Swiss crypto regulatory landscape: what works and where do the challenges lie?

Switzerland is regarded as one of the most progressive countries in the crypto space. As early as 2018, former Minister of Economic Affairs Johann Schneider-Ammann dubbed Switzerland a "crypto nation".

Today, the country is among the top 10 startup ecosystems globally and counts 1,290 crypto companies. There are 13 unicorns, ten by token market cap and three by market valuation. Because Switzerland has become a blockchain hub, some of the most talented people within crypto have been working here. For example, back in the days, Vitalik Buterin and his team came to Switzerland to launch Ethereum.

The Swiss blockchain ecosystem has shown remarkable growth and resilience, even during challenging times. It has been committed to upholding this reputation, continually adapting its regulatory framework to support the crypto industry. Regulation provides security for businesses and private persons alike – an important value in a fast moving world.

So, what are the most important points to know about the Swiss regulatory landscape?

First, there is not one distinct crypto regulation framework in Switzerland. Swiss crypto regulation touches financial market laws as well as private laws. The lawmakers have chosen not to enact a new, overarching law but to integrate crypto regulations into the existing legal framework.

There is also no specific supervisory authority for crypto in Switzerland. Anything that involves Swiss financial regulatory laws falls under the jurisdiction of FINMA. The Swiss regulator is quite active, issuing relevant guidelines and holding subject-specific roundtables. They do so to inform the public about their overall approach to crypto. FINMA is also in intensive dialogue with the stakeholders of the crypto industry. Matters related to civil law are handled by the Swiss courts.

Thanks to this approach, there are fewer gray areas regarding how a crypto project needs to operate in Switzerland compared to other jurisdictions.

Pioneering work: The Swiss DLT Act

For practical purposes, the changes to the existing Swiss legal framework are referred to as the Swiss DLT Law. They are technology-neutral but somewhat blockchain-specific. The key components are threefold:

• Introduction of the Fintech license
• Establishment of rules for handling crypto assets in case of bankruptcy
• Measures to facilitate asset tokenization

It has now been almost three years, since the Swiss DLT Act was enacted. What conclusions can we draw so far? 

The success of the introduction of the Fintech license is debatable. There is only a handful companies that have been granted this license by FINMA. The requirements are somewhat demanding, while some argue that companies operating under this license are permitted to manage too few assets. As of now, license still feels like an experiment that needs to be changed with further experience, making it a more competitive type of license in the future.

Having a clear framework regarding the handling of crypto assets in bankruptcy is highly beneficial from a customer protection point of view, providing a clear advantage for Swiss-based entities over other jurisdictions. Thanks to this component, it is crystal clear in Switzerland in what circumstances digital assets are considered segregated, how they are segregated in the event of bankruptcy, and paid out to customers.

The bankruptcy rules are also very important outside the actual bankruptcy scenario, at least indirectly, as they form the basis for the legal classification of more complex business models. For example, the new staking guidelines provided by FINMA are based on these bankruptcy law rules and help derive adequate regulation for a more complex service (such as “custodial staking as a service”).

The third aspect, facilitating asset tokenization, is particularly challenging in any jurisdiction. Although the adoption of tokenized real-world assets (RWAs) may significantly lag behind initial expectations, having a legal framework remains highly advantageous. Unlike probably any other jurisdiction in OECD, there is a clear blueprint to essentially link any type of assets to a blockchain based crypto token.

The official name for these blockchain-based assets is uncertificated register securities or DLT registered securities. They represent digital securities that are suitable for mass trading. Thanks to blockchain technology, no central securities depository is necessary for their transfer. This is clearly a differentiator to incumbent organizations like central depositories for securities.

Several projects to tokenize bonds have already materialized. To date, $1.62 billion in U.S. treasuries have been brought on-chain globally. One of the players to do this out of Switzerland is Backed Finance. Just recently, our partner Bitcoin Suisse announced the completion of its first tokenized bond issuance. This private debt opportunity was made available to qualified investors only and was issued on a public blockchain.

However, beyond bonds and some ETFs, tokenization efforts have shown limited success. A fundamental challenge remains: technology alone does not create market liquidity and hence demand in such assets. This issue also affects various tokenized equity offerings in Switzerland, despite the favorable legal amendments mentioned above.

Several Swiss startups and a few smaller established companies have already tokenized their share (source: tokenmarketcap.ch). However, a liquid secondary market for trading these tokenized equities has yet to develop. Initiatives like those from BX Swiss are underway, but to establish a robust secondary market for tokenized assets, the following criteria must be met:

• Defined and enforced quality standards
• Provision of transparent, reliable market data
• Presence of market makers
• Introduction of a tokenized, i.e., blockchain-based payment method, such as an official stablecoin

Because there is no trading venue that meets all these criteria, the problem of asymmetric information persists. Quality assessment is compromised, and investors must evaluate tokenized offerings based on limited and often biased information. Consequently, investment decisions are driven by subjective opinions and preferences rather than objective market data aggregated in secondary markets. This inefficiency in pricing turns potential capital appreciation into a gamble and in the end reduces liquidity in that market.

These issues are even more pronounced with real estate. Attempts to tokenize real estate ownership have struggled – among others - because the land register remains off-chain. To transfer a real estate token, the trading parties' names must be recorded in this off-chain register, making the process inefficient. Indirect tokenization methods exist as well; however, they are often not worthwhile due to the complex legal engineering required.

Is it all just doom and gloom then? Not at all. While the increasing amount of tokenized asset projects still have to stand the test of time, other aspects of the Swiss regulatory framework, like the rules for handling crypto assets in bankruptcy, have already proven.

Undeniably, through its efforts, Switzerland has created significant regulatory clarity for crypto projects and companies-arguably more than anywhere else in the world. In essence, Switzerland has established a favorable sandbox environment for fintechs where crypto developers and entrepreneurs can safely explore the technical possibilities of blockchain technology, test viable business models, and gauge market demand.

Important stakeholders, such as the regulator but also banks, asset managers, law firms and specialized service companies support this unique ecosystem. Overall, Switzerland has a clear strategy to progressively integrate blockchain technology, striving to make it the backbone of their financial services industry one day. This integration spans from payments to security settlements, interbank operations, and even OTC trading. Of course, this vision relies on support and adoption from other jurisdictions. Nevertheless, Switzerland is determined to be a pioneer in adopting and advancing this technology.