The crypto industry is active 24/7 and is not restricted by stock exchange opening times, which makes regulating this sector very complex. As a result, regulations may vary depending on the country or region, and there is currently no consistent international regulation. In some countries, special laws and regulations have been introduced for cryptocurrencies and blockchain technology, while other countries such as China and India have severely restricted or banned cryptocurrencies.
Crypto regulation: Switzerland by international comparison
The collapse of various crypto markets and the disastrous consequences for the sector and private investors continue to raise questions about the need for crypto regulation. The Swiss regulator laid out clear political guidelines in this sector at an early stage. Find out here why Switzerland is taking a leading role on an international level.
When it comes to crypto regulation, it is important to know that this encompasses not only payment tokens such as cryptocurrencies (e.g. Bitcoin or Ethereum) and stablecoins (e.g. USDC), but also so-called asset tokens that represent financial assets (e.g. shares) and tangible assets (e.g. wine). Also covered are “use tokens”, which guarantee functionalities, voting rights and access. These can all be grouped under the umbrella term “cryptoassets” or “digital assets”.
Why is crypto regulation necessary?
Creating a legal basis for this new asset class is interesting from several perspectives.
- Protecting investors: cryptocurrencies and other digital assets are subject to frequent fluctuations and can represent a greater risk to investors than traditional investment types. Regulating cryptocurrencies can contribute towards protecting investors. Specifically, crypto regulation ensures that companies and platforms that trade in cryptocurrencies or offer them as investment instruments comply with certain standards and provide transparency.
- Combating money laundering and terrorist financing: cryptocurrencies and other digital assets are usually pseudonymous. As a result, transactions are much easier to trace than cash transactions. Sophisticated crypto regulation can help combat money laundering, terrorist financing and other illegal activities.
- Creating legal certainty: cryptocurrencies and the blockchain technology they are based on are relatively new and legally complex. Crypto regulation can help create a clear legal basis and in turn guarantee legal certainty for companies, investors and consumers.
- Promoting innovation and growth: appropriate crypto regulation can help inspire trust in the crypto sector and make it easier for companies to enter the market. This, in turn, can contribute towards the growth of the sector and towards driving innovation, which ultimately means that crypto-based assets can be introduced to a wider audience as an investment type.
Switzerland as a pioneer
The Swiss regulator specified clear political guidelines at an early stage and is a leading location in the field of distributed ledger technology (DLT) and blockchain technology. With its global focus, the Swiss financial center is one of the most important in the world. In the financial sector in particular, Switzerland has, in recent years, established a growing fintech and blockchain ecosystem comprising over 1,000 companies. This makes it all the more important that the legal frameworks in place facilitate innovation and that the potential offered by new technologies is allowed to flourish. Switzerland has succeeded in creating a regulatory framework that promotes development and innovation without jeopardizing the integrity and security of the financial system.
Crypto regulation in Switzerland is based on the “principle of technology neutrality”. In other words, Switzerland does not regulate the technology itself, but any activities that may be carried out using the technology. The integrity of the financial market is of utmost importance to Switzerland. For this reason, it is placing great emphasis on ensuring that the same rules apply to cryptocurrencies as to cash values. For crypto assets, this means that they are not subject to special regulations, but instead are governed by existing laws and regulations. (Source: SIF)
Who is responsible for crypto regulation in Switzerland?
In Switzerland, there are various authorities that are responsible for regulating the crypto market.
Parliament as legislator and the Swiss Financial Market Supervisory Authority (FINMA) are responsible for the effective crypto regulation in Switzerland. FINMA is the highest financial market supervisory authority in Switzerland and is therefore responsible for supervising and regulating financial institutions and services, including those that work with cryptocurrencies and blockchain technology.
The Swiss National Bank (SNB) is Switzerland’s central bank and thus responsible for the country’s financial stability. It does not possess any direct regulatory authority over cryptocurrencies, but it has stated on multiple occasions that it monitors developments on the market closely. At the same time, the SNB is actively involved in various projects relating to central bank digital currencies (CBDC), i.e. blockchain-based central bank money.
New DLT Act
Switzerland is one of the first countries in the world to enact legal regulations governing blockchain technology. On 1 August 2021, the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (DLT Act) and the related ordinance came into force. (Source: SIF)
The DLT Act is part of Switzerland’s efforts to create a favourable regulatory environment for companies, and it aims to facilitate the use of blockchain and DLT technology in Switzerland. An important change in this law includes the segregation of crypto-based assets in the event of bankruptcy. This means that cryptoassets held by insolvent companies or private individuals can be removed from the debtor’s assets in the event of bankruptcy. This is because, in the event of insolvency, it can be difficult to identify, value and manage digital assets.
How is crypto taxed in Switzerland?
The tax legislation governing digital assets is complicated and depends on numerous factors, such as the asset type, the holding period, the usage purpose and the transaction type.
As a general rule, capital gains and losses from non-commercial trading of cryptocurrencies are tax-exempt. Any ownership of cryptoassets such as Bitcoin must be declared in the assets and is subject to wealth tax. Commercial income linked to trading, mining or any other dealings in cryptocurrencies is subject to income tax.
It is advisable to document all crypto transactions carefully so that tax returns can be completed accurately. Careful transaction documentation can also help to prove the origin of the assets at a later point. Furthermore, it is important to recognize that the tax approach to cryptoassets can vary depending on your individual situation. In order to understand and meet the specific tax requirements, it is a good idea to consult professional tax experts or crypto experts. More information on taxation of cryptocurrencies in Switzerland is available from the Federal Tax Administration (FTA).
Crypto regulation in Europe
Switzerland created a legal framework for digital assets at an early stage. As of 20 April 2023, Europe has now also adopted a Union-wide crypto legal framework. The European Parliament passed the Markets in Crypto Assets (MiCA) Regulation, which is set to come into force in 2024.
The Regulation’s aim is to introduce consistent rules and regulations for the trade in crypto-based assets throughout the EU. MiCA is intended to create a clear definition of cryptoassets and virtual currencies and to classify certain cryptoassets as financial instruments. The Regulation also aims to better protect investors and to minimize the risk of money laundering and terrorist financing in relation to cryptoassets. MiCA stipulates that cryptoasset service providers such as stock markets and wallet and initial coin offering providers must register with the relevant authority and meet certain requirements. This includes compliance with know-your-customer (KYC) and anti-money laundering (AML) regulations, safekeeping of customer funds and assets and publication of information regarding the trade of cryptoassets.
Regulatory pressure in the USA
Whilst Switzerland has established itself as a safe haven for crypto companies, crypto regulation in the USA is still in its infancy and is shaped by an uncertain regulatory environment. In the USA, there is still no consistent regulation of cryptocurrencies. They are regulated by different supervisory authorities in different ways.
- Securities and Exchange Commission (SEC): the SEC regulates the trade of securities and has stated that some cryptocurrencies can be regarded as securities, especially those being sold as investment contracts. If a cryptocurrency is deemed to be a security, it is subject to SEC regulations.
- Commodity Futures Trading Commission (CFTC): the CFTC regulates the trade of futures and options for goods and has stated that some cryptocurrencies can be regarded as goods. If a cryptocurrency is deemed to be goods, it is subject to CFTC regulations.
- Financial Crimes Enforcement Network (FinCEN): FinCEN is part of the US Department of the Treasury and focuses on preventing money laundering and terrorist financing. Cryptocurrency markets in the USA that exchange money must comply with FinCEN regulations.
- Internal Revenue Service (IRS): the IRS views cryptocurrencies as property and taxes them accordingly. Crypto investors and traders must report their activities and pay the relevant taxes.
Last but not least, the pressure to strengthen crypto regulation in the United States has increased because it is not entirely apparent who is responsible for this regulation. Switzerland, by contrast, stands out in the field of cryptocurrencies thanks to clearly assigned responsibilities and an explicit division of competencies.
What does the future hold for crypto regulation?
Crypto regulation is a very dynamic field, which makes accurate predictions about future developments difficult. However, it is likely that crypto regulation will continue to increase in future, as governments around the world are trying to minimize the potential risks of cryptocurrencies, whilst also trying to support the innovation and growth potential of the crypto ecosystem. In addition, there are a few trends and developments emerging that suggest how crypto regulation might evolve:
Many countries are already working on developing and implementing crypto regulations. Effective collaboration between the different regulatory authorities is likely to increase to ensure consistent, coordinated regulation.
Better investor protection
A large number of authorities are concerned about protecting investors on the cryptocurrency market, and we can expect to see stricter regulations being introduced to protect investors from fraud and manipulation.
Compliance with KYC and AML regulations
Governments are expected to focus increasingly on complying with KYC and AML regulations as part of their efforts to protect investors and ensure prevention of illegal activities such as money laundering and terrorist financing.
Regulation of stablecoins
As stablecoins are becoming increasingly popular and important in the crypto ecosystem, the expectation is that legislators will tighten regulation of these assets to ensure that they are secure and stable.
One thing is clear: Switzerland is adopting a progressive, pro-innovation attitude towards digital assets and blockchain technology, while at the same time preserving the integrity of the financial system and complying with regulatory requirements. The Swiss crypto market is comprehensively regulated, and the regulatory authorities provide clear guidelines for companies and investors.
While Switzerland is a pioneer in the field, the rest of the world is catching up when it comes to regulating digital assets. Around the world, digital assets are increasingly being integrated into the existing regulatory and legal framework. This means that the crypto ecosystem is becoming less of an extralegal space than it was a short while ago. The crypto market is maturing and become more secure, and more and more users should benefit from tightened regulations.