This year, the Distributed Ledger Technology (DLT) bill entered into full force in Switzerland, opening up new opportunities and business models by providing legal clarity in areas including ledger-based securities and digital securities exchanges.

The new legal framework entered into force in two phases: on February 1, 2021, amendments enabling the introduction of ledger-based securities represented on a blockchain-based platform became effective, and on August 1, 2021, the remaining provisions, notably regarding DLT trading facilities, took effect.

Since the DLT Act introduces a number of new concepts which can be challenging to grasp, industry trade group the Swiss Blockchain Federation (SBF) has produced two papers delving into the key two concepts introduced in the law, namely ledger-based securities, and DLT trading systems, dissecting their legal definitions and highlighting their requirements.

Ledger-based securities

The DLT Act defines a ledger-based security as a right that is entered in a securities ledger under a registration agreement. Such securities can only be exercised and transferred via a particular securities ledger.

The law leaves the structure and design of the securities ledger open but lays down four requirements for a facility to be characterized as a securities ledger: the use of technological processes to give creditors the power of disposal over their rights; the protection of the integrity of the facility and the corresponding entries; the transparency of rights and functions in the ledger; and a minimum required content of the entries.

And since the ledger represents property rights, it must also satisfy the general public notice requirements

These new ledger-based securities are expected to facilitate the ability of companies to raise capital and issue instruments representing equity or debt by reducing the cost and effort. They are also expected to improve liquidity by making the transfer and secondary trading of securities easier and more accessible.

Trade via a conventional trading platform might look something like this, Swiss DLT law: New regulations bring new opportunities, PwC

DLT Trading Systems: rights and requirements

To support and facilitate the trading of ledger-based securities, a license for so-called DLT Trading Systems was introduced.

DLT Trading Systems are defined as institutions enabling the multilateral trading in DLT securities, or security tokens.

These venues are regulated following the existing rules for traditional trading venues such as stock exchanges and multilateral trading facilities. Requirements include for example being operated by a Swiss entity. DLT Trading Systems must also set up an independent body for supervising trading activities as well as an appeals body.

However, unlike traditional trading venues, licensed DLT Trading Systems are able to admit non-financial institutions as participants, offer central custody services, and/or clear and settle transactions with DLT securities.

This means that regulated DLT Trading Systems are allowed to offer all the services required for trading in one place, avoiding the need to split these operators’ activities across several legal entities.

However, certain financial instruments are not eligible for trading on a DLT Trading System, notably certain derivatives and those deemed to significantly impede the enforcement of anti-money laundering rules.

DLT Trading System license exemptions

To lower market entry barriers, the DLT Act exempts operators of DLT Trading Systems from the licensing requirement in a number of cases.

So-called non-commercial DLT Trading Systems, for example, do not require a license to operate at all.

A DLT Trading System is deemed to be running commercially when it generates gross profits of at least CHF 50,000 per year, if it maintains a business relationship with more than 20 clients or at least one securities dealer, or if it has indefinite power of disposal over third-party DLT securities with a total amount of more than CHF 5 million at any given time.

This exemption is aimed at facilitating the organization of smaller markets. For example, a company that organizes a small trading system for employees, investors and other stakeholders to trade its own shares does not need to hold a license.

So-called small DLT Trading Systems are also provided with certain exemptions, mainly in relation to organizational requirements. Small DLT Trading Systems are those with trading volume and settlement volume which do not exceed CHF 250 million per year, respectively, and which hold less than CHF 100 million worth of DLT securities in custody.

A hotspot for blockchain innovation

The introduction of the Swiss DLT Act comes at a time when jurisdictions around the world are ramping up digital assets and blockchain regulatory efforts.

Liechtenstein’s so-called Blockchain Act came into force on January 1, 2020, introducing a comprehensive legal framework for the blockchain industry that covers cryptocurrencies, utility tokens, payment tokens and digital securities like security tokens.

The European Commission (EC) is also working on regulating the space, publishing in September 2020 a proposal titled the Markets in Crypto-Assets Regulation (MiCA). The proposal is part of a comprehensive Digital Finance Package, which also includes other documents including the DLT Pilot Regime.

Switzerland has one of the world’s most dynamic and developed blockchain ecosystems. Its canton of Zug has earned the nickname of Crypto Valley for the high density of crypto-related and blockchain startups and projects, hosting for example the Ethereum Foundation, the Web3 Foundation (Polkadot), and the Cardano Foundation.

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