Ledge-based securities now in Switzerland - material changes in Swiss regulation

With the advent of changes in Swiss regulation, a shareholder of a company can independently own and transfer his/her digital shares, without a bank intermediary and custody. The transfer of rights is greatly simplified. Corporate procedures such as voting, capital increase, registry status updates and many other actions become more efficient and less expensive. Thanks to the technological solutions, many functions are available to the company management 24/7.

It is not only about Bitcoin when we think about blockchain

Often, when talking about crypto assets, the first thing we have in mind is Bitcoins (BTC) and how much they are worth today. But in fact, there are more advantages of blockchain and DLT technologies, such as the ability to digitalise assets, including company shares. In Switzerland, there has been a positive change in regulation to allow company shares to be registered as a blockchain/DLT record. The well-known Bitcoin and Ethereum are out of scope as they represent payment tokens (intangible assets) and consequently cannot be registered as ledge-based securities.

New type of securities – ledge-based

The recently partially enacted DLT Act (“Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology”) affects and brings more understanding to the rules on transfer and ownership of digital assets from the perspective of Swiss law. All final changes to the DLT Act will be introduced on 1 August 2021.

The updated Code of Obligation Art. 973d (CO) explains that a ledge-based security is a right, which by agreement between the parties is registered in a securities ledger and may be exercised and transferred to others only through that ledger.

Among the requirements, the securities ledger must use the technological process that gives the power of disposal of the rights to the shareholder, but not to the issuer. It is also explained that all entries should be recorded in the accounting book. The integrity of the technological solution must be ensured by adequate technical and organisational measures, such as joint management by several independent participants that are given to protect against unauthorised changes. The shareholders or creditors should have access to the information on the ledger, verify the integrity of the ledger content without interference from third parties. Moreover, the issuer must ensure that the securities ledger is organised by its intended purpose and that the ledger operates in accordance with the registration agreement (Articles of Association) at all times.

According to Art. 686 CO, the company must keep a share register in which beneficiary owner information is recorded. This process is organised much more efficient and less costly because the register is provided via ledge-based securities. The blockchain method of recording the company's actions also simplifies the audit process and can eliminate operational costs considering that blockchain allows more transparency and full traceability.

Simple conversion

To issue and hold ledge-based securities, the issuing company does not need to use a third party, custodian, or a bank to register and delegate such shares. In principle, this means that the investor can transfer shares as a registration value to another investor directly through a dedicated platform. The digitalisation possibilities are not only applicable to newly created companies but can also be applied to existing structures. Companies can convert their intermediated securities into blockchain-based securities. But it is important to bear in mind that the new rules will not allow shares to be held on blockchain simultaneously with traditional registration methods or vice versa. In case of being transferred to a custodian, the ledger-based securities shall be immobilised in the securities ledger (FISA, Article 6).

Switzerland is already in full mode

As you can see from the legal requirements, it is important to have an adequate technological solution for the digitalisation process. Tokenisation can be done on the well-known Etherium ERC 20 platform or on one of the other available ones. A smart contract will reflect the rules described in the Articles of Association.

There are already solutions on the Swiss market providing easy management of companies registered on blockchain or DLT. From a legal perspective, appropriate expertise is still required to ensure a smooth transition process while operational costs can be substantially reduced.

The Federal Laws involved in the amendments of the new DLT Act:

  • Civil Code (ZGB)
  • Bankruptcy Law (SchKG)
  • Banking Law (BankG)
  • Financial Market Regulation (FIDLEG, FINIG, FINFRAG)
  • Anti-Money Laundering Act (GwG)
  • Federal Law on Private International Law (IPRG)
  • National Bank Law (NBG)
  • Federal Intermediated Securities Act (BEG)
  • Code of Obligations (OR)
  • Collective Investment Schemes Act (KAG)