The Tokenization Revolution in Switzerland: Its Legal Framework

Asset Tokenization in Switzerland revolutionizes the transactions of financial products

The blockchain space in Switzerland, especially in the area of tokenization, is marked by a number of innovations and an advanced regulatory approach that have put the country in a leading position in financial technology. In a recent interview on the Token City show, Gabriel Jaccard, CEO of Arbitri and a prominent figure in the tokenization sector, detailed the keys to Swiss success and discussed how these could inspire other countries to adopt tokenization. Below we summarize the topics covered in the interview, focusing our attention on asset tokenization in Switzerland and its implications for the global financial market, as well as the debate this technology generates.

Advanced regulation

Switzerland has adopted a functional and generalist approach to cryptocurrency and blockchain regulation, avoiding overly specific regulations. This approach allows for the integration of crypto technology as if it were any other industry, fostering an environment conducive to innovation and growth.

The Swiss regulatory framework facilitates, for example, the creation of cryptoasset-based companies without the need for traditional bank accounts and enables the tokenization of rights in a flexible and secure manner.

Pioneers in Tokenization

Since 2017, Switzerland has been a pioneer in legally defining tokens and setting clear guidelines for conducting ICOs, which has been crucial in providing legal certainty for investors and developers.

The possibility of tokenizing any type of right makes it crucial to define well the type of token that represents it. The Swiss Financial Market Supervisory Authority (FINMA) establishes the following categories of tokens.

Payment Tokens: which function as cryptocurrencies.
Utility Tokens: which provide access to an application or service.
Asset Tokens: which represent physical assets or rights, including financial rights.

Rights tokenization usually falls under the category of asset tokens. This is crucial to ensure that the token complies with relevant regulations, especially if the token offers rights similar to traditional securities, such as stocks or bonds.

Blockchain Education and Competence

Jaccard stresses the importance of specialized blockchain education to develop competencies needed in the creation and auditing of smart contracts.

The legislative proposal recently approved in Geneva also seeks to cover the full chain of needs of the crypto industry, providing a comprehensive ecosystem that includes education, legal certainty and an improved regulatory environment.

Financial Sector's involvement with Blockchain

The Swiss financial sector's engagement with blockchain technology and tokenization is manifested in the activities of banks such as Sygnum and SEBA, which not only offer custody services for cryptoassets, but also develop platforms for trading security tokens. This facilitates secure and regulated access to digital assets for retail investors and large entities, being fundamental to their widespread adoption. The participation of these banks stands out for combining innovation with tradition, ensuring their relevance in the digital market and attracting a new generation of financial customers.

In addition, the fintech license introduced by FINMA in 2018 as a “light banking license”, allows fintechs to operate with fewer restrictions than traditional banks, with a limit of accepting public deposits of up to CHF 100 million, without allowing the investment of these funds or the generation of interest. This legal framework facilitates the incorporation of new technologies in financial operations and allows smaller entities to participate in the digital financial market, thus promoting innovation and diversification of services in the Swiss financial sector. This regulatory approach evidences how Switzerland adapts its legal framework to support technological evolution, while maintaining the stability and security of the financial system.

DeFi Challenges and Opportunities

Decentralized Finance (DeFi) presents a radically different model from the traditional financial system, operating without intermediaries and, in many cases, without a centralized authority to oversee transactions. The regulatory challenge this presents is significant: how do you regulate an entity that is, by its very nature, decentralized?

Switzerland is addressing this challenge by adapting its legal framework to include DeFi in its classification of financial services, provided that these activities are aligned with existing financial laws.

The key here is the principle of “same business, same risks, same rules,” which seeks to apply consistent regulations without stifling innovation. However, this also raises questions about the effectiveness of regulation when faced with protocols that are truly decentralized and global in nature.

Impact of EU Regulation on the Swiss Ecosystem

While Switzerland is not a member of the EU, regulations such as the EU's MiCA (Market for Cryptoassets) have the potential to indirectly influence the Swiss regulatory environment. MICA seeks to establish a harmonized regulatory framework for crypto assets across Europe, something that could set standards that Switzerland would have to consider in order to maintain access to the European market.

Switzerland's approach to blockchain and cryptocurrency offers an interesting model for other countries looking to foster innovation while maintaining a robust regulatory framework.