Switzerland introduces comprehensive regulation of secondary markets for security tokens. Digital Asset Live Editor-in-Chief talked to Martin Liebi, Head Capital Markets, Legal Services, PwC Switzerland, to find out what to expect of the new rules.
Q1: Why in your opinion the Swiss DLT regulations shifts focus from primary to secondary markets?
A1: The shift from the focus of the regulator from the primary market to the secondary market is driven by the need to have reliable, stable, and safe markets for institutional and private investors. It is the normal progression in the maturity process of any market. Markets start out as over the counter markets (OTC) with relatively low volume and high customization. Increasing demand requires the possibility to transact in high volumes on regulated, safe, and reliable secondary markets.
Q2: You mentioned earlier market maturity, what signs of it do you see in DLTs?
A2: We see that the quality of the people involved in the projects and the projects themselves have become better after the hype. More and more senior people from finance and banking and other industries flock into DLT-related start up ventures. This has helped to make a market that is still in its infancy a little bit more mature.
Q3: One of the key features in the new regulations is the introduction of a new form of uncertificated transferable securities called “DLT uncertificated securities”. How will it work, if you were to explain it to an outsider? What legal and economic effects will it have?
A3: The newly to be introduced DLT uncertificated rights in the form of securities will allow a similar transferability, collateralization, and transparency like non-DLT uncertificated securities by means of a simple transfer from one wallet to another. All rights that can be securitized are eligible to be a DLT uncertificated right. Uncertificated rights are securities, i.e. qualify as DLT uncertificated rights, if they are recorded in a distributed electronic ledger based on a contract and can only be invoked through this register and transferred to others.
Such a register must fulfil key requirements, which are the functioning of the DLT based register and the registration terms must be disclosed in the register itself or in data linked to the register, the register has to ensure state-of-the-art functional reliability and data integrity, the parties may at any time consult the entries in the register and the information concerning them.
Q4: Another important novelty is the introduction of a new category of DLT trading venues called “DLT trading systems”, “DLT exchanges”, or “DLT trading facilities”. Why is it introduced, what current challenges will it ease/solve?
A4: This new category of trading venues will address one of the key bottle-necks in today’s multilateral trading activities in DLT-uncertificated rights. The missing piece is the missing readiness of the post-trading value chain for multilateral trading in DLT-uncertificated rights. The new DLT-trading system license will cover with one license both the trading and post-trading value chain.
Another key advantage is of the new licensing regime is the fact that the organizational requirements, minimal capital, and other requirements can be alleviated in case the risk profile and the business activities of the trading venue allow that.
Q5: What will be the difference in the new Swiss regulations between the ‘trading systems’, ‘exchanges’, and trading facilities’. Will they be treated differently?
A5: The Swiss regulatory framework will allow in the future for the following multilateral trading facilities:
(i) stock exchange, that allow generally also for the multilateral trading and listing in DLT-assets in the form of securities,
(ii) multilateral trading facility (MTF), that allow for the multilateral trading in DLT-assets in the form of securities,
(iii) organized trading facilities (OTF), that allow for the discretionary and non-discretionary trading in DLT-assets in the form of financial instruments, and
(iv) DLT-trading systems that allow for the multilateral trading, settlement and custody in DLT-uncertificated securities for legal and natural persons.
Although all types allow theoretically the multilateral trading in DLT-assets, it is foreseeable that the DLT-trading system will be the category of choice for DLT-assets.
Q6: The new rules for OTFs (Organised Trading Facilities), can you please explain them?
A6: The organized trading facility (OTF) in Switzerland is becoming the standard for all licensed crypto-brokers that engage on a bilateral basis in trading activities related to DLT-assets in the form of financial instruments with their clients that can also be natural persons.
The OTF allows also for the multilateral trading in financial instruments or other securities on a discretionary basis, meaning that the OTF-operator can intervene in the price building process, as well as the multilateral trading in financial instruments that are not securities on a non-discretionary basis.
The Swiss version of an OTF is thus a “catch all solution” for all multilateral and bilateral trading activities. One of the key advantages is that it can be operated by a bank, securities dealer, and stock exchange, and does not require a dedicated post-trading value chain.
Q7: You mention in your excellent analysis, that the flip side in the coming regulations us that Swiss law is to consider payment and utility tokens to be public deposits when kept in custody with a bank. What challenges will it give to the token holders?
A7: The non-segregated custody of payment and utility token, meaning that they cannot be allocated individually to each depositor, qualifies as the acceptance of public deposits under the Swiss Banking Act, unless an exemption will apply.
This means that tokens can only be held in custody in a non-segregated way by entities licensed as banks or benefiting from the FinTech license, the Swiss version of the E-money institution as known in the EU. For the sake of completeness, minor public deposits up to CHF 1 Mio. can also benefit from a regulatory sandbox regime in case all required preconditions are met.
Q8: Switzerland is widely known as one of the most DLT-friendly countries in the world. What are the reasons behind this development, in your view? Do you consider the new regulation a step forward or back, in this trend of being a DLT-friendly country?
A8: Switzerland is one of the most DLT-friendly countries, because of its liberal approach to new technologies, alternative investments, and innovation. Switzerland is an attractive place to run a business due to its large talent pool and easiness of doing business.
The new DLT-securities regulation is a leap forward and will help to ensure that Switzerland will remain at the forefront of new regulatory developments in the DLT-financial services industry. The new rules and regulations will address some current shortcomings in the legislation and will also ensure that there are no regulatory obstacles in the build-out of the infrastructure of the DLT-financial services industry.
We see a lot of industry from the entire world in the possibilities the new DLT-regulation will offer. Switzerland is poised to become one of the leading multilateral trading places for DLT-assets globally.
The featured image of Martin Liebi was kindly provided by PwC Switzerland