on having a highly organized system of rules in other matters would take such a flexible attitude towards blockchain and digital tokens. But it does provide a great deal of flexibility and reflects the overall openness of Switzerland to financial innovation and ease of doing business.

The drawback to this approach is that founders may not know they’re doing anything wrong until FINMA shows up to tell them, by which time they may already have fallen foul of securities laws.

However, help is at hand. The canton of Zug is home to the Crypto Valley Association, an independent, government-supported organization which helps to connect startups and established enterprises. It runs regular networking events, as well as making policy recommendations, and running research programs.

A Thriving Startup Scene

Switzerland’s welcoming attitude to blockchain startups is obviously working. Fintech News reports that by the end of December 2018, there were no less than 750 blockchain companies across Switzerland and Liechtenstein, employing more than 3300 people. The top 50 of these companies accounts for 20% of the total market cap of the global crypto market.

Some of the biggest and best-known names in the business have made their home in Switzerland, including the Ethereum Foundation, mining giant Bitmain, open cloud platform DFinity, and smart contract platform Cardano.

Other developments indicate Switzerland is going out of its way to foster blockchain innovation. Later this year, the country’s principal stock exchange, SIX, will launch its digital asset exchange powered by blockchain. According to Reuters, SIX will launch its own security token offering on the exchange as a way of showcasing the technology.

SIX also listed a multi-cryptocurrency exchange-traded product (ETP) late last year. It’s the first of its kind globally, comprising Bitcoin, XRP, Ether, Litecoin, and Bitcoin Cash. This came at a time when the value of crypto was at its lowest point in the preceding twelve-month period, which demonstrates the level of faith in the long-term potential of the technology. It also came after repeated attempts to obtain regulatory approval for launching a similar product in the US had fallen flat.

Overall, the Swiss environment is proving itself as the ideal environment for incubating blockchain innovation. The regulatory landscape is friendly to startups, founders will be among plenty of like-minded company and support is on hand through organizations like Crypto Valley. For tech entrepreneurs looking for the best place to put down roots, Switzerland is offering some of the most fertile ground in the world. We are based right here in the heart of the Swiss Crypto Valley, and we know very well the advantages that this country offers to your start-up.

THE RELEVANCE HOUSE is a full-service blockchain marketing consulting agency for startups conducting an ICO or STO. The focus is to guide blockchain startups in building, designing and delivering a relevant brand and story. Because only relevance has impact. We look forward to hearing about your project. Contact us, we don’t bite!

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