Switzerland’s Crypto Playground: Navigating the Regulatory Maze

Key Takeaways

• Switzerland is a global hub for crypto businesses, offering a robust financial infrastructure.
• The Swiss Financial Market Supervisory Authority (FINMA) is the primary regulatory body overseeing the cryptocurrency sector.
• The regulatory framework is technology-neutral and applies existing financial market laws to crypto assets.
• Key regulations include the Anti-Money Laundering Act, Financial Market Infrastructure Act, and Distributed Ledger Technology Act.
• FINMA categorises tokens into payment, utility, and asset tokens, each with different regulatory implications.
• Switzerland requires various licences for crypto businesses, including Banking, FinTech, SRO Membership, DLT Trading Facility, and Portfolio Managers and Trustees licences.
• Switzerland’s regulatory approach offers high legal certainty but has complex licensing requirements.
• The Canton of Zug, known as “Crypto Valley,” provides favourable tax conditions for crypto businesses.
• While stringent, Switzerland’s regulatory environment is stable and respected, though alternative jurisdictions like the UAE offer additional flexibility and support.
• The UAE’s innovative and adaptable regulatory framework may provide more tailored support for businesses than Switzerland’s more established system.

Introduction

As the global financial landscape evolves with the rise of cryptocurrency, Switzerland stands out as a key player. Known for its robust financial infrastructure, Switzerland offers a welcoming environment for digital assets, but this comes with a complex regulatory landscape that businesses must navigate. This article explores Switzerland’s regulatory environment for crypto businesses, focusing on key regulations, licensing requirements, and the Swiss Financial Market Supervisory Authority’s (“FINMA”) role.

Switzerland’s regulatory environment is overseen by FINMA, a federal body responsible for licensing, supervising, and ensuring compliance among financial institutions. FINMA’s role is crucial in maintaining the financial system’s integrity, with its oversight extending to digital asset businesses operating within Switzerland.[1] The regulatory approach here is technology-neutral and principle-based, applying existing financial market laws to the crypto sector, ensuring that businesses in this space adhere to the same standards as traditional financial institutions.

Switzerland’s regulatory framework for cryptocurrency activities is multi-faceted, covering several key laws designed to ensure financial stability, protect investors, and prevent illicit activities such as money laundering.

1. Anti-Money Laundering Act (“AMLA”):[2] The AMLA is central to Switzerland’s regulatory regime, aimed at preventing money laundering and terrorist financing. It applies to financial service providers, including Virtual Asset Service Providers (“VASPs”) and exchanges dealing in virtual assets. Under the AMLA, these entities must implement rigorous due diligence and reporting procedures, ensuring transparency in their operations.
2. Financial Market Infrastructure Act (“FMIA”):[3] The FMIA governs the financial market infrastructure, including stock exchanges and multilateral trading facilities. It sets out the authorisation requirements, regulatory obligations, and self-regulation mechanisms that such entities must adhere to, as regulated by FINMA.
3. Distributed Ledger Technology (“DLT”) Act:[4] The DLT Act is specifically tailored to address the nuances of cryptocurrency and blockchain technology. It establishes a comprehensive framework for crypto licensing, trading, anti-money laundering, and the financial market infrastructure required for cryptocurrency trading. The DLT Act also outlines the procedures for handling bankruptcy involving digital assets.
4. Financial Services Act (“FinSA”) and Financial Institutions Act (“FinIA”): The FinSA and FinIA are complementary regulations that provide a framework for financial service providers. They focus on investor protection, transparency, and the supervision of financial institutions. These acts are particularly relevant for entities dealing in digital assets that qualify as financial instruments.

In Switzerland, there is no specific, standalone regulation governing crypto businesses. Instead, FINMA applies existing financial market regulations to crypto assets based on their economic function. Businesses involved in the crypto sector may require one or more of the following licences:

1. Banking Licence:[5] This licence is necessary for entities accepting public deposits, including crypto-based assets. It is granted to entities accepting deposits from the public up to CHF 100 million, provided they do not invest these assets or pay interest on them.[6]
2. FinTech Licence:[7] Known as a “Banking Licence Light,” the FinTech licence is designed for innovative financial and crypto companies. It allows institutions to accept public deposits up to CHF 100 million, provided these deposits are not invested and no interest is paid on them. This licence is ideal for crypto exchanges, wallet providers, and custodians.[8]
3. Self-Regulatory Organisation (“SRO”) Membership:[9] Financial intermediaries without FINMA’s supervision must obtain an SRO licence. This applies to simple crypto businesses, such as exchanges involved in converting fiat to crypto or entities engaged in initial coin offerings for payment tokens.
4. DLT Trading Facility Licence:[10] Entities that operate multilateral trading facilities for DLT securities require a DLT Trading Facility licence.[11] This licence is critical for crypto exchanges that offer trading and custody services for security tokens.
5. Portfolio Managers and Trustees Licence:[12] FINMA also licenses portfolio managers and trustees through Supervisory Organisations.[13] This licence is necessary for entities involved in managing or safeguarding assets in collective investment schemes, including digital assets.

Switzerland’s regulatory framework also addresses asset tokenisation through the introduction of DLT securities under the DLT Act.[14] These securities allow for the digital representation of rights, claims, and financial instruments on a blockchain. The legal recognition of DLT securities provides a solid foundation for asset tokenisation, making Switzerland a leader in the development of blockchain-based financial products.[15]

FINMA categorises tokens into three main types: payment tokens, utility tokens, and asset tokens.[16] Each type of token is subject to different regulatory requirements:

• Payment Tokens: Regulated under the AMLA, these tokens are intended for use as a means of payment or value transfer.
• Utility Tokens: These tokens provide access to a digital service or application and typically do not trigger specific regulatory requirements.
• Asset Tokens: Treated as securities, asset tokens are subject to FinSA and FMIA regulations, particularly when they involve the issuance or trading of securities.

Switzerland does not have specific tax legislation for crypto assets, meaning general tax principles apply. The taxation of crypto assets depends on the specific characteristics of the tokens and varies across different cantons. The federal corporate income tax is levied at a flat rate of 8.5%,[17] with cantonal rates varying significantly. The Canton of Zug, known as “Crypto Valley,” offers one of the lowest tax rates in the country, making it an attractive location for crypto businesses.

Switzerland’s regulatory environment is more stringent than that of other jurisdictions, but it offers the highest level of reputation and legal certainty. The timeline for obtaining licences is longer, and the cost is higher, but these factors are offset by the stability and credibility that come with operating in Switzerland.

Switzerland’s regulatory landscape for crypto businesses is both comprehensive and complex. While it offers a high level of legal certainty and a robust framework for digital assets, navigating this landscape requires careful planning and a thorough understanding of the relevant laws and regulations. For crypto businesses willing to invest the time and resources, Switzerland presents an unparalleled opportunity to operate within one of the world’s most reputable and stable financial environments.

Switzerland v the UAE – A Comparison

Aspect	Switzerland	UAE	Which Wins?
Regulatory Approach	Traditional and stringent, applying existing financial market laws to crypto assets. High legal certainty but less flexibility.	Innovation-friendly and flexible, with multiple specialised regulators. Proactive and supportive of new business models.	UAE wins for flexibility and supportiveness.
Licensing Process	Longer and more complex, with some licences taking 18-36 months to obtain. Requires significant capital.	Generally faster and more streamlined, with FinTech licences obtainable in 6-9 months. Lower entry barriers.	UAE wins for speed and ease of obtaining licences.
Regulatory Certainty	High, with a stable and well-established legal framework. Less frequent updates but very predictable.	High, but more adaptive with frequent updates to align with industry changes. Regulatory sandboxes available.	Switzerland wins for predictability; UAE wins for adaptability.
Taxation	Corporate income tax ranges from 12% to 20%, depending on the canton. Lower taxes in Zug (Crypto Valley).	No income, capital gains, or withholding tax. Corporate tax capped at 9% and VAT at 5%. More cost-effective overall.	UAE wins for tax efficiency.
Regulatory Support	Formal and less personalised. Businesses must conform to existing regulations with less scope for dialogue with regulators.	Highly personalised support, with close engagement between regulators and businesses. Use of regulatory sandboxes.	UAE wins for personalised support and adaptability.
Market Reputation	Long-established financial hub with a high global reputation. Particularly strong in traditional finance sectors.	Rapidly growing reputation as a leading hub for crypto and digital assets. Strong in innovation sectors.	Switzerland wins for traditional finance.
Licensing Cost and Requirements	High capital requirements and higher costs associated with lengthy licensing processes.	Generally lower capital requirements and costs associated with quicker licensing processes.	UAE wins for lower costs and requirements.
Innovation Ecosystem	Strong, but more aligned with traditional finance. Innovation within existing frameworks.	Highly innovation-driven with specific frameworks for emerging technologies like blockchain and crypto.	UAE wins for fostering innovation.
Legal Framework	Technology-neutral, applying the same laws to digital and traditional assets. This ensures consistency but can limit flexibility.	Specialised laws for different types of digital assets, allowing for more tailored regulation.	Switzerland wins for having a more dependable legal framework.

***

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[1] FINMA grants licences to and supervises almost all types of financial intermediaries, including in the crypto space such as banks, fintech companies, securities firms, insurance companies, collective investment schemes, payment systems, stock exchanges, multilateral trading facilities, central securities depositories, collective asset managers, fund companies.

[2] 955.0 Federal Act of 10 October 1997 on Combating Money Laundering and Terrorist Financing in the Financial Sector (Anti-Money Laundering Act, AMLA), <https://www.fedlex.admin.ch/eli/cc/1998/892_892_892/en>. This is supplemented with the Swiss Anti-Money Laundering Ordinance and FINMA Anti-Money Laundering Ordinance.

[3] Article 2a, 958.1 Federal Act of 19 June 2015 on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (Financial Market Infrastructure Act), <https://www.fedlex.admin.ch/eli/cc/2015/853/en>.

[4] Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, <https://www.newsd.admin.ch/newsd/message/attachments/60601.pdf>.

[5] Banks and Securities Firms Authorisation, FINMA, <https://www.finma.ch/en/authorisation/banks-and-securities-firms/>.

[6] Article 1a, The Swiss Federal Act on Banks and Savings Banks.

[7] FinTech Financial Services Providers, Authorisation, FINMA, <https://www.finma.ch/en/authorisation/fintech/>.

[8] A further requirement is that an institution with a FinTech licence (persons under Article 1b of the Banking Act) must be a company limited by shares, a corporation with unlimited partners or a limited liability company and must have its registered office and conduct its business activities in Switzerland. Guidelines for FinTech licence applications according to Article 1b of the Banking Act, <https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/weg_bewilligungfintech_20230505.pdf?sc_lang=en&hash=4F17B88E957184B11FC72F20CB47EC1A>.

[9] Professional financial intermediaries pursuant to Art. 2 para. 3 of the Anti-Money Laundering Act (AMLA) must join an SRO recognised by FINMA in accordance with Art. 14 para. 1 AMLA.

[10] Licensing as a DLT trading facility, FINMA, <https://www.finma.ch/en/authorisation/fintech/dlt-handelssystem/>.

[11] The DLT-Law introduced a new type of negotiable securities, called “DLT-Securities” that allows for the tokenisation of rights, claims and financial instruments, such as bonds, shares, structured products or derivatives.

[12] Portfolio managers and trustees, FINMA, <https://www.finma.ch/en/authorisation/portfolio-managers-and-trustees/>.

[13] Licenced and authorised by FINMA.

[14] DLT Act, <https://www.newsd.admin.ch/newsd/message/attachments/60601.pdf>.

[15] The DLT-Law introduced a new concept of DLT-Securities under the Swiss Code of Obligations.

[16] Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs) published on 16 February 2018, <https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-ico.pdf?la=en>.

[17] The tax level could also be changed since Corporate Income tax is deductible from taxable income, thereby reducing the taxable income base.