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Switzerland is about to complete the fundamental adaptation of its legal framework to DLT realityOther noteworthy developmentsConclusion
Thursday, 10 December, 2020
The Digital Regulator

Swiss DLT regulatory framework implementation

Abstract

During the past few months, the Swiss Parliament endorsed the Federal Act adapting federal laws to distributed ledger technologies (DLTs). The project began in late 2018, and the Swiss Federal Council (FC) adopted the dispatch on the framework conditions for DLTs in November 2019. The FC initiated the consultation on adapting various ordinances on 19 October 2020. The consultation ends on 2 February 2021, as does the process of fundamental adaptation of the Swiss legal framework to DLTs. At that point, Switzerland will feature the most comprehensive and articulated DLT regulatory framework globally. Realised through the adaptation of existing laws, as opposed to introducing a dedicated Act, this framework would offer entrepreneurs, investors, and consumers the highest regulatory certainty in the blockchain space—a primacy likely to persist for some years.

The month of November 2020 recorded some other noteworthy regulatory developments in the digital space. Switzerland’s FC created a Green Fintech Network, deemed to strengthen the sustainability of fintech initiatives. The Swiss Financial Market Supervisory Authority (FINMA) began consultation on upgrading video identification guidelines to allow for scanning the biometric passport chip. The Financial Action Task Force (FATF) sent a clear message to peer-to-peer (P2P) crypto exchanges, anticipating Anti-Money Laundering (AML) & Combating the Financing of Terrorism (CFT) standards. China’s President asked the G20 nations to support Central Bank Digital Currency (CBDC) initiatives through global standards.

Other noteworthy developments

Switzerland’s FC has created a Green Fintech Network, and the FINMA has begun upgrading its video and online identification requirements. These initiatives reinforce the leadership of the digital nation, Switzerland.

  • The FC decided to complement its fintech initiatives with a sustainability dimension. It has created a Green Fintech NetworkGreen Fintech Networklink1 through its Secretariat for International Finance and endorsed with the mandate to identify areas ‘in which the conditions for green fintech in Switzerland could be improved’. The expectation is that, by spring 2021, the Network will submit an action plan and then assist with the implementation of measures.
  • FINMA pioneered the globally-online video identification in 2016, when it issued a dedicated CircularCircularlink1. The financial regulator now takes stock of technological progress and has opened consultations on a revised Circular. The proposed revisions would enable financial intermediaries to identify clients by scanning the biometric passport chip. The FATF is mulling over AML & CFT standards for P2P crypto exchangesAML & CFT standards for P2P crypto exchangeslink1. The industry should welcome this move.
  • During an event organised by the V20, a group that drives collaboration between government regulators and industry to deliver a coordinated response to standards proposed by the FATF, the Chairwoman of the FATF’s Virtual Asset Contact Group informed that the FATF is working on AML & CFT standards for P2P crypto-exchanges. So far, P2P exchanges have been able to stay unregulated due to their business model, which matches buyers and sellers directly in a decentralised way rather than through a centralised system. Depending on how such standards will be made mandatory, their issuance would play out positively in the mid-to-long term for the industry.

The topic of CBDCs continued to record new initiatives, witnessing broad interest of financial regulatory bodies globally.

  • China’sChina’slink1 President urged the G20 nations to conceive regulations that support CBDCs. The reference is to global standards and principles that would support the issuance and use of central bank digital currencies in a risk-controlled environment.
  • In a working paper entitled ‘Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law ConsiderationsLegal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerationslink1’, the International Monetary Fund concluded that most central bank laws are not compatible with the idea of issuing a retail CBDC and that legislative changes are therefore needed to make the issuance of retail CBDC possible.
  • The European Central Bank (ECB)(ECB)link1 announced that the decision on releasing a digital euro should be taken early next year and that if the decision will be to move forward with the project, strict AML & CFT and data privacy requirements will apply. Such a project would probably take 3–4 years to be completed.
  • The Spanish Central BankSpanish Central Banklink1 analysed the risks, the potential and the possible regulation of stablecoins and concluded that regulators could embed supervisory requirements into stablecoin systems themselves. It speculated that stablecoins could provide more effective solutions to the issues that CBDCs are meant to address.

Several jurisdictions have begun regulatory initiatives aimed to improve crypto finance business conditions, witnessing further steps in the creation of supporting frameworks globally.

Conclusion

The ongoing consultation on the adaptations of several implementing Ordinances in Switzerland is the last step in the process, which began in November 2018, of fundamentally developing the Swiss legal framework to create a supportive and risk-controlled environment for DLT-based products and services. The completion of the process will provide Switzerland with the most comprehensive and articulated DLT regulatory framework globally, realised through the adaptation of current laws as opposed to introducing a dedicated Act.

November 2020 was characterised by several noteworthy regulatory developments in the digital space, including the creation—at the federal level in Switzerland—of a Green Fintech Network aimed to increase sustainability in the fintech space, the start of a consultation by FINMA on upgrading video identification guidelines to account for technological progress, the announcement of AML & CFT standards for P2P crypto exchanges by the FATF, and the call to G20 nations by the President of China to support CBDCs with dedicated global standards.

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Authors


Mattia Rattaggi
External Regulatory Analyst
METI Advisory AG
in
Yves Longchamp
Head of Research
SEBA Bank AG
in
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