The Federal Council Bern, 7 December 2018 Legal framework for distributed ledger technology and blockchain in Switzerland An overview with a focus on the financial sector Federal Council report Federal Council report – Legal framework for distributed ledger technology and blockchain in Switzerland Table of contents 1 Introduction ............................................................................................................. 11 1.1 Background and objective of the report ............................................................ 11 1.2 General comments on the report ...................................................................... 12 1.3 Principles of the Swiss regulatory approach to blockchain and DLT ................. 12 1.4 Development and structure of the report .......................................................... 14 1.5 Other relevant framework conditions ................................................................ 14 2 Fundamentals of DLT/blockchain .......................................................................... 17 2.1 Introduction ...................................................................................................... 17 2.2 Fundamentals of DLT using the example of Bitcoin ......................................... 17 2.3 Design of a DLT systems ................................................................................. 21 2.3.1 Application and flexibility ....................................................................... 21 2.3.2 Access .................................................................................................. 22 2.3.3 Consensus mechanism ........................................................................ 23 2.3.4 Log structure ........................................................................................ 24 2.3.5 Anonymity and privacy.......................................................................... 24 2.3.6 Scaling ................................................................................................. 25 2.4 Stakeholders in the DLT world ......................................................................... 25 2.5 Technological obstacles ................................................................................... 27 2.5.1 Possible design trade-offs .................................................................... 27 2.5.2 Operational risks................................................................................... 28 3 Applications of DLT in the financial sector ........................................................... 31 3.1 Introduction ...................................................................................................... 31 3.2 Corporate and project financing through initial coin offerings (ICOs) ................ 31 3.2.1 Preliminary remarks .............................................................................. 31 3.2.2 Market size worldwide and in Switzerland............................................. 31 3.2.3 How ICOs work .................................................................................... 32 3.2.4 Characteristics of tokens ...................................................................... 34 3.2.5 Potential of ICOs .................................................................................. 34 3.3 Payment transactions ...................................................................................... 34 3.3.1 Preliminary remarks .............................................................................. 34 3.3.2 DLT in payment transactions ................................................................ 35 3.3.3 Potential of DLT .................................................................................... 35 3.3.3.1 Domestic payment transactions ......................................................... 35 3.3.3.2 Cross-border payment transactions ................................................... 36 3.4 Securities trading, clearing, and settlement ...................................................... 36 3.4.1 DLT in securities trading, clearing, and settlement ................................ 36 3.4.2 Potential of DLT .................................................................................... 36 3.4.3 Payment tokens for settling securities transactions ............................... 37 3.4.3.1 Instability of value and credit risk of payment tokens ........................ 37 3.4.3.2 Possible design of a payment token for settling securities transactions ........................................................................................ 38 3.5 Asset management .......................................................................................... 38 3.6 Trade finance ................................................................................................... 38 3.7 Insurers ............................................................................................................ 40 3.8 Regulatory disclosure and reporting ................................................................. 40 4 International environment ...................................................................................... 41 4.1 Developments at the international level ............................................................ 41 4.2 Multilateral developments ................................................................................ 41 4.3 Switzerland's positioning in multilateral bodies in the financial area ................. 42 2/162 Federal Council report – Legal framework for distributed ledger technology and blockchain in Switzerland 5 Legal basis under civil law ..................................................................................... 44 5.1 Legal classification and transfer of tokens ........................................................ 44 5.1.1 Data ownership rights ........................................................................... 44 5.1.1.1 The situation under current law .......................................................... 44 5.1.1.2 The question of introducing the concept of data ownership .............. 44 5.1.1.3 Ownership rights to tokens? ............................................................... 45 5.1.2 Legal classification of tokens by content ............................................... 46 5.1.2.1 General principles .............................................................................. 46 5.1.2.2 Claims ................................................................................................ 46 5.1.2.3 Membership in a company ................................................................. 47 a) Limits on company structure .............................................................. 47 b) Possibility of linking tokens to membership of a company ................. 48 5.1.2.4 Rights in rem ...................................................................................... 49 a) Principle: Embodiment of rights in rem through ownership ............... 49 b) Separation of ownership and direct possession ................................ 49 c) Conclusion .......................................................................................... 50 5.1.2.5 Cryptocurrencies ................................................................................ 50 a) Intangible assets ................................................................................ 50 b) Money? ............................................................................................... 51 5.1.3 Classification by wrapper: Negotiable securities, uncertificated securities, and intermediated securities ................................................ 52 5.1.3.1 Background ........................................................................................ 52 5.1.3.2 Certificated securities ......................................................................... 53 a) Definition and creation of certificated securities ................................. 53 b) Securitised rights ................................................................................ 54 c) Effects of securitisation ...................................................................... 55 d) Tokens as certificated securities de lege lata? .................................. 56 5.1.3.3 Uncertificated securities ..................................................................... 57 a) Definition and creation of uncertificated securities ............................. 57 b) Effects of design as an uncertificated security ................................... 57 c) Tokens as uncertificated securities de lege lata ................................ 58 5.1.3.4 Intermediated securities ..................................................................... 58 5.1.4 Transfer of tokens ................................................................................. 59 5.1.4.1 General principles .............................................................................. 59 5.1.4.2 Simple claims and uncertificated securities ....................................... 59 a) Assignment ......................................................................................... 59 b) Assumption of contract ....................................................................... 60 c) Conclusion .......................................................................................... 61 5.1.4.3 Property (including certificated securities) ......................................... 61 a) Principle: