Switzerland is making waves in the world of cryptocurrencies and digital assets. Its “Crypto Valley” in Zug is currently one of the better known centers of this space. Industry participants are concerned about how regulators intend to enforce the new law. In this in-depth feature, we talk to parties from all sides.
Switzerland has emerged from being a secretive international banking center. As it adapted, the European country elevated itself as a fintech powerhouse. That includes becoming one of the world’s hottest places for cryptocurrencies and digital assets.
But ointments can harbor flies.
The European Union recently announced the Cryptoassets Market Regulation (MiCA), so Swiss authorities are aware that they cannot be complacent. And industries such as Zug’s “Crypto Valley” appear to be facing potentially significant regulatory challenges regarding so-called “staking.”
“Staking” refers to depositing a certain amount of cryptocurrency to support proof-of-stake (consensus mechanism) operations.
Swiss financial regulator FINMA has argued that risk factors for digital and traditional banks should be treated equally, and the current requirement that cryptocurrency service providers offering staking services hold a banking license has been lifted. We are considering changes to our practices. FINMA is concerned that assets may not always be available during the staking process, creating a risk of potential failure. Considering some of the high-profile scandals and issues in the crypto world, such as the collapse of the FTX cryptocurrency exchange, regulators want to take note. FINMA intends to interpret the 2021 Swiss law “DLT Law” to mean that banking licenses must be involved in the system. (“DLT” stands for “distributed ledger technology,” also known as blockchain.)
As a general rule, Swiss cryptocurrency service providers are not subject to a license by FINMA, but belong to a self-regulatory organization with anti-money laundering controls.
While in some ways a technical issue for the financial sector, the debate illustrates how financial jurisdictions such as Switzerland are trying to balance risk management, safety and healthy innovation. Similar arguments can be seen regarding AI.
The risk that Swiss law enforcement could force providers out of business is not a trivial issue now that financial hubs are trying to grab a slice of this business. But with memories of the 2008 financial crisis still in the background, and recent episodes such as the FTX scandal and the meltdown of certain “stablecoins”, regulators are careful to avoid problems. (There are also concerns about anti-money laundering and customer understanding of the use of cryptocurrencies and how the sector operates.) The publication has many articles on the Swiss digital asset sector (see here and here) It is written. Banks operating in this sector, such as SEBA Bank. (Click here for the interview.)
problem
Zurich-based lawyer Raphael Züger, who leads LINDEMANN LAW’s digital assets practice, interprets the new practice intended by FINMA as follows:
“At the core of the new approach envisaged by FINMA is the possibility of a temporary blocking of digital assets during the staking process (the so-called lock-up period) and the forfeiture of digital assets in case of false verification (the so-called lock-up period). “slash”) is a possibility. ‘). In FINMA’s view, this characteristic of staking means that digital assets may become unavailable at any time, which is required by Swiss law for the purpose of segregation of digital assets. According to this interpretation, staked digital assets would not qualify as custodial assets, but would qualify as deposits from the public triggering licensing requirements. ”
In Zuger’s view, while the “substantial” risks and potential lock-up periods do pose certain risks for investors, FINMA’s technical interpretation jeopardizes legal certainty and undermines Switzerland’s position in international comparisons. said to limit innovative strength and competitiveness. He warned that the new interpretation could lead to Swiss customers staking their digital assets with foreign cryptocurrency service providers with lower levels of investor protection.
Zuger said FINMA’s proposal does not address any specific issues that have arisen in the market, but rather represents a new general interpretation of staking under Swiss banking law.
FINMA’s position
wealth briefing asked regulators.
“The DLT Law legally articulates a comprehensive risk-based approach. It also provides legal clarity on the use of blockchain solutions for issues such as,” a regulator spokesperson said. “Legal clarity and mitigation of certain risks associated with cryptocurrencies and DLT will strengthen client protection and confidence in these products, and ultimately reduce competition between serious service providers and Swiss fintechs.” It strengthens your power.”
The regulator said the new law distinguishes between different types of crypto asset storage based on a risk-based approach.
“The higher the risk, the more stringent the licensing requirements (banking license, fintech license, AML license). The treatment of DLT law under financial regulation is also consistent with the treatment under bankruptcy law,” the spokesperson said. Stated.
blow to competition
Jesper Johansen, CEO and founder of Northstake, a custodial digital asset services provider that helps financial institutions reduce risk and participate in staking, said competition could be hurt and rival centers such as the EU could benefit. He said that there is a sex.
“We are receiving an increasing number of inquiries from Swiss-based crypto investors who do not have a regulated staking provider within the EU. FINMA has not yet implemented the latest interpretation of the DLT law, but staking service providers We strongly emphasize that banks must maintain a banking license in their jurisdiction and must have access to their assets at all times,” Johansen said in a statement.
“This represents some challenges for banks from a risk management perspective, and it is unlikely that banks will accept it. This will create a capital inefficient system and weaken the digital asset environment in Switzerland. There are also risks. The Swiss Blockchain Federation and the Crypto Valley Association have pushed back, but so far they have been unsuccessful. The implementation schedule has not yet been established,” Johansen continued.
Concerns
“Our current clients based in Switzerland are increasingly expressing concern about the changes in practice made by FINMA. “We continue to work with customers who do business with cryptocurrencies, and this demonstrates the need for investors to factor in regulatory risk when evaluating crypto counterparties,” Johansen continued.
“EU Onshore Regulation VASP” [Virtual Asset Services Providers]Unlike the narrow definition of Swiss law, EU law (MiCA) broadly defines virtual currencies and therefore does not face similar issues. This is not likely to change in the foreseeable future, even with the full enforcement of crypto market regulations in 2024, he added.
asked Dr. Rolf Weber, Zurich-based Blatch lawyer and member of the Swiss Blockchain Federation. wealth briefingIf he thought the way FINMA enforced DLT laws would squeeze the number of providers.
“The DLT Act has several chapters, and only certain parts (such as DLT trading facilities) are relevant to financial markets. Whether a service provider requires a license for its activities depends on the Banking Act or “It depends on the Financial Institutions Act (not the DLT Act). The key question is which virtual currency transactions are bank-like and therefore can only be offered by companies with a banking license,” he said. “The DLT law was implemented with the aim of making the Swiss financial market more attractive for crypto businesses. A good example is the transfer of digital assets from the bankruptcy estate of a service provider. A similar effect We also see the possibility of introducing DLT trading capabilities (so far not licensed, but expected to be available soon).”
“FINMA’s staking approach is extremely restrictive and will jeopardize Switzerland’s attractiveness. In contrast to FINMA, SBF [Swiss Blockchain Federation] “We are of the opinion that most staking services are not bank-like services,” he said.
Although the EU’s MiCA system is not as liberal as the Swiss system, it does offer a different regulatory approach, Dr Weber said.
“The EU is rules-based and Switzerland is also principles-based. While the highly detailed MiCA rules provide a high degree of legal certainty and are partly preferred by financial service providers, the Swiss rules It is more flexible and open to discussions with FINMA,” he said. “Competitive ‘disadvantages’ may arise over time as MiCA does not contain market access rules, meaning that Swiss offerors cannot directly contact EU customers. We cannot, and we need to look for alternative indirect solutions.”
get the balance right
The news service asked how FINMA seeks to balance regulatory risk management with the need for innovative vitality.
“DLT law and the ‘same business, same risks, same rules’ approach (which in some cases, such as in the AML space, can mean ‘higher risks, stricter rules’) are key to legal clarity, “This will promote risk mitigation, customer protection, but also increase customer trust in such products and the competitiveness of serious service providers and Swiss fintechs as a whole,” he added.