The Financial Technology Law Review Sixth Edition Cryptoassets, NFTs and DAOs: A Swiss Perspective

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A Brief Overview

• Bitcoin, and many other cryptocurrencies, soared to all-time highs in 2021, but dropped to less than a third of their value since April 2022. This caused problems for countries like El Salvador, which declared Bitcoin as an official currency. In early 2022, media attention focused on non-fungible tokens and decentralised finance, and many crypto exchanges started to list at traditional exchanges. There are now well-established investment products focused on cryptocurrencies, DeFi projects or fintech startups. The year 2022 will be remembered for the problems of crypto, the massive layoffs of many fintech companies and the Wirecard scandal. New regulations were thus urgently welcomed by the crypto community.

• The European Union has approved the Markets in Crypto Assets (MiCA) Regulation, which will enter into force in early 2023. The United States is also considering legislation to address the risks that digital assets pose to the financial system.

• The outlook for 2023 is promising with more regulated ecosystems, artificial intelligence becoming more widely adapted, and systems becoming more interconnected. Banks may start to play a bigger role, as ecosystems become more mature and banks more tech-savvy. The authors of this publication are from the most widely respected law firms in their jurisdictions and have a proven record of experience in the field of fintech. They discuss emerging or unsettled issues where appropriate.

• Swiss regulation focuses on governance, responsibility and risk analysis, and on the activity of the licensed entity, rather than the company as a whole.

• Payment tokens are subject to the securities regulation and the public deposit regulation, while utility tokens do not. FINMA must consider the specific details of each case, using an economic approach and relying on the actual features of the ICO. The acceptance of public deposits on a professional basis requires authorisation from FINMA and is typically only allowed for banks holding a full banking licence or a fintech licence. Payment tokens are usually sold by the issuer with no redemption rights. To avoid being classified as a deposit, a payment token should not offer a guarantee of repayment or a right to withdraw funds. The holder of a payment token can only burn the token by using it for payment.

• ICO issuers can outsource their anti-money laundering duties to a third party financial intermediary who is already subject to AMLA in Switzerland, and who can perform the corresponding due diligence on behalf of the issuer.

• Investment tokens can include tokens intended to make physical valuables tradable on the blockchain, similar to a digital securitisation of asset.

• Tokens can be foreign capital tokens, investment-based contractual tokens, or both. The former entail an obligation to reimburse the investment with the possibility of interest. According to FINMA, investment tokens are those that give the holder a property right in the issuer, are standardised and capable of being widely distributed in the market, and are not debt instruments granting a redemption or repayment right towards the issuer.

• The issuance and trading of asset tokens should be subject to stamp duties. A tax opinion is required.

• FINMA considers utility tokens to be non-securities when they only provide a right of access to a digital service, and are only used in this way at the time of issuance. However, utility tokens will be considered as securities if they serve an investment purpose.

• A third party manager may manage the funds accepted within an ICO, in which case the scheme might qualify as a collective investment.

• FINMA reviews crypto projects and provides regulatory clearance. They need detailed information about the project, including the name, promoter's details and involved parties, as well as information on any authorised parties according to regulations in other countries.

• FINMA requests information on the issuing of coins, technical specifications, transfer processes, investor rights, documentation and terms, as well as details about financial intermediaries' due diligence obligations.

• FINMA categorizes non-fungible tokens as securities, but they are difficult to assign to a specific category given their wide range of potential application and variations. To qualify as securities, NFTs must meet four conditions: transferability, transparency, register agreement, and registration.

• NFTs can be considered derivatives under Article 2, letter c FinMIA, but not typically when they include the right to acquire a digital garment for a game-player.

• The tax position on NFTs is currently unknown, but there may be opportunities for minimising tax liability, such as treating an NFT as a piece of furniture to avoid wealth tax in the canton of Geneva.

• In Switzerland, DAOs are currently not explicitly regulated by law, but there are some legal and regulatory frameworks that may apply to DAOs in certain circumstances. Before setting up a DAO, the purpose of the organisation and its goals should be determined, as well as the legal structure of the organisation.