The Swiss State Secretariat for International Finance (SIF) announced the Federal Council’s adoption of a recent report—Legal Framework for Distributed Ledger Technology and Blockchain in Switzerland—and expressed their intent to assist in developing laws for new technologies, specifically distributed ledger technology and blockchain innovation.

Switzerland: Blockchain Safe Haven?

In a Dec. 14th press release, the Swiss State Secretariat released a report outlining predictions for blockchain’s “remarkable and potentially promising developments… for innovation and enhanced security,” while at the same time, holding a cautious tone about the future of regulation regarding the new technology.

The report outlines the fundamentals and potential uses of blockchain and DLT tech, places this insight in an international context, examines the applicable legal framework—particularly financial market law and classification of tokens as ‘assets’—and discusses potential problems.

The report outlines the following principles:

Policymakers should provide an optimal framework conducive to innovation.

Switzerland should swiftly make targeted adjustments… with regard to DLT/blockchain applications.

Switzerland should continue to pursue a principle-based and technology-neutral legislative and regulatory approach.

Switzerland should position itself as an attractive location [for] DLT/blockchain companies.

Swiss authorities should position themselves as open towards new technologies.

The report makes no claims as to what the future holds. What’s clear, however, is the council’s desire to “exploit” the potential benefits of the new tech and to usher in a welcoming environment for blockchain businesses in Switzerland:

“[The Federal Council] wants to create the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies.”

The primary goal, as stated in the report, is a boon for struggling blockchain tech, especially in terms of acceptance and universalization. By utilizing a “bottom-up approach,” Switzerland can allow the market and technology to come into its own “based on principle,” not on the whim of a spooked market, or uninformed government body.

Of the several principles outlined in the report, the laissez-faire approach of leaving decision-making “up to the market” stands out as an optimistic take on the recently grim regulatory landscape:

“The preferences of the market and society should decide which technologies prevail, while policy should ensure optimal and innovation-friendly framework conditions.”

Need for Regulation

Along with this rosy outlook, however, comes the need for updating the financial regulatory “infrastructures” currently in place. The Council suggests “creation of a new authorisation category for crypto-based assets.” The report does not go so far as to predict the future; it simply states the need for “adjustments” to the current financial regulatory framework:

“This paradigm shift (i.e. the shift from centralised to decentralised structures) also poses major challenges for the regulator[s]. The same aims will apply in decentralised structures as in centrally organised financial markets.”

Observation of ‘Due Diligence’

Additionally, the report mentions the awareness of potential threats from money launderers, as well as terrorists using the new technology to nefarious ends.

Addressing these issues, the report includes an in-depth examination of Swiss Criminal Code, but ultimately concludes that monitoring transactions—regardless of the classification of assets—is up to financial intermediaries to police the exchange of all assets intended for corrupt business dealings or terrorist-related transactions:

“Financial intermediaries must observe duties of due diligence to prevent money laundering and terrorist financing, as well as duties in the event of a suspicion of money laundering. Due diligence duties [include] clarifying the type and purpose of the business relationship.”

Swiss law adheres to several know-your-customer (AML) and anti-money laundering (AML) guidelines common among financial hubs.

However, they still have room to improve as they are known for a “lack of adequate regulation of some potential means of facilitating money laundering.” This is even more urgent considering the anonymous nature of cryptocurrencies.

Still, Switzerland is poised to take on the challenge of blockchain technology. According to the Heritage Foundation’s 2018 Index of Economic Freedom, Switzerland ranked 4th (behind New Zealand, Singapore, and Hong Kong), demonstrating its initiative in promoting economic development based on “rule of law, government size, regulatory efficiency, and open markets.”

This latest move ensures Switzerland’s place as a promising option for companies and developers interested in pursuing blockchain development. On the same token, this may also defeat some of the principles of decentralization, a cornerstone of the blockchain ethos.

Along with its reputation for economic freedom, perhaps Switzerland will become known as a sanctuary for blockchain and cryptocurrency technology.