Switzerland's blockchain regulation policy and practice

Switzerland is currently recognized as a country friendly to cryptocurrencies, and blockchain technology has penetrated into many areas. This point has similarities with Japan, Singapore and other countries. The author has a lot of analysis in the book "International Supervision and Compliance of Blockchain" (Mechanical Industry Press, February 2019). In terms of virtual currency, Switzerland allows BTC to pay, banks support digital currency products, and issue regulatory policies for ICO activities, which greatly reflects Switzerland's support for ICO. This paper introduces the country's regulatory policies and practices, and provides relevant reference for Chinese practitioners to conduct business in the country.

I. Advantages of current blockchain projects in Switzerland

(1) Strong support from the government

The Swiss government supports the blockchain technology. At the G20 summit, Swiss Minister of Economy Johann Schneide-Ammann praised financial technology innovation and said that digital currency is part of the fourth industrial revolution, hoping to make Switzerland the "world blockchain capital". The state of Zug has become the seat of many blockchain companies, including the Ethereum Foundation, and the Minister of Economy has expressed the willingness to extend this blockchain technology center to other parts of Switzerland [1].

The long-term neutrality policy has made Switzerland one of the most stable economies in the world. Compared to other countries, Switzerland is called a “safe haven” for investors because of its long-term policy, security of the financial system and bank secrecy.

(2) Perfect tax law norms

In Switzerland, taxes related to financial transactions are classified into property taxes, income taxes and value added taxes. Virtual currency payments are allowed throughout Switzerland, and digital currency transactions are also applicable to these three taxes. Switzerland implements a tiered tax system that is divided into federal direct taxes, state taxes, and town taxes. States can establish state tax standards and determine tax rate levels within the scope of federal tax laws. Since the Swiss federal tax law does not introduce a specific tax policy for digital currencies, the taxation of cryptocurrencies is mainly based on state policies.

The first is property taxes. In most states, cryptocurrencies are considered to be part of the net assets, so property taxes are imposed like traditional foreign currencies. However, in different states, this part of the assets is included in different classifications. For example, in St. Gallen, Lucerne, Bern, and Zug, it must be included in securities. However, in the city of Basel, cryptocurrencies are classified as “cash, precious metals and other assets”. As with other assets, ownership of Bitcoin and other cryptocurrencies must be reported to the tax authorities. In recent months, the states of Zurich, Zug, and Lucerne have issued guidelines for individuals to pay property taxes on cryptocurrencies. Personal deposits in cryptocurrencies are subject to a wealth tax, but no income tax is levied. The value of the cryptocurrency is then added to other assets (such as bank balances, stocks, cash, and real estate) and taxed. Usually, the tax is between two thousandths and three thousandths, and some states have a tax exemption of 100,000 Swiss francs. However, as with foreign currencies, the benefits of rising cryptocurrency prices are tax-free. On the contrary, price losses are not tax-free.

The second is income tax. In addition to property tax, one of the most important taxes for personal taxation is income tax. Everyone who lives or works in Switzerland must pay an income tax every year. In Switzerland, digital currency holdings and transactions are not subject to income tax, but are subject to payment in two special circumstances. One is mining to get cryptocurrency, and the other is to pay as a salary bonus.

The third is VAT. In Switzerland, cryptocurrency is defined as currency, so there is no need to pay VAT. In 2015, the Swiss Federal Tax Administration (ESTV) made a statement on cryptocurrency, which defines a cryptocurrency as a currency for purchasing things. They think that cryptocurrency, like the Swiss franc, is a payment method, but it does not have a value-preserving effect. Therefore, the conversion of cryptocurrency does not constitute a transaction of goods, nor does it involve the collection of value-added tax. Converting electronic money into Swiss francs is like converting a franc into a euro. Therefore ESTV decided that the use of cryptocurrency in Switzerland does not require VAT. In the second section of Article 21 of the Swiss VAT Act, it can be seen that the transaction fees paid by the cryptocurrency company are exempted, so there is no VAT required to buy and sell cryptocurrencies on the exchange. 【2】

(III) Practice of blockchain application in Switzerland

Among the 26 federal states in Switzerland, the state of Zug is known as the “Crypto Valley” and is the most in-depth and widely used place in the Swiss blockchain technology. “Encryption Valley” is positioned as a development center for encryption technology. The local government hopes to attract leading encryption technology startups to help them establish business, provide professional services and promote the development of friendly regulatory environment. The Ethereum core team and its foundation headquarters are located in Zug, and more and more cryptocurrency and blockchain companies are coming to Switzerland. At present, the Zug Encryption Valley Association has more than 400 companies. “Encryption Valley” leads the world in the number of ICOs each year, and hosts the most prestigious conference in the industry every year – the Crypto Valley Conference, which also illustrates its global reach.

"Encryption Valley" has grown into the world's leading ecosystem of encryption, blockchain and distributed ledger technologies. As conferences and news continue to emerge, “Encryption Valley” is considered one of the most important hubs for experts, investors and enthusiasts to meet and exchange ideas and information. The relevant personnel, with the support of the Swiss government, established the Crypto Valley Association with the goal of becoming an “independent, government-supported association that leverages Switzerland's strengths to build the world's leading ecosystem of blockchain and encryption technologies”.

Swiss financial institutions are also embracing the blockchain technology, and banks allow virtual currency transactions. In July 2017, Switzerland's leading online financial and trading services provider, Swissquote Bank, launched the Bitcoin trading service, becoming the first online bank in Europe to offer investment in bitcoin transactions. Customers can purchase bitcoin in euros or dollars to provide investors with a bitcoin investment channel. Swissquote also launched the bank's first cryptographic asset-related active fund, the "bitcoin certificate" exchange-traded product (ETP). In June 2018, Credit Suisse Bank of Germany (Hypothekarbank Lenzburg) became the first bank in Switzerland to provide commercial accounts to blockchain and cryptocurrency companies. Bank products are also shifting towards cryptocurrency. In addition to the Lunsburg Bank and Swissquote Bank, Swiss private banks Falcon and Vontobel have chosen to embrace the cryptocurrency market. [3]

The blockchain has been expanding its application in Switzerland, and it has made great strides in the fields of payment and voting. As early as 2016, the local government announced that it would allow citizens to use virtual currency to pay for government services. The referendum system is widely used in Switzerland, from the federal to the municipalities. In July 2017, Zug announced plans to launch an app called "uPort." Based on the Ethereum application, this blockchain technology is applied to the voting system and digitizes local resident identity information [4]. Although the Zug City Blockchain vote is only a test, the blockchain provides greater security than other electronic voting systems, including better protection against hackers and abuse of personal data. The Zug city authorities said that the fragmentation of the blockchain meant that hackers did not have a single entry point to manipulate the ballot results. The system also promises to give users complete control over their voting data and has the opportunity to erase the traces of their personal voting preferences, thereby better protecting the anonymity of voters.

Second, the basic overview of blockchain supervision in Switzerland

(1) Regulatory framework

1. Supervision department

The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss financial regulator. The agency integrates the functions of the Federal Private Insurance Management Office (FOPI), the Swiss Federal Banking Commission (SFBC) and the Swiss Anti-Money Laundering Control Committee, and is fully responsible for all financial regulation in Switzerland, including Swiss banks, insurance companies, stock exchanges, Securities dealers and other types of financial intermediaries (including foreign exchange dealers). FINMA has now focused on the financial risks involved in the blockchain sector and is monitoring the ICO.

2. Overview of regulatory policies

In September 2017, FINMA released the ICO Guide (FINMA Guidance 04/2017, Regulatory treatment of ICO), recognizing the innovative potential of distributed ledgers and blockchains, and welcomes and supports all efforts to propose blockchain solutions at Swiss financial centers. . FINMA said that according to the intrinsic nature of ICO, it may be regulated by existing financial market regulations, such as anti-money laundering and terrorist financing regulations, banking laws, securities transactions and collective investment schemes.

In the months following the release of FINMA Guidance 04/2017, ICO projects increased dramatically, and FINMA received inquiries from a large number of market participants. The main focus was on ICO's applicability to existing financial markets and the existence of licensing conditions. In response to these inquiries quickly and accurately, in February 2018, FINMA re-released the ICO Regulatory Guide [5] to supplement the earlier release of FINMA Guidance 04/2017. The ICO Regulatory Guide clarifies the regulatory framework from the aspects of ICO project nature, token classification, anti-money laundering, ICO project investigation, etc. It also stipulates the information and identification principles that ICO needs to submit when inquiring, providing clearer guidance for market participants. In the appendix to the guide, the minimum requirements for ICO projects and detailed information on designing and issuing tokens and potential secondary market transactions are listed.

(II) Details of ICO regulation in Switzerland

The ICO guidelines issued by FINMA in September 2017 clearly define the attitude towards ICO, and Switzerland's legislation on financial markets follows the basic principle that technology is neutral. FINMA believes that ICO should be within the existing jurisdiction of Switzerland. FINMA accurately defines the type of cryptocurrency based on the use of cryptocurrency and the attached rights, and then decides which type of law (the securities law and anti-money laundering regulations) applies. Companies or individuals preparing for ICO must ensure that their actions are in compliance with relevant financial market legal requirements, and the ICO project development team must comply with four regulations: anti-money laundering and terrorist financing regulations, banking law provisions, and securities transactions. Regulations and collective investment plan laws; due to the diversification of ICO business model structure, FINMA only conducts supervision and evaluation according to specific ICO projects under specific circumstances, and does not conduct legal evaluation of ICO outside the region. [6]

The ICO Regulatory Guide issued in February 2018 indicates that existing financial market laws and regulations do not apply to all ICOs, and whether ICO is regulated depends on the specific circumstances of the case. When evaluating ICO, FINMA will focus on the economic function and purpose of tokens issued by ICO organizers. The key factors are the basic purpose of the token, and whether they can be traded or transferred. It also indicates that the ICO is also regulated by anti-money laundering.

(1) Cost of ICO project compliance inquiry: The ICO project development team will pay for the inquiry to FINMA, depending on the time required and the applicable hourly rate (see Article 1 of the FINMA Regulations for collecting supervision fees and levy details) .

(2) FINMA's ICO project compliance evaluation principle: The ICO project covers a variety of traditional financial fields. Currently, there are no specific regulatory requirements for ICO. Therefore, when evaluating various legal risks of ICO projects, there is no relevant case law for reference or reference. Uniform legal principles. Considering the variety of tokens (pass-certificate) issuance and ICO structure models, the regulatory scheme cannot be summarized into a unified model. A legal risk assessment for each ICO project requires a thorough consideration and case analysis. Whether the information provided by the organizer meets the minimum requirements becomes the basis for assessing compliance with the ICO project. FINMA will be evaluated based on the potential economic objectives of an ICO project, especially if it finds that the ICO project is attempting to circumvent the symptoms of existing regulations.

Third, the classification and supervision of the certificate

(1) Specific classification of the certificate

Tokens are not universally recognized in the international classification. Therefore, FINMA classifies according to its own methods, depending on the potential economic functions of the token.

(1) Payment token: Synonymous with virtual currency, used now or in the future to obtain goods or services, used as a means of payment for money or value transfer. Virtual currency does not cause the holder to claim against the issuer. (2) Application token: A digitally generated application or service based on blockchain technology.

(3) Asset token: This type of token represents an asset, usually expressed as a token holder who can claim debts or equity from the issuer, and the ICO project promises the token holder to make a future profit or The share of the flow of assets. Therefore, in terms of their economic function, such tokens are similar to stocks, bonds or derivatives. Tokens that make physical assets trade on the blockchain also fall into this category.

Different types of tokens are not mutually exclusive relationships. Asset-type tokens and application-type tokens may also be classified as payment tokens, referred to as hybrid tokens. In these cases, the compliance requirements are superimposed accordingly. For example, the token issued by an ICO project belongs to both the asset-based token and the payment-based token. This ICO project must meet the compliance requirements of the asset-based token and the payment-based token. In other words, such tokens can be considered both as securities and as a means of payment.

In the guidance document issued in February 2018, FINMA's provisions on pre-financing include two situations: First, in some ICO projects, the funds raised have not yet ended, the tokens issued have entered the market circulation; the second is in other types. In the ICO project, the token has not yet been issued, and the underlying blockchain technology is still under development, only to promise investors the prospect of the project, investors can receive tokens at some time in the future. In the process of raising ICO projects, pre-funding behaviors often appear as pre-sale or seed round, angel round financing.

For different types of tokens, their laws are determined to have their own merits.

(1) FINMA believes that the main purpose of payment-type tokens is for payment, and its function is not similar to that of traditional securities, so payment-type tokens are not securities (such as Bitcoin and Ethereum). However, if there is new case law or legislation that identifies the payment class as a security, FINMA will modify its regulations accordingly.

(2) FINMA distinguishes whether the practical token belongs to the securities. If the purpose of the utility token is to use the certificate for the ICO project development application or service, and the practical token can actually be used in this way ( Functionality that has been designed before development is not a feature added by later technology development, and such practical tokens will not be recognized as securities. If a utility token is partially or solely for investment purposes at the time of issue, these practicable tokens are treated as securities.

(3) FINMA believes that asset-based tokens belong to securities. FINMA believes that if pre-finance is pre-funded through ICO and investors are pre-sold tokens, and such tokens are standardized and suitable for large-scale standardized transactions, the right to claim tokens will be treated as securities.

(2) The application of laws of different certificates

Once the token is considered a security, it is subject to Swiss securities law. The issuance of tokens similar to stocks or bonds is subject to the provisions of the Swiss Civil Code regarding the prospectus. If the token is issued with the characteristics of debt capital (such as a promised return on interest), the virtual currency raised will be treated as a deposit, and unless there are exceptions, it is necessary to comply with the Banking Law to obtain a business license. If the funds raised by the ICO are managed by a third party agency, the provisions of the Collective Investment Plan Act need to be applied. Regardless of whether the ICO project is transferred before or after the IPO, as long as the payment token can be transferred on the blockchain infrastructure, these tokens meet the requirements of the Anti-Money Laundering Law for payment and are subject to the Anti-Money Laundering Act.

According to FINMA's guidelines published on its official website, for practical tokens, as long as the issued tokens provide access to applications developed based on blockchain technology, they do not apply to the Anti-Money Laundering Act. [7]

The issuer's ICO needs to provide minimum information standards, including general information, basic project information, information on the stage of token issuance, and information on secondary market transactions. General information includes the name of the project; company name, name of the project operator, company location/address/email address/website, etc. The basic information of the project letter includes project organization and project plan information (ICO's different stages of planning/milestones, etc.), key features of future development services, target participants (investors) of ICO projects, and so on. Information on the token issuance phase includes: Will tokens be issued during the ICO process? If so, in which step will the token be created? And its technical standards, such as ERC20, use technology, etc. In addition, it is necessary to disclose the functions of the token (detailed description), the implementation time of the token function plan, and so on. The information of the secondary market transaction includes: how the token is transferred (providing the information of the wallet and the technical standard), whether the token has the transfer function at the time of the transaction, whether the project operator/issuer has the counter repurchase token, etc. Wait.

Fourth, the evaluation of Swiss regulatory policy

Unlike countries such as Japan and Thailand, Switzerland's regulatory focus on blockchain technology focuses on ICO, which treats different virtual currencies or certificates through careful classification. Different types of virtual currency or certificates are subject to different laws. The special circumstances of pre-financing are included in the scope of supervision. Another highlight of the Swiss regulatory rules is the adherence to the “case-by-case” principle and the reduction of regulatory costs through fees for projects that actively consult legal compliance.

Previously, many investors believed that Switzerland was one of the countries with the most relaxed ICO regulation in the world. We believe that it is better to say that Switzerland is a country that is friendly and meticulous in terms of ICO friendly. With the continuous improvement of the supervision of ICO by the regulatory authorities, some project costs have also increased compared with the previous ones, and some ICO projects have chosen to find another way out. For example, according to the guidelines issued by FINMA, all required projects need to prevent participants from laundering through ICO, so ICO projects need to comply with Swiss anti-money laundering requirements. “Anti-money laundering regulation brings a range of due diligence requirements, including requirements for determining the identity of the beneficial owner, and either to join a self-regulatory organization (SRO) or to be directly regulated by FINMA. These requirements can be regulated by AML already in Switzerland. And on behalf of the organizers to exercise the corresponding due diligence requirements of the financial intermediaries to receive funds to achieve." This means that ICO event sponsors must use the Swiss company to conduct KYC for all ICO participants. But only a few companies can perform such checks, and in fact these entities are equivalent to having a monopoly. “In the ICO sector, the average cost of KYC inspections ranges from $0.6 to $2, but Switzerland is an exception. Swiss accredited institutions charge up to $25, which puts projects that have decided to launch crowdfunding in Switzerland. The situation." [8] This part of the increased cost makes some ICO projects find a way out, or raise the amount of tokens raised. In February 2018, a Swiss company called Grain had to raise its minimum crowdfunding volume to make up for the increase in the cost of Swiss KYC.

In a recent report issued by the European Parliament (EP) in June 2018, the authors of the report were more positive about virtual currency. The report entitled "Virtual currencies and central banks monetary policy: challenging ahead" was commissioned by the European Parliament's Economic and Monetary Affairs Committee. The core issue of the report pointed out that “virtual currency is a contemporary private currency. Due to its technical characteristics, the virtual currency global trading network is relatively safe, transparent and fast. This provides a good prospect for the further development of virtual currency. However, virtual currency is unlikely Challenge sovereign currency and central bank dominance, especially in mainstream currency use. As for other innovations, virtual currency anonymity and cross-border characteristics pose challenges to financial regulators.” [9] In some countries mainstream media and some regulators sing Against the background of virtual currency and ICO, this report is different from the positive attitude. The spirit behind it is in line with the relevant Swiss regulatory policies.

The blockchain is basically judged by most professionals as an important technology in the future, representing an important development direction of technology. The extent to which the blockchain industry is prosperous and whether it has a competitive advantage is closely related to the regulatory policy environment in the region. Effective regulatory policies have boosted the rapid development of the blockchain industry and reduced financial and related risks. Regulatory policies have a fundamental and overall impact on the development of the industry and determine its future. Therefore, the competition between countries is essentially a contest of institutional heights. In the past, Chinese regulators issued relevant policies on ICO, which on the one hand played a positive role in the timely crackdown on the high incidence of illegal issuance of securities and fund-raising fraud; on the other hand, it reflected the deep concern of regulators about the risks associated with the blockchain.

However, regulators' concerns should be placed in the right place. In the blockchain field, although controlling financial risks has always been ranked first, it cannot be the only factor in practice. Otherwise, it may be due to excessive pursuit of financial security, and finally hinder the innovation and development of blockchain technology.

On the one hand, the Swiss regulatory rules fully reflect the humanization thinking, and make a very detailed classification of the certificates. Different types of certificates should be treated differently in terms of law application. On the other hand, these rules are based on the basic principles of anti-money laundering and user identification. Moderately embrace the risks that may arise in the development of technology and encourage innovation. This point has a deeper analysis of the book "International Supervision and Compliance of Blockchain" (Machinery Industry Press, February 2019).

Facing the rapid development of the pass and blockchain technology, as mentioned before, it is difficult for China's Securities Law to accurately define the legal attributes of the pass. At the same time, the single country ban has the following dilemma: a large number of blockchain project startup teams moved overseas and continued to finance Chinese citizens ICO. For some of the phenomenon that securities have securities attributes and a large number of violations of Chinese citizens' rights and interests, due to the practical difficulties of cross-border judicial coordination and regulatory enforcement, it is difficult for Chinese regulators to achieve overseas law enforcement. The careful legal classification of the certificate and the ICO's regulatory policy in Switzerland and other countries may give us wisdom.

Quote:

[1] "Switzerland wants to be the "Encryption Country"", http://news.jgy.com/21/6277.html, visit time: September 11, 2018.

[2] "Can tax havens really avoid taxation in Switzerland? 》, https://www.jinse.com/blockchain/191758.html, visit time: 2018

3] See "Deciphering the Small Town of Switzerland, Zug: How to Become a Cryptographic Heaven in the Land of the Projectile", https://www.bianews.com/news/details?id=16685&type=0, visit time: September 11, 2018.

[4] See “Swiss City Uses Ether-based ID Program for Blockchain Voting”, http://liancaijing.com/alerts/113510.html, visit time: September 11, 2018.

[5] FINMA publiziert Wegleitung zu ICOs, https://www.finma.ch/de/news/2018/02/20180216-mm-ico-wegleitung/, February 16,2018, visit time: September 11, 2018 .

[6] FINMA trifft Abklärungen bei ICOs, https://www.finma.ch/de/news/2017/09/20170929-mm-ico/, September 29, 2017, visit time: September 11, 2018.

[7] FINMA Publiziert Wegleitung zu ICOs, https://www.finma.ch/de/news/2018/02/20180216-mm-ico-wegleitung/, February 16,2018, visit time: September 11, 2018 .

[8] The Swiss ICO Regulatory Guide may be counterproductive, https://www.jinse.com/news/bitcoin/181854.html, visit time: September 11, 2018.

[9] See http://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf, visit time: September 11, 2018.