Developments in FinTech

Blockchain was prominent in 2018. Questions about the issue of blockchain-based tokens, the primary market, dominated the first half of the year, while FINMA received more questions on the secondary trading of blockchain-based products in the second half-year. FINMA also responded to other FinTech queries.

Questions on initial coin offerings

Switzerland has become a preferred location globally for holding ICOs. An ICO is when investors transfer funds (usually in cryptocurrency form) to the ICO organiser. In return, the investors receive blockchain- based coins or tokens, either created from a new blockchain or a smart contract based on a pre-existing blockchain where they are stored in a decentralised way. There are no specific regulatory requirements for ICOs, however, certain aspects of ICOs do fall under financial-market law. FINMA enables the use of innovative technologies through its interpretation of applicable financial-market law.

At the same time, FINMA makes investors aware of the risks involved in ICOs (see Guidance 04/2017 published on 29 September 2017). Tokens purchased during an ICO can experience high price volatility. Often, ICOs are conducted at an early stage, which results in a number of uncertainties regarding the projects to be funded. FINMA cannot rule out that ICO activities may be fraudulent. FINMA does not tolerate fraudulent or abusive practices or the circumvention of the regulatory framework and it will take action against such conduct where necessary.

As the structure of ICOs varies greatly, the applicable financial-market laws can change in each instance. FINMA defined its minimum information requirements for processing enquiries relating to ICO projects and the principles on which FINMA will respond to them in its guidelines published on 16 February 2018. FINMA organised roundtable discussions in Zug, Geneva and Lugano to present the guidelines to market participants. This created as much transparency as possible regarding the application of the law, enabling interested market participants to organise themselves in a rapid and straightforward manner and resolve most regulatory issues independently. At the request of a market participant, FINMA is prepared to adopt a position vis-à-vis a specific ICO project prior to its inception. FINMA had received a total of 155 detailed queries on the ICO regulatory framework by the end of 2018, most of which were addressed. As set out in its guidelines, FINMA defines three types of tokens: payment, utility and asset tokens:

• Payment tokens (for example cryptocurrencies) are tokens which are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. The issue of payment tokens is subject to AMLA provisions as a rule.
• FINMA defines utility tokens as tokens intended to provide access digitally to an application or service by means of a blockchain-based infrastructure. The issue of utility tokens does not require supervisory approval if the digital access to an application or service is fully functional at the time the tokens are issued.
• Asset tokens represent assets, such as a debt or equity claim on the issuer. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. The self-issue of asset tokens that qualify as securities does not require FINMA approval, but is governed instead by the prospectus requirements of the Code of Obligations (CO).

Hybrid tokens are also possible: a token that simultaneously counts for utility and payment for example.

Wallet services

Tokens or coins are managed and transferred in the blockchain environment using software applications (wallets). These wallets basically serve as a digital facility available to the user to store or transfer cryptoassets. Every transfer has to be signed using the token owner’s private key. There are two types of wallet provider: custody wallet providers and non-custody wallet providers. Custody wallet providers store and manage clients’ private keys and have a direct power of disposal over third-party assets entrusted to them as the holder of the keys and thus provide a payment transaction service. The professional provision of a payment transaction service is governed by the Anti-Money Laundering Act (AMLA). There are also questions of banking law. FINMA’s current position is that no banking licence is required if the virtual currencies are stored separately on the blockchain for each customer, and each deposit can be attributed to an individual customer at all times. Clients of non-custody wallet providers have sole access to their private keys. Non-custody wallet providers thus have neither a legal nor actual power of disposal over the third-party assets. As a result, these providers are not subject to the AMLA as the law currently stands or under international standards.

Trading platforms in the blockchain environment

If a trading platform aims to deal in asset tokens, in addition to payment and utility tokens, the asset tokens probably qualify as securities as defined in the Financial Market Infrastructure Act (FinMIA). Platform securities trading is regulated by the FinMIA. A number of current FinTech projects involve establishing trading platforms enabling securities trading among several users (multilateral trading) without allowing any discretion for the trading venue operator to match supply and demand (non-discretionary trading). According to the FinMIA, trading platforms require a licence to operate as an exchange or multilateral trading system to trade in securities in this way. Under the law, only regulated institutions, but not private persons, may be admitted to participate in an exchange or multilateral trading facility (MTF). Organised trading facilities (OTFs), on the other hand, allow discretionary bilateral or multilateral securities trading. OTFs may be operated by banks or securities dealers and, unlike exchanges and MTFs, may also admit private clients. Supply of and demand for tokens come together on trading platforms, for example in an order book. Centralised trading platforms manage clients’ cryptocurrency assets in their own wallets and have access to their private keys. They often hold client funds in a national currency or cryptocurrency over the long term. The funds taken (legal tender and cryptoassets) may, under certain circumstances, qualify as public deposits, which require a licence under the Banking Act (BA) according to supervisory law. Decentralised trading platforms do not manage wallets for their clients. As a result, they only fall under banking law in certain aspects and only in specific instances, for example through smart contracts with a processing or repayment function. As long as they have power of disposal over the traded assets (for example by being able to release or stop transactions or orders), they are subject to AMLA.

FinTech licence

On 15 June 2018 the Swiss Parliament approved provisions for the promotion of innovation in the BA and created an extra licensing category (FinTech licence) for institutions which accept public deposits of up to CHF 100 million without actually engaging in any lending activities, i.e. without investing or paying interest on the deposits. The FinTech licensing conditions were specified by the Federal Council as part of a partial revision of the Banking Ordinance (BO). In contrast to the FinTech licence, the regulation- free space known as the sandbox has been in effect since August 2017. The sandbox exception allows public deposits of up to CHF 1 million without requiring a banking licence, whereby compliance with AMLA provisions and affiliation to a self-regulatory organisation are required. The aim of the new licence is to facilitate innovative business models. It is therefore in the spirit of this innovative approach for licensing not to be based on a specific type of static business model. The new licence basically applies to all business models that accept public deposits (depending on the structure of the business model, for example payment services provider, depository of cryptocurrencies or crowdlender), which corresponds to the principlebased Swiss regulatory approach. FINMA published guidelines on its website explaining the requirements of the corresponding licensing applications to speed up processing as much as possible.

(From the Annual Report 2018)