On 27 November 2019, the Federal Council published the draft bill for a new Federal Act regarding the Adaptation of Federal Law to Developments in the Technology of Distributed Electronic Registers (the "Draft DLT Act") along with the accompanying dispatch and a report on the results of the consultation process that ended in June this year.1 The proposed new law is a framework act intended to introduce pinpoint amendments to Swiss law to provide more legal certainty to business applications of distributed ledger technology (DLT). In its media release, the Federal Council emphasises that it aims to create the best possible conditions for Switzerland to evolve as a leading, innovative and sustainable location for fintech and DLT companies while at the same time taking a firm stance against any potential abuse of the new technologies. The Federal Council considers that specific amendments to the legal framework in key areas are sufficient to achieve these goals and has decided against a full codification in a technology-specific act.
The Draft DLT Act was published within just five months of the end of the consultation process with interested market participants, which was based on a preliminary draft of the new law published in March 2019 (the "Preliminary Draft"). The Federal Council has therefore continued on the accelerated path that characterised this project from the beginning. The importance placed by the market on a clearer legal framework for DLT applications is evident from the notably active consultation process: some 80 responses were received and considered in drawing up the Draft DLT Act. The Swiss Parliament is expected to start deliberations on the draft as soon as early in 2020.
Key Elements of the Draft DLT Act
The cornerstones of the Draft DLT Act remain basically unchanged when compared to the Preliminary Draft 2 and include the following proposed changes to civil securities law, insolvency law and financial market regulation, respectively:
- the introduction of uncertificated register value rights (previously referred to as DLT uncertificated securities) to create a sound legal basis for the digitisation or tokenisation of assets (rights) such as shares, bonds and other financial instruments as well as for the transfer of such instruments;
- clarifications on the segregation of crypto-based assets from the bankruptcy estate as well as rules on (non-asset) data access in bankruptcy, both in general insolvency and bank insolvency;
- the creation of a new regulatory licence category for DLT trading facilities.
However, while the focus areas remain, there have been many changes to the details of the proposed new provisions based on the results of the consultation process.
Register Value Rights
Arguably the most prominent element of the Draft DLT Act is the proposed amendment of civil securities law with the introduction of the new articles 973d et seq. of the Code of Obligations (CO) and revision of certain other articles in the law. The amended CO will enable the creation of so-called "register value rights" (Registerwertrechte; droits-valeurs inscrits), i.e. uncertificated value rights that can serve the same functions as "traditional" paper securities or centrally registered book-entry securities. In line with the principle of private autonomy in Swiss civil law, the amendments to the CO will create a general set of rules on register value rights and their legal effects, in particular on how they can be established, transferred, pledged and cancelled, but leaves the technical details of the implementation in practice to the market participants. Consequently, in contrast to the Preliminary Draft, the Draft DLT Act no longer delegates any power of the Federal Council to specify technical requirements for eligible registers. In line with this approach, there will be no governmental certification of register value rights or oversight over the persons establishing them, although the Federal Council expects private "token audits" to become standard practice by market participants to manage liability risks.
The rules on register value rights have been significantly revised in the Draft DLT Act as compared to the Preliminary Draft. The Federal Council took up many of the suggestions made by the participants in the consultation process, in particular with regard to making the new rules more technology-neutral and flexible. A comprehensive discussion would exceed the scope of this briefing, but certainly one of the most apparent changes is the variation in the legal terminology from the originally proposed "DLT uncertificated securities" (DLT-Wertrechte; droitsvaleurs d'un registre distribué) to the technology-neutral term "register value rights". Register value rights are distinguished from "simple value rights" (einfache Wertrechte; droits-valeurs simples), previously plainly called "value rights", that do not have the specific features and rights attaching to the former. In the context of the amendments to the CO, the Draft DLT Act generally no longer refers to the term "DLT" or similar technology-specific terms, setting out the relevant requirements for register value rights using technology-neutral descriptions.
The central provision is the proposed new article 973d CO, which requires that, based on a registration agreement among the parties: (a) register value rights must be registered in an eligible register, and that (b) registered rights can only be exercised or transferred by way of such register. For a register to be eligible for the purposes of creating and transferring register value rights, it must fulfil four requirements, which have been significantly revised in comparison to the Preliminary Draft with the aim of increasing practicality and which reflect more realistic and sustainable expectations regarding the qualities of the register (the Preliminary Draft e.g. would have required that the functioning of the register and the integrity of the data must be "ensured" using "the latest state of technology"):
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2. See our earlier briefing on the Preliminary Draft under https://www.baerkarrer.ch/publications/2019_03_BK_Briefing_DLT_Proposal.pdf
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