Swiss authorities consider launch of sandbox for blockchain applications

The Blockchain/ICO Working Group, established by the State Secretariat for International Financial Matters (SIF), with the involvement of the Federal Office of Justice (FOJ) and the Swiss Financial Market Supervisory Authority (FINMA), is mulling whether a separate sandbox should be established for blockchain-related projects. The proposal is a part of a wider consultation concerning blockchain-based technologies and initial coin offerings (ICOs).

Let’s recall that the working group was established at the start of 2018 to review the legal framework for such technologies and to determine whether there is any need for action. The working group is now inviting the sector to comment on the work carried out up until now and to respond to proposals.

Over the past months, the working group has dealt intensively with civil and financial market law and has examined whether and to what extent amendments to the current legislative instruments are appropriate due to the development of blockchain technology. The focus here is not only on so-called initial coin offerings but on all applications of distributed ledger technology in the financial sector. In particular, the group has identified a need for action in the civil law for transfer of tokens, their treatment under insolvency law and the creation of new opportunities in the area of financial market infrastructures.

The working group is directly inviting financial and fintech associations to participate in the consultation. However, concerns may be submitted by all interested parties to [email protected] by September 20, 2018. The working group will report to the Federal Council by the end of 2018, taking due account of the results of the consultation.

One of the proposals concerns the establishment of a sandbox for blockchain-based applications. There is a sandbox for fintech projects in Switzerland already but it is used for projects in the area of banking. The working group enquiries whether such a separate sandbox (or even separate sandboxes) would be able to solve certain regulatory hardships for companies engaged in the development of products based on blockchain.

In a recent fact sheet on virtual currencies, the Swiss Financial Market Supervisory Authority (FINMA) noted that virtual currencies like Bitcoin are not the only application of blockchain technology, which also underpins the services provided by so-called “colored coins” and “smart contracts”. In these cases the provider must ascertain in advance whether approval is required under other financial market laws (e.g. the Stock Exchange Act or the Financial Market Infrastructure Act).

At present, Switzerland has no regulations regarding the buying and selling of virtual currency units or their use as a means of paying for goods and services. Put otherwise, no special approval is required for these activities. This applies to everyone who pays with a virtual currency or buys units of it as well as to all those who accept payments in a virtual currency or sell units of it. This does not mean, however, that there are no risks in using or investing in virtual currencies given that they are subject to significant price fluctuation and there may be uncertainties regarding the currency issuer. Currently, it remains unclear whether claims to virtual currencies can be asserted under civil law.

In July this year, FINMA said it had commenced enforcement proceedings against envion AG. FINMA explained it possessed evidence that the company may have violated financial market law in relation to an initial coin offering (ICO).

The proceedings focus on possible breaches of banking law resulting from what is suspected to be unauthorised acceptance of public deposits in connection with the ICO for the EVN token. Investigations carried out by FINMA to date indicate that, in the context of its ICO, envion AG accepted funds amounting to approximately one hundred million francs from more than 30,000 investors in return for issuing EVN tokens in a bond-like form.