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Switzerland's Crypto Valley is Blazing a Trail in Regulated Digital Asset Markets

September 14, 2021

Christina

Switzerland's Crypto Valley is Blazing a Trail in Regulated Digital Asset Markets
The U.S. tends to dominate the lion’s share of the headlines regarding blockchain and cryptocurrency regulation. However, while U.S. regulators continue to equivocate, many smaller nations embrace the opportunity to capture some of the value in the burgeoning digital asset space. Among them, Switzerland is leading the pack.

The Alpine nation established itself as a crypto-friendly jurisdiction during the regulatory turmoil that resulted from the ICO boom in 2017. In contrast to many countries that implemented outright bans on selling tokens, Switzerland introduced a framework that classified digital assets so they could be regulated in the same way as existing financial markets. 

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Although the framework didn’t necessarily offer crystal clarity over the legal status of any given asset, the move was welcomed by the industry. Over recent years, over 900 blockchain and crypto companies set up homes in Switzerland’s so-called Crypto Valley. Of those, 11 have unicorn status, including Ethereum, Cardano, Polkadot, Tezos, and Cosmos. According to PwC, the valuation of the 50 largest companies has grown 680% to reach a total of $254 billion. 

Introducing Switzerland’s Blockchain Act

Even despite the impressive growth, the Swiss government didn’t stop there. It’s proven to be intent on positioning the nation as “an international pioneer in modern regulation of innovative financial market technologies.” Given the country’s long history and global reputation as a finance hub, along with the opportunity to attract the kind of innovation the U.S. government continually rejects, it’s perhaps unsurprising.  

As a result, the latest raft of legislation brings in sweeping changes. The DLT blanket act was passed in September 2020. Rather than introducing an entirely new set of laws, the Blockchain Act, as it’s become known, amends 10 of Switzerland’s existing laws to accommodate the introduction of assets issued on a blockchain

The Act has come into force in two parts. The first, which was rolled out in early February, enables the introduction of blockchain-based securities. The Act amends existing Swiss law such that registered uncertificated securities are created and given legal recognition when they’re entered into an electronic register that meets certain requirements—in other words, a blockchain. It provides blockchain-based securities the same functionality and protection as other securities. 

A wave of activity

Effectively, the first part of the Act provides the green light to regulated institutions to go ahead and start issuing blockchain-based securities in a way that’s compliant with Swiss law. As a result, there’s been a slew of developments emanating from Switzerland—not just from Crypto Valley but also the nation’s renowned financial sector. 

Sygnum, one of the digital asset banks which holds a Swiss banking license, was ready to press the button the day the new legislation went live. The company partnered with Fine Wine Capital AG to tokenize a range of wines, making it the first to issue regulated tokenized securities under the new Swiss law. In July, it followed up with tokenized shares of a Picasso painting, worth around $6,000 each. 

The move also seemed to be a starting pistol for traditional Swiss banks to move into digital assets. In April, digital-first bank Swissquote announced it would expand its footprint into cryptocurrencies, while the Bern Cantonal Bank announced it would release its own tokenization platform. 

Most recently, Swiss B2B bank InCore announced it was working with digital asset firm Crypto Finance to launch a new tokenization tool based on the Tezos platform. 

Regulated secondary markets

In early August, the second part of the Act came into force. Whereas the first part allows for creating blockchain-based securities as a primary market, the second part paves the way for regulated secondary market trading of digital assets. It introduces a new type of financial market infrastructure authorization, allowing the multilateral trading of DLT securities by non-professional investors. 

This section also clarifies the position regarding insolvency and bankruptcy, ensuring that if an operator becomes insolvent, the client’s cryptocurrency assets can be segregated from the operator’s. 

What’s next for crypto in Switzerland?

Aside from more new cryptocurrency operators and traditional players taking advantage of tokenization, other potential developments are hinted at. Now that the basic market infrastructure is in place, DeFi seems likely to be the next frontier for the Swiss digital asset sector. 

In early August, Swisscom’s Digital Asset unit announced it would be running a pilot as an oracle node on the Chainlink network. Chainlink is used heavily in the DeFi space as a price feed, and its reliability depends on reputable oracle nodes providing the most recent price data on demand. In announcing the pilot, Swisscom cited that it intends to understand the opportunities involved in DeFi, and sees “no end in sight” to the growth of DeFi applications. 

Soon after this news came out, SEBA, another digital asset bank with a Swiss banking license, announced that it would be integrating support for AAVE and LINK tokens, offering its investors exposure to the burgeoning DeFi markets. 

The developments in Switzerland are excellent news for the cryptocurrency and blockchain space. The country is helping to showcase best practices in regulated digital asset markets to lawmakers around the world. By blazing a trail, Switzerland is paving the way for other nations to follow. 

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